THE 

ELECTRIC   RAILWAY 

PROBLEM 


By  DELOS  F.  WILCOX 


Municipal  Franchises,  in  Two  Volumes.    (710  and  885 
pages) 

Fundamental  Planks  in  a  Public  Utility  Program.  (12 
pages) 

Experts,  Ethics  and  Public  Policy  in  Public  Utilities. 

(16  pages) 

Financial  and  Administrative  Preparation  for  Muni- 
cipal Ownership.     (12  pages) 

Solving  the  Traction   Problem:   The   Problem  from 
the  Public  Point  of  View.     (20  pages) 

Problem   of  Reconstruction  with   Respect  to  Urban 
Transportation.     (16  pages) 

Service  at  Cost  in  Local  Transportation.     (8  pages) 

The  Transit  Problems  of  New  York  City.    (28  pages) 

Working  Capital  in  Street  Railway  Valuation.     (2-1 
pages) 

What  Shall  We  Do  With  The  Street  Railways?     (4 
pages) 


flDS 


-ANALYSIS 

OF  THE 

ELECTRIC  RAILWAY  PROBLEM 


REPORT  TO  THE  FEDERAL  ELECTRIC  RAILWAYS  COM- 
MISSION WITH  SUMMARY  AND  RECOMMENDATIONS, 
SUPPLEMENTED  BY  SPECIAL  STUDIES  OF  LOCAL  TRANS- 
PORTATION ISSUES  IN  THE  STATE  OF  NEW  JERSEY 
AND  THE  CITY  OF  DENVER,  WITH  NOTES  ON  RECENT 
DEVELOPMENTS     IN     THE     ELECTRIC     RAILWAY     FIELD 


DELOS   F.  WILCOX,   Ph.D. 

CONSULTING  FRANCHISE  AND  PUBLIC  UTILITY  EXPERT 

CHIEF    OF    THE    BUREAU    OF     FRANCHISES     OF    THE    PUBLIC     SERVICE    COMMISSION     FOR     THE    FIRST 
DISTRICT,    STATE    OF    NEW    YORK,    1907-1913;    DEPUTY   COMMISSIONER    OF    THE 
}^  DEPARTMENT  OF   WATER   SUPPLY,  GAS   AND   ELECTRICITY 

I  CITY  OF   NEW  YORK,  1914-1918 


PUBLISHED    BY 

THE    AUTHOR 

NEW  YORK  CITY 

1921 


PRINTED  AND  BOUND  BV 

AI-FERTON  PRESS 

NEW    YORK 


TO  THE  MEMORY  OF 
STILES  P.  JONES 

In  his  report,  "Financial  Mismanagement  of 
Street  Railways,"  submitted  as  a  part  of  the 
employes'  case,  Mr.  Jones  placed  before  the 
Federal  Electric  Railways  Commission  an 
illuminating  and  unanswerable  indictment  of 
the  fatuous  financial  policy  that  has  all  but 
wrecked  the  street  railway  as  a  public  utility. 


PREFACE 

On  May  15,  1919,  the  Secretaries  of  Commerce  and  Labor  submitted  to  the 
President  a  joint  recommendation  for  the  appointment  of  a  Federal  commission 
to  study  and  report  upon  the  electric  railway  problem.  During  the  war  the 
traction  companies  had  been  caught  between  the  upper  and  the  nether  millstones. 
The  increase  in  the  cost  of  labor  and  materials  had  been  sharp,  sudden  and 
irresistible.  The  maximum  five-cent  fare,  fixed  by  contract  and  by  custom,  had 
stood  in  the  way  of  a  prompt  increase  in  revenues  to  meet  the  increase  in  the 
costs  of  the  transportation  service  rendered.  Through  the  National  War  Labor 
Board,  the  Federal  Government  had  taken  a  hand  in  compelling  the  street  rail- 
ways to  pay  to  their  conductors  and  motormen  what  at  that  time  seemed  an  enor- 
mous wage.  While  the  nation  was  engaged  in  its  gigantic  struggle,  continuity  of 
street  railway  service  had  to  be  maintained  at  any  price.  The  companies  paid  the 
wage  bills  and  appealed  to  the  Government  to  raise  the  fares.  Failing  to  bring 
about  direct  interference  either  by  Congress  or  by  the  President  through  some 
hoped-for  exercise  of  war  powers,  they  had  to  content  themselves  with  trying 
to  get  favorable  publicity  and  helpful  recommendations  to  the  state  and  local 
authorities.  They  sought,  at  the  very  least,  the  appointment  of  a  Presidential 
commission  to  serve  as  a  sort  of  national  sounding-board  before  which  they  could 
beat  the  tom-tom  and  attract  public  attention  everywhere  to  their  financial  distress 
and  to  the  inadequacy  of  the  five-cent  fare. 

On  May  31,  1919,  the  Federal  Electric  Railways  Commission  was  appointed, 
consisting  of  eight  members  representing  various  interests,  as  follows : 

Charles  E.  Elmquist,  president  and  general  solicitor  of  the  National  Asso- 
ciation of  Railway  and  Utilities  Commissioners. 

Edwin  F.  Sweet,  Assistant  Secretary  of  Commerce,  and  former  mayor  of 
Grand  Rapids,  Mich.,  representing  the  Department  of  Commerce. 

Philip  H.  Gadsden,  vice-president  of  the  United  Gas  Improvement  Company, 
and  president  of  the  Charleston  Consolidated  Railway  and  Lighting  Company, 
representing  the  American  Electric  Railway  Association. 

Royal  Meeker,  Commissioner  of  Labor  Statistics,  representing  the  Depart- 
ment of  Labor. 

Louis  B.  Wehle,  general  counsel  of  the  War  Finance  Corporation,  repre- 
senting the  Treasury  Department. 

Charles  W.  Beall,  of  Harris,  Forbes  &  Company,  representing  the  Invest- 
ment Bankers  Association  of  America. 

William  D.  Mahon,  president  of  the  Amalgamated  Association  of  Street  and 
Electric  Railway  Employes  of  America,  representing  that  association. 

George  L.  Baker,  mayor  of  Portland,  Ore.,  representing  the  American 
Cities  League  of  Mayors. 

ix 


X  Preface 

The  Commission  organized  by  electing  Mr.  Elmquist  chairman  and  Mr. 
Sweet  vice-chairman.  Mr.  Charlton  Ogburn,  who  had  served  as  chief  examiner 
for  the  National  War  Labor  Board  in  street  railway  controversies,  was  selected 
as  executive  secretary.  At  the  time  of  its  appointment,  the  Commission  received 
from  the  President's  war  fund  an  appropriation  of  $10,000,  and  that  was  all  of 
the  public  money  ever  made  available  for  its  work. 

The  Commission  held  one  public  hearing  in  New  York  in  June  and  a  series 
of  hearings  in  Washington,  extending,  with  interruptions,  from  July  to  October. 
The  American  Electric  Railway  Association  was  represented  by  able  counsel, 
and  its  case,  prepared  by  a  special  Committee  of  One  Hundred,  was  laid  before 
the  Commission  in  an  orderly  and  effective  way.  Later  on,  the  Commission 
invited  public  service  commissioners,  mayors  and  some  private  individuals  to 
come  to  Washington  at  their  own  expense  and  present  the  public  side  of  tht- 
problem.  Among  the  rest,  I  was  invited.  My  testimony  was  given  at  consider- 
able length  on  August  13th.  Under  the  circumstances,  the  case  for  the  public 
was  necessarily  presented  in  an  uncoordinated  and  somewhat  fragmentary  way. 
In  October  the  Amalgamated  Association  of  Street  and  Electric  Railway  Em- 
ployes put  in  an  elaborate  and  carefully  prepared  case  on  behalf  of  organized 
labor. 

In  its  report  to  the  President,  dated  July  2S,  1920,  signed  by  all  of  its 
members,  the  Commission  said :  "At  the  conclusion  of  the  final  public  hearing 
the  Commission  engaged  the  services  of  Dr.  Delos  F.  Wilcox  to  aid  in  analyzing 
the  testimony  gathered  and  to  make  suggestions  to  the  Commission  with  refer- 
ence to  its  report.  Dr.  lVilco.v  made  a  very  comprehensive  analysis  of  the  evi- 
dence, containing  8^j  pages  of  matter.  The  Commission  regrets  that  it  cannot 
publish  this  analysis  with  the  proceedings,  since  it  represents  a  complete  and 
masterful  study  of  the  ivhole  electric  railway  problem." 

The  inability  of  the  Commission  to  publish  my  analysis  as  a  part  of  its 
Proceedings  is  the  occasion  for  its  separate  publication  in  this  book.  The 
Commission's  Report  and  the  Proceedings,  containing  all  the  testimony  and  cer- 
tain supplementary  documents,  were  published  and  distributed  at  the  expense 
of  the  American  Electric  Railway  Association,  though  I  am  advised  that  the 
Government  Printer  had  some  additional  copies  run  off,  which  he  is  disposing 
of  at  cost.  With  respect  to  the  publication  and  distribution  of  its  Proceedings, 
the  Commission  said  :  "A  complete  report  of  the  testimony  will  be  printed,  together 
zvith  this  report,  and  will  be  placed  in  the  Congressional  Library  in  Washington 
and  other  leading  libraries  in  the  country;  with  all  regulatory  commissions,  and 
with  the  mayors  of  the  leading  cities  of  the  United  States." 

In  the  belief  that  my  Analysis  ought  to  be  available  as  a  reference  work 
along  with  the  Report  and  Proceedings  of  the  Commission,  I  decided  to  under- 
take its  publication  in  the  present  form. 

In  Appendix  A,  I  have  included  a  review  of  Local  Transportation  Issues  in 
New  Jersey,  prepared  immediately  following  the  conclusion  of  my  report  to  the 
Commission.  The  New  Jersey  situation  had  been  referred  to  at  considerable 
length  in  the  Testimony.     The  Public  Service  Railway  lines  ramify  over  the 


Preface  xi 

state  of  New  Jersey  from  Newark  as  the  center,  reaching  140  municipalities 
ranging  in  population  from  414,000  down  to  a  few  hundred.  The  Public  Service 
Corporation  of  New  Jersey,  controlling  through  its  subsidiaries  the  street  rail- 
way, gas  and  electric  services  of  two-thirds  of  the  people  of  a  great  urban  state, 
typifies  the  public  utility  problem  for  the  entire  country.  In  the  review  of  the 
Public  Service  Railway  proceedings  most  of  the  complex  problems  which  were 
brought  to  the  attention  of  the  Federal  Electric  Railways  Commission  may  be 
seen  in  cross  section. 

In  Appendix  B,  I  am  including  a  report  on  Certain  Aspects  of  the  Traction 
Problem  of  the  City  of  Denver,  prepared  in  October,  1920,  for  the  Denver 
Commission  of  Religious  Forces,  and  hitherto  unpublished.  In  it  I  have  dis- 
cussed a  typical  street  railway  valuation  problem  and  have  analyzed  a  typical 
service-at-cost  plan  worked  out  by  the  Denver  Tramway  Adjustment  Committee 
of  Fifty-Five  during  the  very  time  when  the  Federal  Electric  Railways  Com- 
mission was  busy  with  its  investigation. 

The  Denver  plan  was  defeated  at  the  polls  by  a  narrow  vote.  Its  signifi- 
cance lies  in  the  fact  that  the  Federal  Electric  Railways  Commission  recom- 
mended service  at  cost  as  a  solution  of  the  electric  railway  problem,  and  service 
at  cost  has  been  taken  up  as  the  program  of  the  street  railway  companies  them- 
selves. The  rejected  Denver  plan  is  typical  of  what  may  be  expected  through 
the  active  cooperation  of  the  leading  business  interests  of  any  urban  community 
with  a  utility  in  financial  distress  upon  the  assumption  that  the  solution  of  the 
problem  must  in  any  event  be  found  in  continued  private  ownership  and  operation. 

My  analysis  of  the  evidence  presented  to  the  Federal  Electric  Railways 
Commission  confirmed  me  in  the  opinion  that  no  permanent  solution  of  the 
electric  railway  problem,  consistent  with  the  public  interest,  is  possible  except  in 
public  ownership.  I  advised  the  Commission  that  the  most  important  thing  to 
be  done  at  the  present  time  is  frankly  to  recognize  the  necessity  of  public  owner- 
ship and  operation  as  an  ultimate  policy  and  to  concentrate  eflfort  upon  plans 
for  the  removal  of  obstacles  in  its  way  and  for  the  assurance  of  its  success  when 
undertaken.  The  Commission,  not  concurring  in  this  view,  put  forward  the 
service-at-cost  plan  as  a  means  of  resuscitating  and  prolonging  the  life  of  private 
ownership  and  operation.  In  these  kaleidoscopic  days  the  financial  condition  and 
public  relations  of  any  particular  street  railway  are  likely  to  change  almost  over- 
night. But,  for  all  that,  the  underlying  problems  remain  the  same,  and  the  need 
for  a  permanent  policy,  based  upon  the  recognition  that  the  public  interest  in 
urban  transportation  is  paramount,  continues  to  be  imperative  regardless  of  tem- 
porary shifts  in  the  condition  and  relations  of  particular  companies. 

The  final  solution  of  the  problem,  as  I  see  it,  lies  in  the  full  recognition  of 
public  responsibility  for  local  transportation  and  in  the  acceptance  by  the  com- 
munity of  the  primary  obligation  of  self-help  in  the  performance  of  this  all- 
important  community  service. 

Delos  F.  Wilcox. 

Elmhurst,  Long  Island,  July  11,  1921. 


TABLE    OF   CONTENTS 

CHAP.  PAGE 

Letter  of  Transmittal    xv 

I.    The  Street  Railway  an  Essential  Public  Industry  1 

II.    Restoration  of  Electric  Railway  Credit  a  Fundamental  Necessity 6 

III.  Fundamental   Importance   of   Labor   as   a    Factor   in    Street    Railway 

Operation    9 

IV.  Credit  and  Cooperation  the  Coordinate  Needs  of  the  Electric  Railways    15 
v.    Conditions    in    Electric    Railway    Operation    Normally    Favorable   to 

Credit    16 

VI.    Conflicting  Evidence  as  to  Amount  of  New  Capital  Required  Annually 

IN  THE  Electric  Railway  Industry   21 

\'IL     Amount    of    New    Capital    Requirements    Not    Clearly    Shown,    but 

Necessity  for  Restoration  of  Credit  Proven  31 

VIII.    Why  Has  Electric  Railway  Credit  Been  Lost?   35 

IX.     Overcapitalization  a  Cause  of  the  Failure  of  Credit   36 

X.     Neglect  to  Amortize  Excess  Capitalization    43 

XI.    Failure  to  Amortize  Normal  Accrued  Depreciation  46 

XII.     Payment  of   Unearned    Dividends    and    Neglect   of   Ordinary    Mainte- 
nance      55 

XIII.     Overbuilding    •• 61 

XI\'.    Holding  Companies  and  Banker  Control   67 

XV.    The  Uniform  5-Cent  Fare   75 

X\T.    Special  Taxation  and  Franchise  Obligations    78 

X\TI.     Use  of  Police  Power  to  Compel  More  and  Better  Service  88 

XVIII.     Public  Regulation  of  Stock  and  Bond  Issues    92 

XIX.    Share  of  Companies  and  Public  in  Responsibility  for  Loss  of  Credit.  .  97 

XX.    Effect  of  Automobile  and  Jitney  Competition  on  Credit  99  ■ 

XXI.    Increasing  Demands  of  Labor   113 

XXII.     The  War  and  the  Dollar    116 

XXIII.  How  Can   Credit  be  Restored?    129 

XXIV.  The  Pros  and  Cons  of  Public  Ownership    140 

XX\'.     Public  Cooperation  and  a  New   Deal  Required    149 

XXVI.     Increase  in  Margin   Available  for  Capital   157 

XXVII.     Double   Purpose  of  Unit   Fare   Increases    160 

XXVIII.    Effect  of  Fare  Increases  upon  Traffic  and  Revenues  165 

Table    I. — Analysis   of   Traffic    Showing   Relation    of    Revenue    Pas- 
sengers to  Fare  Increases  183  to  188 

Table  II. — Analysis  of  Gross  Passenger  Revenue  Showing  Relation  of 

Passenger  Revenue  to  Fare  Increases  189  to  194 

xiii 


XIV 


Contents 


CHAP.  PAGE 

Table   III.— Revenue   Passengers   Carried   on    Principal    Urban    Street 

Railway  Systems  for  the  First  Six  Months  or  1917,  1918  and  1919  199 
Table  IV.— Comparative  Summary  of  Traffic  Data  in  Relation  to  Fare 

Increases   205  to  207 

Table  V. — Comparative  Summary  of  Passenger  Revenues  in   Relation 

to  Fare  Increases  208  to  210 

Table  VI. — General  Summary  of  Analysis  of  Effect  of  Fare  Increases 

Upon   Traffic  and   Revenues    212 

XXIX.    The  Zone  Fare  or  Distance  Tariff  218 

^  XXX.    Relief  from  Taxation  and  Other  Public  Burdens   244 

XXXI.    Efficiency  in  Management  and  Economies  in  Oper.\tion  260 

"^  XXXII.    Control  or  Abolishment  of  Jitney  Competition  286 

XXXIII.  Co-operative  Relations  Between  Management  and  Men    300 

XXXIV.  Public  Subsidies   303 

XXXV.    Abandonment  of  Unprofitable  Lines   322 

XXXVI.    Financial  Re-organization    327 

XXXVII.    No  One  Remedy  Sufficient  343 

XXXVIII.    The    Valu.\tion    345 

XXXIX.    The  Rate  of  Return   385 

.  XL.    Unrestricted  State  Regulation    405 

■— —  XLI.    Service  at  Cost     434 

XLII.    The  Use  of  Public  Credit  505 

XLIII.    The  Electric  Railway  Labor  Problem   530 

Table  of  Conductors'  Wages     532  and  533 

XLIV.    Labor's  Public  Relations  Recognized   537 

XLV.    Limitation  of  "The  Right  to  Strike" 541 

XLVI.    The  Program  of  the  Amalgamated  564 

XLVII.    Labor's   Participation   in    Management    598 

XLVIII.    Electric  Railway  Employes  as  Civil  Servants   618 

XLIX.    Service  Versus   Profits 621 

L.    The   Four   Choices    •  • 623^ 

LI.    Abandonment  of  the  Public  Interest  no  Remedy  624 

Lll.    Commission  Regulation  not  Adequate  as  a  Solution  of  the  Problem  . .  626 

LIII.    Where  "Servhce  at  Cost"  Falls  Short  631 

LI V.    Public  Ownership  and  Operation  the  Ultimate  Solution    635 

Summary    644 

.Appendix  A.    Local  Transportation  Issues  in  New  Jersey   659 

.^ppENDIx  B.    A  Report  on  Certain  Aspects  of  the  Traction  Problem  of 

the  City  of  Denver,  Colorado  717 

Notes   and   References    749 

I NDEX    771 


LETTER    OF    TRANSMITTAL 

Hon.  Charles  E.  Elmquist, 

Chairman,  Federal  Electric  Railways  Commission, 
Washington,  D.  C. 
Sir: 

Pursuant  to  the  action  taken  by  the  Commission  October  4,  1919,  and  the 
arrangement  with  me  subsequently  made  by  Mr.  Charlton  Ogburn,  Executive 
Secretary,  and  confirmed  by  you  in  your  letter  of  October  20,  1919,  I  have  gone 
over  the  testimony  presented  before  the  Commission,  the  exhibits  filed  with  it 
and  the  data  collected  on  its  behalf  by  the  Executive  Secretary  with  as  much 
thoroughness  as  the  time  at  my  disposal  would  permit,  and  have  prepared  a 
report  containing  an  analysis  of  the  testimony  taken  at  the  hearings  and  of 
the  supplementary  information  filed  with  the  Commission,  together  with  a 
general  discussion  of  the  electric  railway  problem  with  suggestions  looking 
to  the  formulation  and  adoption  of  public  policies  designed  to  aid  in  its  solution. 
This  report  consists  of  fifty-four  sections  and  is  accompanied  by  a  summary, 
table  of  contents,  and  index  of  witnesses  and  authorities  cited.*  On  account  of 
the  enormous  mass  of  material  laid  before  the  Commission,  and  on  account  of 
the  multitude  and  complexity  of  the  problems  under  consideration  by  the  Com- 
mission, my  report  has  necessarily  become  quite  voluminous.  It  has  been  trans- 
mitted to  you,  to  each  of  the  other  members  of  the  Commission,  to  the  Executive 
Secretary  and  to  Dr.  Milo  R.  Maltbie  from  time  to  time  as  parts  of  it  were  com- 
pleted. As  the  Commission  will  soon  meet  for  the  purpose  of  considering  my 
analysis  and  formulating  its  own  report  to  the  President  on  the  matters  which 
it  was  appointed  to  consider,  I  think  it  advisable  in  this  letter  to  review  as  briefly 
as  possible  the  salient  points  upon  which  emphasis  may  properly  be  laid. 

Certain  aspects  of  the  electric  railway  problem  appear  simple,  but  a  close 
examination  of  the  causes  that  have  contributed  to  the  present  financial  embar- 
rassment of  the  electric  railway  industry  and  a  consideration  of  the  consequences 
to  the  industry  and  to  the  country  likely  to  follow  upon  the  application  of  par- 
ticular remedies  reveal  the  fact  that  the  problem  as  a  whole  is  not  simple,  but 
extremely  complicated  and  baffling. 

The  most  important  facts  with  respect  to  which  there  is  little  or  no  dispute 
may  be  summarized  as   follows : 

1.  The  electric  railway  industry  at  present  is  a  factor  of  vast  importance 
in  the  urban  life  and,  to  a  less  extent,  in  the  interurban  relations  of  the  country. 

2.  Electric  railways  as  common  carriers,  primarily  used  for  local  passenger 
transportation,  have  been,  are,  and  will  continue  to  be  a  public  utility,  subject 

*  As  printed,  the  sections  have  been  treated  as  chapters,  and  the  index  of  witnesses 
and  authorities  has  been  merged  with  the  general  index. 

XV 


xvi  Electric  Railway  Problem 

to  public  control  as  to  the  extent  and  character  of  the  service  they  render  and 
as  to  the  rates  they  charge  for  such  service.  This  is  true  whether  or  not  the 
policy  of  private  ownership  and  operation  is  continued. 

3.  Until  very  recently  public  control  as  to  the  rates  of  fare  charged  for 
electric  railway  service  has  almost  universally  in  this  country  taken  the  form 
of  a  fixed,  uniform  unit  fare  of  five  cents  prescribed  either  by  statute  or  by  local 
franchise  ordinances  or  contracts. 

4.  As  a  result  of  the  trend  of  economic  forces  through  a  period  of  about 
twenty  years  prior  to  the  outbreak  of  the  World  War  a  gradual  increase  had 
been  taking  place  in  the  unit  prices  of  labor  and  materials  entering  into  the 
construction,  maintenance  and  operation  of  electric  railways.  This  gradual  in- 
crease was  wholly  or  in  part  overcome  by  improvements  in  the  electric  railway 
art.  Following  the  outbreak  of  the  World  War,  however,  and  particularly  since 
1916,  an  enormous  increase  in  electric  railway  imit  prices  has  taken  place  which, 
at  least  for  the  time  being,  has  quite  outstripped  the  economies  due  to  the  progress 
of  the  art  and  the  growth  of  revenues  due  to  the  increase  of  traffic. 

5.  For  several  years  prior  to  the  war,  and  to  an  increasing  extent  through- 
out the  war  period  and  up  to  the  present  time,  the  automobile  has  proven  to  be 
a  serious  competitor  of  the  electric  railways  in  rendering  local  transportation 
service.  Jitneys  and  automobile  buses  operating  as  common  carriers  have  been 
able  in  many  cases,  through  the  absence  of  sufficient  public  regulation,  to  engage 
in  unfair  and  destructive  competition  with  the  electric  railways  for  the  most 
profitable  part  of  urban  passenger  traffic.  The  direct  results  of  this  competition 
and  the  doubt  as  to  the  extent  of  its  future  development  have  even  raised  a  query 
in  the  public  mind  as  to  whether  or  not  the  electric  railway  can  survive  as  the 
principal  means  of  local  transportation,  and  this  doubt  has  seriously  aftected 
the  credit  of  the  industry. 

6.  Electric  railways,  as  a  general  rule,  were  not  conservatively  financed 
in  their  early  years  and  have  not  since  made  good  their  overcapitalization,  except 
to  a  limited  extent,  otherwise  than  through  the  process  of  bankruptcy  and 
reorganization.  Also,  they  have  not  reduced  their  capital  on  account  of  the 
accruing  depreciation  of  their  physical  property  and  have  not  spent  in  the  main- 
tenance of  their  property  or  set  aside  as  a  depreciation  reserve  enough  money 
to  maintain  the  integrity  of  the  investment  at  100  per  cent. 

7.  The  destruction  of  capital  incident  to  the  World  War,  the  unprecedented 
demands  of  the  Government  for  loans  during  the  war  period,  the  great  increase 
in  the  burden  of  taxation  growing  out  of  the  war,  and  the  general  sense  of 
increasing  insecurity  of  invested  capital  have  resulted  in  an  increase  in  the  cost 
of  new  money  needed  in  the  electric  railway  as  well  as  in  all  other  industries. 

8.  The  net  income  of  the  electric  railways  has  been  greatly  diminished 
and  their  credit  so  impaired  that  they  cannot  readily  refund  their  outstanding 
obligations,  and  cannot  without  great  difficulty,  or  at  all,  secure  new  capital  for 
extensions,  additions  and  improvements. 

9.  The  electric  railways  generally  have  reached  a  condition  where  the 
margin  of  income  available  for  return  upon  investment  must  be  enlarged  or  else 
the  entire  capital  foundation  of  the  industry  must  be  changed. 


Letter  of  Transmittal  xvii 

10.  While  the  immediate  occasion  of  the  present  evil  plight  of  the  electric 
railway  industry  is  the  economic  changes  that  have  been  incident  to  the  war 
period,  the  condition  of  the  industry  even  prior  to  the  war,  particularly  in  its 
public  relations,  was  unsatisfactory  and  unsound. 

11.  The  wages  of  street  railway  labor  prior  to  the  war  were  generally 
insufificient  from  the  point  of  view  of  "the  living  wage,"  and  the  increases  in 
wages  that  have  taken  place  since  the  beginning  of  the  war  period  have  not  been 
greater,  on  the  average,  than  the  increase  in  the  cost  of  living. 

From  a  consideration  of  the  foregoing  points  the  following  general  conclu- 
sions appear  to  be  obvious : 

1.  Unless  the  usefulness  of  the  electric  railway  as  a  public  utility  is  to  be 
sacrificed,  public  control  must  be  flexible  enough  to  enable  the  electric  railways 
to  secure,  in  one  way  or  another,  sufficient  revenues  to  pay  the  entire  cost  of  the 
service  rendered,  including  the  necessary  cost  of  both  capital  and  labor. 

2.  Where,  the  cost  of  service  has  greatly  increased  as  a  result  of  conditions 
over  which  the  electric  railways  have  no  control,  a  corresponding  increase  in  the 
rates  charged  for  the  service  is  the  remedy  that  first  suggests  itself  as  in  line 
with  the  remedies  applied  in  other  industries  under  similar  circumstances. 

3.  In  view  of  the  essential  nature  of  the  service  rendered  by  the  electric 
railways  and  the  extent  of  their  use  it  is  a  matter  of  the  highest  public  impor- 
tance that  both  the  total  cost  of  the  service  and  the  cost  to  the  individuals  who 
use  it  shall  be  kept  as  low  as  possible  without  injustice  to  those  who  take  part 
in  producing  it. 

4.  Economies  in  operation  that  do  not  involve  a  harmful  lowering  of  the 
standard  of  service  or  an  injustice  to  those  who  take  part  in  rendering  it,  wherever 
such  economies  are  practicable,  are  preferable  to  an  increase  in  fares  as  a  means 
of  meeting  the  increased  prices  which  enter  into  the  cost  of  service. 

5.  Economy  in  the  use  of  capital  to  the  extent  that  such  economy  does  not 
impair  the  service  rendered  is  preferable  to  fare  increases  as  a  means  of  meeting 
the  increase  in  the  cost  of  capital,  where  such  economy  is  practicable. 

6.  Savings  in  the  cost  of  capital  through  financial  reorganization  and  the 
adoption  of  more  advantageous  and  economical  methods  of  financing  are  pref- 
erable to  rate  increases  as  means  of  meeting  the  increase  in  the  market  rates  of 
interest,  where  such  savings  are  practicable. 

7.  Wherever  unequal  or  excessive  public  burdens  have  been  laid  upon  the 
electric  railways  on  the  theory  that  the  community,  as  the  grantor  of  the  fran- 
chise for  operation,  is  entitled  to  a  share  in  the  profits  of  the  industry,  the 
removal  of  these  burdens  is  preferable  to  fare  increases  as  a  means  of  meeting 
the  necessary  increase  in  the  cost  of  service. 

8.  The  restoration  and  development  of  electric  railway  trafific  and  revenues 
through  the  removal  of  unfair,  irresponsible  and  destructive  jitney  competition, 
and  through  the  recognition  and  encouragement  of  the  principle  of  monopoly 
within  reasonable  limits  as  applied  to  electric  railway  service  under  adequate 
public  regulation,  is  preferable  to  fare  increases  as  a  means  of  meeting  the 
increased  cost  of  electric   railway   service. 

9.  If  economies  in  operation,  economy  in  the  use  of  capital,  savings  in  the 


xviii  Electric  Railway  Problem 

cost  of  capital,  the  removal  of  excessive  and  unequal  public  burdens  and  the 
elimination  of  unfair  competition  cannot  be  made  to  ati'ord  sufficient  succor  to 
enable  the  electric  railways  to  pay  the  entire  cost  of  service  out  of  the  revenues 
derived  from  electric  railway  rate  schedules  which  the  public  has  been  accustomed 
to  pay,  then  the  remaining  deficiencies  may  properly  be  made  up  by  an  adjustment 
of  the  fare  schedules,  subject  to  the  limitation  that  in  no  case  should  the  fares 
be  so  greatly  increased  as  seriously  to  impair  the  usefulness  of  the  electric  railway 
as  a  public  utility. 

10.  In  communities  where  considerations  of  public  policy  require  that  elec- 
tric railway  fares  shall  be  maintained  at  a  fixed  level  or  below  a  fixed  maximum, 
then  deficiencies  in  the  earnings  of  the  electric  railways  must  be  made  up  through 
other  sources  than  passenger  revenues  to  whatever  extent  may  be  required  to 
meet  the  full  cost  of  electric  railway  service.     These  deficiencies  may  be  made 

I  up  through  the  levy  of  special  taxes  upon  property  benefited,  through  the  loan 
of  public  credit,  or  through  direct  subsidies  from  general  taxation,  but  these 
methods  of  relief  are  everywhere  subject  to  a  proper  consideration  of  sound 
public  policies  whether  or  not  such  policies  are,  in  a  particular  case,  embodied 
in  constitutional  or  statutory  restrictions. 

11.  If  under  private  ownership  and  operation,  with  such  degree  of  freedom 
from  regulation  or  such  degree  of  public  assistance  as  may  be  practicable  and 
the  community  may  approve,  the  electric  railways  are  unable  to  continue  to 
render  the  essential  service  now  being  rendered  by  them,  and  to  expand  their 
facilities  in  proportion  to  the  reasonable  increase  in  the  public  demand  for  their 
service,  then  the  assumption  by  the  community  of  direct  responsibility  for  the 
performance  of  the  function  of  local  transportation  is  a  logical  necessity. 

The  salient  points  outlined  above  arc.  I  think,  supported  by  the  overwhelming 
weight  of  testimony  presented  to  the  Commission.  The  conclusions  which  I  have 
personally  reached  from  my  previous  study  and  experience  as  well  as  from  this 
investigation  go  somewhat  further.     I  will  state  them  briefly  as  follows : 

1.  Local  transportation  service,  coming  as  it  does  within  the  accepted 
definition  of  a  public  utility,  is  affected  with  a  public  interest.  It  has  for  its 
primary  purpose  the  rendering  of  a  public  service.  The  electric  railways  are 
constructed,  maintained  and  operated  not  primarily  for  the  purpose  of  enabling 
capital  to  find  profitable  investment ;  not  primarily  for  the  purpose  of  enabling 
labor  to  earn  a  living;    not  primarily  for  the  purpose  of  enabling  management 

I  to  win  the  rewards  of  administrative  ability;  but  primarily  for  the  purpose  of 
I  rendering  an  essential  service  to  the  commuifity.  This  fact  distinguishes  the 
/electric  railway  industry  from  any  and  every  purely  private  business,  and  makes 

the  public  interest  in  the  quantity,  quality  and  continuity  of  the  service  rendered, 

and  in  the  charges  made  for  such  service,  paramount. 

2.  Heretofore,  under  the  policy  of  private  ownership  and  operation,  capital 
has  assumed  the  management.  Capital  engaged  in  a  public  service  such  as  local 
transportation  enjoys  the  special  guaranties  which  the  Federal  constitution  and 

.many  of  the  state  constitutions  throw  about  property  interests.  It  is  entitled 
to  a  fair  return  subject  to  the  limitation  that  in  no  case  must  the  rates  charged 
to  the  public  represent  more  than  the  service  is  reasonably  worth.     The  right  of 


Letter  of  Transmittal  xix 

capital  to  earn  a  fair  return  has,  in  many  respects,  been  limited  by  the  effect  of 
restrictive  contracts  voluntarily  entered  into  with  the  communities  within  which 
public  service  is  being  rendered.  In  case  these  contractual  restrictions  are  all 
removed  capital  demands  not  merely  the  assurance  of  a  fair  return  upon  the 
investment,  but,  so  long  as  it  assumes  the  management,  demands  something  more 
— a  speculative  chance  of  profit,  or  a  special  reward  for  efficiency.  If  it  were 
divorced  from  management  capital  would  ask  for  nothing  save  security  and  a 
fair  return,  which,  under  those  circumstances,  would  be  the  minimum  rate  of 
interest  required  to  attract  capital  to  a  secure  investment. 

3.  The  cost  of  labor  as  an  element  in  the  cost  of  electric  railway  service 
has  hitherto  been  determined  primarily  by  the  law  of  supply  and  demand  subject 
to  such  adjustments  as  the  employes  could  enforce  through  negotiation  with 
the  management  representing  capital,  or  through  the  power  of  the  strike.  As 
yet  labor  has  no  constitutional  guaranty  of  the  living  wage  corresponding  to 
capital's  guaranty  of  the  fair  return,  but  at  the  present  time  labor  is  properly 
demanding  that,  in  the  permanent  settlement  of  the  electric  railway  problem, 
the  living  wage  shall  receive  practical  recognition  co-ordinate  with  or  even 
precedent  to  the  fair  return  guaranteed  to  capital.  Labor  does  not,  to  an  appre- 
ciable extent,  control  or  participate  in  management,  and,  therefore,  while  existing 
relations  continue  it  cannot  demand  more  than  the  fair  or  living  wage,  except 
under  conditions  where  the  law  of  supply  and  demand  makes  the  payment  of 
a  higher  wage  necessary.  But  if  labor  should  assume  the  management,  or  any 
effective  share  in  the  management,  it  would  then  logically  and  necessarily  claim 
something  more  than  the  living  wage,  just  as  capital  now  claims  something  more 
than  the   fair   return. 

4.  The  public  has  so  fundamental  an  interest  in  electric  railway  service 
that  it  cannot  permit  itself  to  be  the  victim  of  the  vicissitudes  of  an  unregulated; 
struggle  between  capital  and  labor  and  it  cannot  permit  itself  to  be  forced  into 
the  position  of  signing  a  blank  check  to  cover  the  cost  of  service  at  whatever 
figure  capital  and  labor  may,  by  joint  agreement,  fix  it.  Therefore,  it  is  necessary 
that  a  direct  relation  between  the  public  and  labor,  as  fundamental  and  effective 
as  the  direct  relation  between  the  public  and  capital,  be  established,  to  the  end 
that  labor  may  receive  adequate  public  guaranties  and  in  turn  acknowledge  and 
assume  adequate  public  responsibilities  in  connection  with  the  production  of 
transportation  service. 

5.  With  the  establishment  of  direct  relations  between  the  public  and  labor 
the  responsibility  of  capital  for  management  is  undermined  and  its  motive  for 
efficiency  in  management  weakened  if  not  destroyed.  That  the  public  interest 
is  paramount  is  proven  by  the  constantly  increasing  scope  of  the  public  encroach- 
ments upon  management.  With  the  assumption  of  direct  public  responsibility 
for  wages,  hours,  and  conditions  of  work,  and  for  the  enforcement  of  continuity 
of  service,  the  next  step,  which  is  both  logical  and  necessary,  is  the  assumption 
by  the  public  of  complete  responsibility  for  management  and  the  limitation  of 
capital  to  its  true  function  of  supplying  funds  in  aid  of  public  credit  for  a  fixed 
return  determined  by  the  security  it  enjoys. 

6.  The  problem  of  credit  can  most  effectively  be  solved  by  public  ownership 


XX  Electric  Railway  Problem 

undertaken  through  the  acquisition  of  the  existing  electric  railway  properties 
at  a  fair  price  based  upon  the  actual  cost  of  existing  and  useful  property  with 
due  regard  to  its  present  condition  and  with  fair  consideration  of  the  equitable 
claims  of  invested  capital  with  respect  to  losses  not  resulting  from  bad  manage- 
ment or  imprudent  contracts.  Upon  this  basis  capital  will  retire  from  the  man- 
agement and  will  assume  the  same  subordinate  but  useful  position  that  it  already 
occupies  in  relation  to  municipal  improvements  generally.  The  cost  of  capital 
will  be  reduced  to  a  minimum  and  the  credit  necessary  for  inducing  new  capital 
to  flow  into  the  industry  will  be  forthcoming  on  the  basis  of  the  security  offered. 
This  security  will  be  increased  and  the  cost  of  capital  will  be  reduced  in  propor- 
tion to  the  conservatism  of  the  financial  policies  adopted  by  the  community. 
.Ample  depreciation  reserves,  the  prompt  amortization  of  dead  capital,  and  the 
gradual  amortization  of  the  entire  capital  out  of  earnings  or  out  of  taxes  will 
effectively  maintain  public  credit   for  electric  railway  expansion. 

7.  The  assumption  of  management  by  the  public  will  involve  the  definite 
I)ublic  recognition  and  guaranty  of  the  rights  of  labor  to  a  living  wage,  reasonable 
hours  and  just  conditions  of  work,  and  will,  at  the  same  time,  place  electric 
railwav  employes  in  the  position  of  civil  servants  with  the  advantages  and 
responsibilities  which  are  implied  in  that  relationship.  Labor  is  different  from 
capital.  It  is  a  living  thing;  not  inert.  Its  full  cooperation  even  under  public 
management  can  hardly  be  secured  merely  by  civil  service  rules  and  a  guaranty 
of  the  living  wage.  No  doubt  one  of  the  principal  jobs  of  public  management 
will  be  to  work  out  a  more  eft'ective  and  democratic  relationship  with  labor  than 
has  hitherto  characterized  the  electric  railway  industrv  under  either  ])rivate  or 
l^ublic  operation. 

8.  The  imperative  need  of  the  present  time  is  the  acceptance  of  public 
ownership  and  operation  as  a  policy,  and  the  adoption  as  rapidly  as  possible 
of  those  measures  which  are  required  to  clear  away  the  obstacles  to  the  realiza- 
tion of  such  a  policy,  and  to  make  it  successful  in  the  highest  practicable  degree 
when  realized.  .Xny  temporary  relief  granted  to  the  electric  railways  and  any 
temporary  readjustment  of  their  public  relations  under  private  ownership  and 
management,  such  as  the  working  out  of  a  more  complete  and  unrestricted 
system  of  state  regulation  or  the  adoption  of  a  service-at-cost  plan,  ought  to  be 
consistent  with  and  preparatory  for  tiie  early  and  effective  consummation  of 
public  ownershii)   and  operation   as  the   ultimate  policy. 

I  think  1  have  a  projjcr  realization  of  the  dangers  and  difficulties  inherent 
in  the  policy  which  1  have  proposed,  but  I  am  confident  that  these  dangers  and 
difficulties  can  readily  be  overcome  if  public  opinion  can  be  crystallized  in  favor 
of  a  serious  effort  to  overcome  them.  If  public  ownership  and  operation  are 
either  inherently  desirable  or,  in  the  course  of  events,  inevitable,  it  is  of  the 
utmost  importance  that  the  community  should  set  its  house  in  order  and  prepare 
to  assume  in  an  orderly  and  effective  way  the  responsibility  that  it  cannot 
ultimately  escape. 

Respectfully, 

Delos  F.  Wilcox. 

Elmhurst,  N.  Y..  June  8,  1920. 


ANALYSIS   OF  THE    ELECTRIC    RAILWAY 

PROBLEM 

Chapter  I 
THE  STREET  RAILWAY  AN  ESSENTIAL  PUBLIC  INDUSTRY 

The  magnitude  of  the  electric  railway  industry  was  put  forward  by  the 
witnesses  on  behalf  of  the  American  Electric  Railway  Association  as  a  proof 
of  its  importance  from  the  public  point  of  view.  It  was  shown  from  the  infor- 
mation collected  by  the  Bureau  of  the  Census  that  in  1917  the  net  capitalization 
of  the  electric  railways  of  the  country  was  $4,889,962,096.  This  indicates  that 
from  the  point  of  view  of  nominal  investment  the  electric  railways  are  about 
one-fourth  as  important  as  the  steam  railroads  of  the  country,  the  capitalization 
of  the  latter  on  December  31,  1916,  being  $19,630,610,082.  The  total  mileage 
of  the  electric  railways  in  1917  was  44,835  as  compared  with  a  mileage  of  294,030 
in  the  case  of  the  steam  railroads.  These  figures  show  a  net  capitalization  per 
mile  of  track  of  about  $66,771  for  the  steam  railroads,  and  $109,132  for  the 
electric  railways,  indicating  that  the  electric  railways  are  capitalized  63.44% 
higher  per  mile  of  track  than  the  steam  railroads.  In  comparing  the  magnitude 
and  importance  of  the  electric  railways  and  the  steam  railroads  it  must  be  borne 
in  mind  that  the  electric  railways  are  engaged  primarily  in  the  transportation 
of  passengers,  while  on  the  steam  roads  passenger  transportation,  although  of 
great  importance,  from  the  point  of  view  of  both  revenue  and  service,  represents 
only  a  fraction  of  the  transportation  business.  The  total  revenues  from  railway 
operation  collected  by  the  electric  railways  of  the  country  in  1917  were  approx- 
imately $650,000,000  as  compared  with  $4,119,000,000  collected  by  the  steam 
roads  during  that  year,  of  which  $825,000,000,  or  about  20%,  was  for  passenger 
service. 

These  statistics  indicate  that  although  the  electric  railway  industry  is  one 
of  vast  magnitude,  it  is  far  less  important  from  the  financial  point  of  view  than 
the  steam  roads.  The  electric  railways  included  in  the  Census  Bureau's  statistics 
are  primarily  street  and  interurban  railways  and  do  not  include  the  electrified 
portions  of  steam  railroads  engaged  in  suburban  service,  such  as  the  New  York 
City  divisions  of  the  New  York  Central,  the  Pennsylvania  and  the  Long  Island 
railroads. 

The  figures  submitted  to  the  Commission  showing  the  magnitude  and  im- 

1 


■2-'  Electric  Railway  Problem 

pt>rttihce  of  the  electric  railway  industry  make  no  separation  between  urban 
street  railways  and  interurban  electric  lines,  but  the  special  Census  report  for 
the  year  1912  indicates  that  about  40%  of  the  mileage  included  in  the  electric 
railway  statistics  for  that  year  was  suburban  or  interurban.  The  mileage  tigures 
already  given  include  sidings  and  car  house  and  car  yard  tracks,  of  which  there 
were  2,731  miles  in  1912.  Upon  the  basis  of  the  available  information,  it  appears 
that  the  main  track  mileage  of  the  electric  railways  consists  of  about  25,000  miles 
of  tracks  in  city  streets  and  17,000  miles  of  suburban  or  interurban  tracks. 
No  division  of  capitalization  or  earnings  can  be  attempted  from  the  data  sub- 
mitted to  the  Commission,  but  it  is  unquestioned  that  from  the  point  of  view 
of  investment  cost,  service  rendered  and  revenues  collected,  the  urban  lines  are 
relatively  much  more  important,  mile  for  mile,  than  the  suburban  and  interurban 
lines. 

From  the  point  of  view  of  freight  service  the  contrast  between  the  urban 
electric  railway  lines  ant!  the  steam  roads  is  much  more  marked  than  the  contrast 
between  the  interurban  lines  and  the  steam  roads,  since  the  interurbans  have 
developed  a  considerable  amount  of  freight  and  express  business  supplementing 
or  in  competition  with  the  freight  service  of  the  steam  roads. 

While  the  electric  railways  are  less  important  than  the  steam  roads  from 
several  points  of  view,  nevertheless  they  are  much  more  in  the  public  eye,  for 
the  reason  that  they  come  into  daily  contact  with  a  vastly  greater  number  of 
people.  In  the  year  1917  the  electric  railways  carried  a  total  of  11,304,660,462 
revenue  passengers,  and  3,202,254,111  transfer  and  free  passengers,  as  compared 
with  a  total  of  about  1,1-H,G9O.Q90  passengers  carried  by  the  steam  roads.  Thus 
it  appears  that  the  electric  railways  in  their  passenger  transportation  service 
come  into  contact  with  more  than  ten  times  as  many  people  as  the  steam  roads 
do.  While  the  average  ride  furnished  by  an  electric  railway,  especially  by  an 
urban  street  railway,  is  of  very  much  less  importance  than  the  average  ride 
furnished  by  a  steam  railroad,  nevertheless  every  ride  is  either  a  necessity  or 
a  convenience,  in  connection  with  which  the  passenger  comes  in  contact  with 
the  physical  property  devoted  to  public  service  and  with  the  eni|)loyes  engaged 
in  rendering  that  service. 

It  is  significant  that  although  the  number  of  passenger  automobiles  in  the 
United  States  on  December  31,  1917,  was  estimated  to  be  4,643,481  as  compared 
with  79,914  electric  railway  passenger  cars,  a  ratio  of  nearly  60  to  1,  and  that 
two-thirds  of  the  development  of  the  automobile  industrj-  was  subsequent  to 
1912,  the  number  of  revenue  passengers  carried  by  the  electric  railways  was 
approximately  1,800,000,000  more  in  1917  than  in  1912.  This  indicates  that 
in  spite  of  the  immense  development  of  the  automobile  industry  the  demand 
for  electric  railway  transportation  has  gone  on  increasing  at  a  rapid  rate.  In 
this  connection,  Mr.  Henry  G.  Bradlee,  President  of  the  Stone  &  Webster  Cor- 
poration, submitted  to  the  Commission,  in  a  letter  dated  October  1,  1919,  certain 
information  with  respect  to  the  development  of  electric  railway  traffic  and  earn- 
ings as  compared  with  the  development  of  population  served  by  Stone  &  Webster 
lines.  Nineteen  companies  operating  in  Texas,  Florida,  Georgia,  Louisiana, 
Washington  and  elsewhere  were  included  in  the  computations.    The  figures  show 


An  Essential  Industry  3 

an  average  estimated  increase  in  population  served  during  the  ten-year  period 

ended  June  30,   1919,  of  42.3%.     Upon  this  basis  the  passenger  earnings  per 

capita  increased  26.9%  during  that  period,  and  the  number  of  revenue  passengers 

carried  per  capita  per  annum  increased  24.3%.     In  explanation  of  the  reason 

for  the  compilation  of  the  tigures  submitted  by  him,  Mr.  Bradlee  said: 

"The  idea  seems  to  be  prevalent  in  many  quarters  that  the  street  railway  has  seen  its 
day  of  greatest  usefulness,  and  that  the  automobile  is  gradually  driving  it  out  of  business  and 
constantly  decreasing  the  public  demand  for  street  railway  service." 

Commenting  upon  the  results  shown  when  the  figures  for  the  entire  nineteen 
companies  had  been  compiled,  he  said : 

"If  these  figures  are  a  fair  indication  of  what  has  taken  place  in  other  cities  (and  I  know 
cf  no  reason  why  they  should  not  be),  the  street  railway  is  by  no  means  a  dying  institution, 
nor  has  it  been  seriously  affected  by  the  introduction  of  the  private  automobile ;  on  the  con- 
trary, the  demand  for  service  is  materially  greater  than  it  has  ever  been  before  and  is  still 
growing  at  a  rapid  rate.  It  would  appear  that  something  has  been  and  is  still  stimulating  the 
street  railway  business ;  possibly  the  automobile  itself  has  helped  in  this  direction.  People 
may  be  acquiring  to  a  greater  extent  than  ever  before  the  riding  habit,  and  may  be  more  and 
more  inclined  to  move  about  and  spend  less  time  in  their  own  homes  or  with  their  immediate 
neighbors.  The  moving  picture  is  probably  also  a  factor  in  the  situation,  but  whatever  may 
be  the  cause  the  fact  seems  pretty  clear  that  the  demand  for  transportation  service  is  still 
growing  apace.  This  fact  I  think  is  pretty  generally  misunderstood;  in  fact  I  am  free  to 
confess  that  we  ourselves  were  surprised  to  see  the  extent  of  the  increased  demand  for  service." 

Figures  prepared  by  the  Public  Service  Commission  for  the  First  Dfstrict 
showing  the  rapid  increase  in  street  railway  traffic  in  New  York  City  tend  to 
bear  out  Mr.  Bradlee's  conclusion  based  upon  the  Stone  &  Webster  experience 
in  smaller  commtmities  of  the  south  and  southwest.  During  the  year  ended 
June  30.  1919,  the  total  number  of  revenue  passengers  carried  by  the  local 
transportation  lines  of  New  York  City  was  2,079,942,604  as  compared  with 
1,402,417.642  carried  during  the  year  ended  June  30,  1909,  an  increase  of  more 
than  48%  in  ten  years.  On  the  basis  of  the  estimated  population  served  the 
Public  Service  Commission  figures  that  the  number  of  revenue  rides  per  capita 
in  1909  was  304  and  in  1919,  370,  an  increase  of  nearly  22%  in  the  riding  habit. 
The  Public  Service  Commission's  table  gives  the  number  of  street  railway 
revenue  passengers  carried  and  the  number  of  revenue  rides  per  capita  in  1860 
and  during  every  census  year  thereafter  until  1900,  and  year  by  year  from  that 
time  on  until  1919.  The  facts  shown  are  so  significant  of  the  absolute  develop- 
ment of  the  street  railway  business,  and  of  its  relative  development  as  shown  by 
the  growth  of  the  riding  habit,  that  the  figures  for  the  entire  period  are  given 
herewith : 

New  York  City  Street  Railway  Traffic^ 


Year 


Total  Revenue     Revenue  Rides 


Passengers 


1860  50.830,173 

1870  152,463.920 

1880  290,417.029 

1890  569,149,560 

1900  846,353,058 

1901  881,344,801 

1902  938.989.964 

1903  1.000.767.483 

1904  1,065,984,910 

1905  1,130,982.696 

1906  1,251,841,175 

1907  1,313,381,388 


Per  Capita 
43 
103 
152 
218 
246 
248 
256 
265 
274 
283 
301 
305 


Total  Revenue      Revenue  Rides 

Year  Passengers  Per  Capita 

1908  1,358.000,407  305 

1909  1,402,417.642  304 

1910  1,531,262,914  321 

1911  1,603,901,397  330 

1912  1,680,913.935  339 

1913  1.769.876.508  350 

1914  1,813,204,356  352 

1915  1.807.632.726  345 

1916  1,898,735.615  356 

1917  1,918,812.229  353 

1918  1,975,511,789  358 

1919  2,079,942,604  370 


4  Electric  Railway  Problem 

From  the  point  of  view  of  the  magnitude  of  the   street   railway  industry 
and  of  the  service  that  it  renders,  it  should  be  added  that  the  electric  railways 

J  had  294,826  employes  in  1917,  and  paid  taxes  amounting  to  $45,736,695  or  7% 
of  their  total  railway  operating  revenues  during  that  year.  No  exact  figures 
are  available  to  show  what  proportion  of  the  total  population  of  the  country  is 
directly  served  by  electric  railways,  but  in  general  it  may  be  assumed  that  the 
population  served  is  somewhat  lower  than  the  total  urban  population  estimated 
on  the  basis  of  the  number  of  people  living  in  cities  and  towns  of  more  than 
5,000  population.  On  this  basis  the  urban  population  of  the  coimtry,  as  shown 
by  the  1910  census,  was  38.517,727.  It  would  probably  be  safe  to  estimate  the 
total  number  of  people  who  are  directly  and  conveniently  accessible  to  electric 
railway  service  at  very  nearly  50,000,000  at  the  present  time.  While  it  is  true 
that  the  electric  railways  have  overflowed  municipal  boundaries  and  now  include 
a  network  of  interurban  lines  in  many  portions  of  the  country,  it  still  remains 
a  fact  that  the  electric  railway  as  thus  far  developed  is  primarily  an  urban  street 
railway  with  its  principal  function  the  transportation  of  passengers  within  the 
limits  of  municipalities.  The  correctness  of  this  conclusion  is  confirmed  by 
consideration  of  the  fact  that  the  total  amount  of  revenue  collected  by  the  electric 
railways  from  railway  operations  in  1917  amounted  to  only  5.75  cents  per  revenue 
passenger  carried.  All  the  figures  go  to  show  that  the  principal  function  of  the 
electric  railways  is  to  supply  cheap  and  convenient  transit  for  urban  populations, 
and  that  the  amount  of  service  demanded  of  them,  though  stupendous  in  the 
aggregate,  is  made  up  of  an  immense  number  of  very  small  units. 

In  an  important  sense  the  essential  nature  of  the  electric  railway  business 
is  demonstrated  by  the  extent  of  the  demand   for  its  service.     Another  factor 

.,  that  tends  to  establish  the  public  character  of  the  electric  railway  business  is  its 
relation  to  the  public  streets.  From  the  very  beginning  of  the  street  railway 
industry — a  generation  before  electric  traction  was  introduced — it  was  univer- 
sally recognized  that  through  its  use  of  the  streets  as  a  right  of  way  for  its  tracks 
the  street  railway  came  into  a  peculiar  relation  with  the  public.  By  special  fran- 
chises granted  either  by  direct  act  of  the  state  legislatures,  and  by  Congress  in 
the  District  of  Columbia,  or  by  the  local  authorities  having  control  of  urban 
streets,  a  contractual  relation  was  established  between  the  public  and  the  com- 
panies that  undertook  to  render  local  transportation  service.  These  special 
francTiises  or  contracts  came  to  be  in  many  communities  very  complex  docu- 
ments, entering  into  great  detail  not  only  with  respect  to  the  fares  to  be  charged 
but  also  with  respect  to  the  character  of  the  service  to  be  rendered  and  the  compen- 
sation to  be  paid  into  the  public  treasury  for  the  use  of  the  streets.  Furthermore, 
after  fifty  or  sixty  years  of  eflfort  to  control  the  operation  of  street  railways  in  the 
public  interest  through  franchise  contracts,  with  very  indifferent  success,  the 
public  was  finally  compelled  to  invoke  the  police  power  and  to  establish  permanent 
regulatory  commissions  to  enforce  upon  the  electric  railways  the  obligations  to 
the  public  which  the  nature  of  their  business  placed  upon  them.  The  theory  of 
continuous  public  regulation  has  come  to  be  so  widely  recognized  and  so  com- 
pletely established  as  a  necessary  public  policy  that  for  the  most  part  the  electric 
railway  companies  themselves  accept  public  regulation  as  a  permanent  condition 


An  Essential  Industry  •  5 

of  their  operation.  While  many  men  speaking  for  the  companies  are  critical  in 
their  view  as  to  the  benefits  thus  far  derived  by  the  industry  from  public  regu- 
lation, there  are  very  few  left  at  the  present  time  who  do  not,  at  least  in  public, 
profess  their  belief  in  the  desirability  and  necessity  of  a  continuance  of  the  policy 
of  regulation  through  public  agencies.  While  some  of  the  policies  which  are  now 
being  proposed  as  a  result  of  the  present  distress  of  the  electric  railway  industry 
would  undoubtedly  tend  to  weaken  and  perhaps  destroy  the  effectiveness  of 
public  regulation,  no  one  responsible  for  the  recommendation  of  such  policies 
is  willing  to  admit  that  they  are  in  eiTect  adverse  to  the  principles  of  public 
regulation. 

Indeed,  if  further  proof  of  the  essential  nature  and  the  public  character  of 
the  electric  railway  business  were  needed,  it  could  be  found  in  the  nation-wide 
appeal  which  the  electric  railway  industry  is  now  making  to  the  federal,  state 
and  local  governments  for  help,  and  particularly  could  it  be  found  in  the  perusal 
of  the  testimony  that  has  been  presented  before  this  Commission  by  the  Com- 
mittee of  One  Hundred  appointed  to  represent  the  American  Electric  Railway 
Association.  A  purely  private  industry  would  not  make  such  an  appeal.  One 
of  the  reasons  is  that  a  purely  private  industry  would  not  be  subject  to  the 
governmental  restrictions  with  respect  to  rates  and  service  which  have  been 
imposed  upon  the  electric  railways,  but  the  appeal  that  is  now  being  made  is 
not  merely  for  the  removal  of  governmental  restrictions — for  the  removal  of 
such  restrictions  would  mean  the  abandonment  of  public  regulation  and  of  public 
responsibility  for  the  welfare  of  the  industry — but  the  appeal  is  rather  for  the 
modification  of  existing  restrictions  and  for  the  establishment  of  a  new  relation 
between  the  public  and  the  industry  that  will  embody  a  clearer  and  fuller  recog- 
nition of  public  responsibility  for  the  financial  welfare  of  those  of  the  agencies 
which  have  undertaken  to  render  electric  railway  service.  The  appeal  of  the 
companies  is  not  "to  be  left  alone,"  which  in  general  they  recognize  as  something 
that  on  account  of  the  nature  of  their  business  is  inherently  impossible,  but  to 
be  helped.  Their  appeal  is  to  the  public  to  assume  some  responsibility  in  the 
conduct  of  a  public  business.  While  it  may  be  that  the  particular  policies  which 
they  ask  the  public  to  adopt  in  the  present  emergency  are  not  in  all  respects  con- 
sistent with  a  full  recognition  of  the  essential  nature  and  the  public  character  of 
the  business,  nevertheless  their  appeal  in  principle  is  based  upon  such  recognition. 

After  looking  at  electric  railway  service  from  every  angle,  we  reach  the 
inescapable  conclusion  that  this  service  is  essential  in  its  nature  and  that  the 
ultimate  responsibility  for  its  performance  upon  terms  and  conditions  conducive 
to  the  general  welfare  rests  upon  the  communities  for  which  it  is  rendered. 


I"  Chapter  II 

RESTORATION  OF  ELECTRIC   RAILWAY  CREDIT 
A  FUNDAMENTAL  NECESSITY 

The  National  War  Labor  Board,  in  its  findings  in  the  Qeveland  Railway 

wage  arbitration  dated  July  31,  1918,  referring  to  the  condition  of  street  railway 

companies  in  general,  said : 

"The  credit  of  these  companies  in  floating  bonds  is  gone.  Their  ability  to  borrow  on  short 
notes  is  most  limited.  In  the  face  of  added  expenses  which  this  and  other  awards  of  needed 
and  fair  compensation  to  their  employes  will  involve,  such  credit  will  completely  disappear." 

The  findings  in  the  Qeveland  case  were  cited  in  a  long  series  of  other 
awards  in  which  a  wage  scale  of  from  43  cents  to  48  cents  per  hour  was  put  into 
effect.  Since  then  wages  in  Cleveland  and  a  number  of  other  cities  have  gone 
up  to  50  cents,  55  cents  and  60  cents  per  hour.'  It  is  admitted  that  the  Cleveland 
Railway  Company,  operating  under  a  service-at-cost  franchise  within  certain 
limitations,  maintained  its  credit  much  better  than  the  other  street  railway  com- 
panies of  the  country. 

The  recommendations  of  the  joint  chairmen  of  the  War  Labor  Board,  based 
on  the  conclusions  they  had  reached  in  acting  as  arbitrators  in  wage  controversies 
between  the  street  railway  companies  and  their  men,  were  in  large  measure 
responsible  ultimately  for  the  creation  of  the  Federal  Electric  Railways  Commis- 
sion. In  fact,  Ex-President  Taft,  one  of  the  joint  chairmen,  was  the  very  first 
witness  to  be  called  before  the  Commission  to  testify  as  to  the  condition  and 
needs  of  the  electric  railways.  He  referred  to  the  companies  as  having  "their 
backs  to  the  wall"  financially,  and  in  reply  to  questions  put  by  Commissioner 
Gadsden,  gave  the  following  testimony  with  respect  to  their  credit  (page  12  of 
the  Proceedings)': 

"Commissioner  Gadsden :  Now.  Judge,  coming  to  the  question  of  investment :  The 
situation  today,  as  doubtless  your  investigations  have  shown,  is  that  the  electric  railway  in- 
dustry has  lost  its  credit  ? 

"Mr.  Taft:     Entirely. 

"Commissioner  Gadsden :  As  a  matter  of  fact,  in  order  that  this  essential  industry  shall 
continue  its  service  to  the  public,  is  it  not  necessary  that  its  credit,  its  financial  credit,  shall 
Ik'  restored  ? 

"Mr.  Taft:     It  is. 

"Commissioner  Gadsden  :  Otherwise  if  can  not  get  the  additional  capital  to  make  its  ex- 
tensions and  improvements  and  keep  the  scn'ice  up? 

"Mr.  Taft:     That  is  true." 

Mr.  Harold  L.  Stuart,  President  of  Halsey,  Stuart  &  Company,  investment 

bankers  of  Chicago,  was  questioned  at  one  of  the  early  hearings  about  the  present 

demand  for  street  railway  securities.     His  testimony  on  this  point  is  found  at 

page   185  of  the  Proceedings,  as   follows: 

"Mr.  Warren:     How  are  street  railway  securities  regarded  now  in  investment  circles? 
"Mr.   Stuart:     They  are  regarded   with  great  distnisf  and  disfavor,  to   such   an  extent 

6 


Restoration  of  Credit  Necessary  7 

that  it  is  almost  impossible  to  distribute  street  railway  securities,  I  don't  care  how  good  they 
are.     I  am  speaking  now  about  bonds — not  stocks. 

"Mr.  Warren:     Yes;  bonds. 

"Mr.  Stuart:     It  would  be  absolutely  impossible  to  distribute  street  railway  stocks. 

"Mr.  Warren:     And  how  long  has  that  been  true? 

"Mr.  Stuart :  So  far  as  bonds  are  concerned,  as  I  say,  about  two  years  ago.  For  some 
time  back  of  that  street  railway  stocks  had  not  been  sought  for,  I  believe." 

Mr.  Samuel  R.  Bertron,  of  Bertron,  Griscom  &  Company,  bankers  of  New 
York  and  Philadelphia,  stated  that  "it  is  practically  impossible  for  anyone  to 
sell  any  street  railway  security  to  any  investor — anything  else,  but  not  a  street 
railway  security ;  an  oil  stock,  or  any  old  thing,  but  no  street  railway  securities, 
and,  as  a  result,  it  is  impossible  to  raise  money,  because  they  have  no  credit." 
(Page  538  of  the  Proceedings.) 

Mr.  Henry  L.  Doherty,  President  of  the  Cities  Service  Company  and  of 
the  Henry  L.  Doherty  Company  of  New  York,  in  his  testimony  on  behalf  of 
the  American  Electric  Railway  Association,  described  the  credit  of  the  street 
railways  as  "already  strained  beyond  the  elastic  limit." 

Mr.  John  G.  Barry,  General  Sales  Manager  of  the  General  Electric  Com- 
pany, after  referring  to  the  amount  of  equipment  sold  during  1917  and  1918 
to  the  Philadelphia  Rapid  Transit  Company  and  other  companies  affected  by 
war  industries  for  which  the  money  was  provided,  at  least  in  part,  by  the  United 
States  Shipping  Board  Emergency  Fleet  Corporation,  gave  the  following  testi- 
mony with  respect  to  companies  not  affected  by  war  industries  (page  384  of  the 
Proceedings)  : 

"The  Chairman  :  Have  the  utilities  which  have  not  been  affected  by  war  industries  pur- 
chased much  equipment  during  the  last  two  years? 

"Mr.  Barry  :  They  have  not,  Mr.  Commissioner.  They  would  like  to  purchase  equip- 
ment, but,  unfortunately,  they  are  not  in  a  position  to  get  the  equipment.    Their  credit  is  gone." 

Mr.  Henry  G.  Bradlee,  of  Stone  &  Webster,  in  describing  the  conditions 
necessary  for  the  establishment  and  maintenance  of  credit  in  the  street  railway 
business,  made  the  following  statement   (page  209  of  the  Proceedings)  : 

"The  street  railway  should  be  looked  on,  as  I  see  it,  not  as  a  static  thing  but  as  a  growing 
organization,  something  which  is  e.xpanding  and  extending  all  the  time  and  which  must  extend 
and  expand  to  adequately  serve  the  public.  It  is  possible  to  make  a  trade  with  the  city  by 
which  the  investment  which  has  already  been  made  shall  accept  what  may  seem  an  adequate 
return,  but  that  is  only  a  half  truth;  it  is  looking  at  only  half  the  situation.  You  can  make 
a  trade  with  a  man  who  already  has  his  money  invested,  but  you  cannot  make  a  trade  of  that 
kind  with  a  man  who  is  going  to  invest  his  money  ne.xt  year  and  the  year  after.  That  man 
will  look  at  the  situation  in  the  street  railway  field  and  compare  it  with  the  situation  in  other 
lines  of  industry.  There  is  no  situation  that  I  know  of  where  competition  is  keener  than 
in  the  investment  of  money.  The  investor  looks  for  the  investment  which  he  considers  is 
going  to  be  the  most  favorable  for  him.  and  that  is  the  investment  which  he  buys.  Unless 
he  can  be  convinced  that  he  will  have  equal  security  and  an  equal  chance  for  profit  in  the 
street  railway  or  other  public  utility  industry  that  he  can  obtain  in  manufacturing  and  any 
other  line  of  industry,  he  will  put  his  money  into  manufacturing  and  not  into  the  public 
utility. 

Now.  that  problem  is  the  one  which  lies  at  the  basis  of  the  solution  of  this  whole  ques- 
tion. It  is  not  the  question  of  what  money  is  in  there  so  much  as  it  is  how  you  are  going  to 
get  additional  money  in  order  to  reasonably  serve  the  public." 

From  the  point  of  view  of  the  public,  .several  witnesses  familiar  with  con- 
ditions in  Massachusetts  gave  especially  significant  testimony.     Hon.   Frederick 


8  Electric  Railway  Problem 

J.  McLeod,  Chairman  of  the  Massachusetts  Public  Service  Commission,  testified 
as  follows  (pages  1454-1455  of  the  Proceedings)  : 

"The  difficulty  of  the  street  railway  problem,  as  I  view  it,  is  not  so  much  in  providing 
means  for  meeting  the  current  costs  of  operation,  although  that  problem  is  difficult  enough, 
God  knows,  but  it  is  the  problem  of  getting  in  them  new  capital. 

"It  is  an  absolute  essential  that  if  this  industry  is  going  to  go  on,  you  have  to  get  new 
capital  in. 

"For  various  reasons  the  street  railway  securities  have  received  such  a  black  eye  that 
investors  will  have  nothing  whatever  to  do  with  them ;  and  I  cannot  see  any  possibility  by 
fare  increases  of  any  extent,  of  restoring  the  companies  to  a  condition  where  the  investors 
will  be  willing  to  buy  tlieir  stock  on  any  reasonable  basis;  and  if  you  start  with  the  theory 
that  you  have  got  to  build  up  fares  and  street  railway's  return  to  a  point  where  you  are  going 
to  make  that  investment  attractive  to  the  people  who  have  money  to  invest,  you  have  got  to 
make  your  returns  so  much  that  they  are  going  to  be  absolutely  out  of  sight  of  what  anybody 
ever  supposed  was  within  the  bounds  of  possibility  as  a  reasonable  return." 

Mr.  Homer  Loring,  Cliairman  of  the  Board  of  Public  Trustees  for  the 
operation  of  the  Eastern  Massachusetts  Street  Railway  Company,  formerly  the 
Bay  State  system,  in  addressing  the  Commission  said  (page  1651  of  the  Pro- 
ceedings) : 

"Of  course,  the  question  Qf  credit,  to  my  mind,  is  the  most  important  thing  that  you 
gentlemen  have  to  consider.  It  is  difficult  enough  to  establish  credit  anyway,  and  it  is  doubly 
difficult  to  rcestal)lish  credit  alter  it  has  once  l)een  lost. 

"Now,  the  street  railways  of  the  country-  have  lost  their  credit.  With  few  exceptions,  I 
think  it  is  vcr\-,  verj'  doubtful  whether  they  are  going  to  be  able  to  get  the  credit  back  while 
under  private  management,  and  of  course,  that  becomes  to  my  mind,  the  most  important  argu- 
ment in  favor  of  public  ownership." 

This  point  of  view  was  further  emphasized  by  Interstate  Commerce  Com- 
missioner Joseph  B.  Eastman,  former  member  of  the  Massachusetts  Commis- 
sion, in  the  following  testimony  (pages  2068-2069  of  the  Proceedings) : 

"Coming  to  the  final  point.  I  really  think  it  is  the  vital  point:  You  ought  to  make  clear 
the  essential  need  of  adjusting  conditions  so  that  necessar>'  supplies  of  capital  can  \ye  secured. 
It  is  absolutely  vital  to  many  of  the  improvements  which  I  have  suggested  that  capital  should 
be  available  so  that  the  improved  ei|uipmcnt  and  apparatus  can  be  bought :  and  apart  from 
those  improvements,  it  is  ctjually  vital,  so  far  as  the  extensions  and  developments  of  the 
properties  in  the  future  are  concerned.  No  property  can  go  on  operating  in  a  growing  city 
unless  it  has  the  ready  means  of  securing  needed  capital." 

A  little  farther  on,  referring  to  the  disappointing  effects  of  increased  fares 
upon  the  financial  condition  of  the  companies,  Mr.  Eastman  said  (page  2069 
of  the  Proceedings) : 

"The  earnings  are  not  liigh  enough  to  support  the  credit  of  even  a  conservatively  capital- 
ized company,  in  many  cases,  and  even  if  the  earnings  were  better,  I  am  still  afraid  that  the 
credit  would  l>e  poor;  tx;cause  street  railways  have,  apparently,  cea.sed  to  be  an  attractive  field 
for  private  investment.  The  investors  are  afraid  of  street  railway  securities.  They  are  afraid 
because  of  their  exiicrience  in  the  past,  and  I  think  they  are  also  afraid  because  of  their  fear 
of  what  may  iwssibly  happen  in  the  future.  They  are  in  doubt,  for  instance,  in  regard  to  the 
possibilities  of  automobile  comiX-'tition  and  labor  complications." 


Chapter  III 

FUNDAMENTAL  IMPORTANCE  OF  LABOR  AS  A  FACTOR 
IN  STREET  RAILWAY  OPERATION 

The  electric  railways  differ  from  most  other  utilities  in  the  fact  that  they 
require  a  relatively  larger  number  of  employes,  and  these  employes  come  into 
more  frequent  contact  with  the  public.  The  electric  railways  render  a  service 
to  their  patrons  instead  of  delivering  a  commodity  to  them.  In  this  respect  they 
are  like  the  telephone,  but  even  the  telephone  girl,  on  account  of  her  invisibility, 
seems  relatively  impersonal  when  compared  with  a  street  car  motorman  or  con- 
ductor. From  the  point  of  view  of  the  public  the  street  railway  cannot  afford 
to  employ  human  automatons  or  merely  intelligent  workmen.  The  conductor 
and  the  motorman  require  a  certain  degree  of  technical  skill,  but  this  is  not  hard 
to  acquire.  Ordinarily  intelligent  men  can  be  quickly  trained  for  platform 
service  so  far  as  the  technical  end  of  the  work  is  concerned.  What  is  more 
important  is  their  personal  appearance  and  their  "social  qualities."  Moreover, 
there  is  no  other  utility  in  which  the  management  is  so  dependent  upon  the  care, 
the  honesty  and  the  faithfulness  of  the  great  body  of  its  employes  in  connection 
with  the  collection  of   its   revenue. 

During  the  war  some  electric  railways  experienced  considerable  difficulty 
in  getting  or  holding  a  sufficient  number  of  men  to  man  the  cars.  In  some  cases 
the  service  was  considerably  curtailed,  even  though  the  managements  knew  per- 
fectly well  that  they  were  losing  money  by  their  failure  to  run  more  car  miles. 
But  outside  of  the  period  of  most  intense  war  activity,  when  labor  was  scarce 
everywhere  and  fabulous  wages  were  being  paid  in  war  industries,  the  electric 
railways  of  the  country  have  never  experienced  any  general  or  prolonged  diffi- 
culty in  securing  an  adequate  number  of  trainmen.  The  men  employed  have  not 
always  measured  up  to  a  proper  standard  of  intelligence,  character  and  efficiency, 
but  for  this  the  companies  themselves  are  chiefly  responsible,  since  it  is  the 
companies  that  set  the  standards  through  the  wages  and  conditions  of  work 
offered  and  the  training  given  or  required. 

From  the  public  point  of  view  the  labor  problem  in  the  street  railway  in- 
dustry is  the  problem  of  securing  an  adequate  number  of  men  with  the  necessary 
qualifications  for  rendering  service,  and  with  the  sense  of  responsibility  and  the 
spirit  of  cooperation  that  will  effectively  prevent  them  from  abandoning  their  work 
for  the  purpose  of  causing  an  interruption  of  service.  Street  railway  service  does 
not  last  a  minute  after  the  men  quit  their  posts,  and  for  this  reason  it  is  essential 
that  the  men  be  continuously  in  a  frame  of  mind  that  will  prevent  strikes. 

The  National  War  Labor  Board  regarded  wages  as  an  operating  expense, 
and  held  that  the  payment  of  a  just  wage  should  not  be  dependent  upon  the 

9 


10  Electric  Railway  Problem 

financial  condition  of  the  employers.     Upon  this  pyoint  Ex-President  Taft's  testi- 
mony, at  page  2  of  the  Proceedings,  is  as  follows : 

"On  the  other  hand,  these  matters  were  referred  to  us  as  arbitrators,  and  the  issue  then 
arose :  Had  we  any  right,  in  considering  what  wages  would  be  fair,  to  take  into  considera- 
tion the  financial  condition  of  the  coniiiany  that  was  present  before  us  as  a  party?  And  we 
had  no  hesitation  in  reaching  the  conclusion  that  labor  was  as  much  entitled  to  an  indeiiendent 
consideration  of  what  its  wages  should  be  as  a  coal  man  was  who  furnished  coal  or  a  material 
man  who  furnished  iron ;  that  that  question  must  be  determined  by  what  was  being  paid  in 
similar  fields  of  labor.  Therefore  we  refused  flatly,  from  the  first,  to  consider  the  financial 
condition  of  any  company  in  determining  the  rate  of  wages.  Of  course  had  we  done  so,  we 
would  have  been  put  in  the  further  absurd  position,  which  seemed  to  demonstrate  the  correct- 
ness of  our  original  conclusion,  that  the  man  working  for  a  company  that  had  been  badly 
managed  and  was  carrying  on  the  business  under  conditions  that  rendered  it  unprofitable  for 
other  reasons  should  \>c  paid  less  for  the  same  work,  than  *  *  *  *  the  nian  who  served 
with  a  company  that  was  better  managed  and  had  a  profitable  arrangement.  So  that  on  all 
sides  it  seemed  to  us  that  that  was  the  just  conclusion. 

"We  realized,  however,  in  stepping  into  that  field  and  increasing  wages  free  from  that 
'back-against-the-wair  position  which  the  railway  employers  had  had  in  the  past — because  we 
were  acting  as  judges  and  as  arbitrators — that  we  might  bring  about,  inasmuch  as  wages 
formed  a  great  factor  in  the  cost  of  operation — that  we  might  bring  about  financial  trouble." 

The  awards  made  by  the  War  Labor  Board  had  the  result  of  greatly  and 
suddenly  increasing  the  cost  of  street  railway  operation,  and  this  was  regarded 
by  a  number  of  the  wntnesses  as  one  of  the  principal  factors  in  bringing  about 
insolvency  and  receiverships.  Upon  this  point,  Mr.  Francis  H.  Sisson,  Vice- 
President  of  the  Guaranty  Trust  Company  of  New  York,  after  discussing  the 
effect  of  the  decrease  in  the  purchasing  power  of  money  and  the  increase  in 
interest  rates  upon  the  credit  of  the  electric  railway  companies,  made  the  fol- 
lowing statement  at  page  318  of  the  Proceedings: 

"Another  factor,  however,  which  has  contributed  largely  to  the  difficulties  of  the  situation, 
has  been  the  wage  awards  of  the  National  War  Labor  Board. 

"In  this  connection,  it  may  be  illuminating  to  quote  the  following  sentence  from  a  letter 
written  by  the  receiver  of  a  New  England  electric  railway  company : 

"  "The  receivership  is  a  direct  result  of  the  National  War  Labor  Board's  award,  which 
placed  an  additional  payroll  burden  of  $125,000  per  annum  upon  the  company,  notwithstanding 
our  having  submitted  to  the  Board  a  full  statement  of  our  funds  and  demonstrating  to  them 
that  any  other  increase  in  wages  would  create  the  situation  which  we  now  face.' 

"In  a  hearing  between  the  street  car  companies  of  Cleveland  and  Detroit  and  their  men, 
the  comi>anies  pleaded  tliat  they  should  not  be  required  to  raise  wages  because  they  had  no 
income  out  of  which  to  pay  the  increase.     They  said : 

"'We  are  working  under  a  franchise  on  which  we  receive  only  three  or  four  cents  a 
passenger  carried  many  miles,  and,  if  a  substantial  increase  in  wages  be  granted,  bankruptcy 
and  a  receivership  follow.' 

"Yet.  the  joint  chairmen  of  the  Board  of  Arbitrators  in  the.se  cases  held  that  the  financial 
condition  of  the  companies  could  not  affect  the  issue  at  slake,  the  issue  of  wages. 

"Such  rulings  are  only  in  keeping  with  the  general  public's  attitude  toward  the  electric 
railways,  which  has  compelled  these  companies  to  operate  under  two  distinct,  and  in  some 
respects,  diametricallv  opposed  kinds  of  law.  legal  and  economic.  The  seriousness  of  this  handi- 
cap is  apparent  when  it  is  realized  that  probably  one-half  of  the  gross  operating  expenses  of  a 
railroad  consist  of  lalxir  costs,  which  are  constantly  increasing  while  the  abnormally  low  rates 
for  the  .ser\nce  rendered  by  electric  railways  were,  in  many  ra.ses,  fixed  years  ago  by  special 
laws,  or  by  provisions  contained  in  ordinances  or  franchises." 

While  there  was  a  general  recognition  on  the  part  of  the  witnesses  repre- 
senting the  -American  Electric  Railway  Association  and  those  representing  the 
public  that  the  decisions  of  the  War  Labor  Board  gave  the  electric  railways  a 
decided  financial  shock,  there  was  very  little  disposition  to  question  the  propriety 
of  the  policies  adopted  by  the  Board  or  its  decisions  in  particular  cases  where 
wage  increases  were  granted.  But  through  the  testimony  of  the  witnesses  rep- 
resenting the  electric  railway  companies,  and  of  those  representing  the  regulatory 


Importance  of  Labor  11 

bodies,  there  was  running  an  undercurrent  of  fear  that  labor  had  been  trained 
by  the  war  to  "take  the  bit  in  its  teeth"  and  that  the  future  financial  status  of  the 
industry  was  rendered  unstable  by  the  uncertainty  as  to  the  attitude  of  labor  in 
the  future.  Mr.  Sisson  spoke  from  the  point  of  view  of  the  investment  banker. 
Mr.  William  C.  Bliss,  Chairman  of  the  Rhode  Island  Public  Utilities  Commission, 
discussed  the  matter  more  from  the  point  of  view  of  the  public.  His  views  are 
found  at  page  1186  of  the  Proceedings,  as  follows: 

"I  wish  briefly  to  touch  upon  what  I  believe  have  been  the  fundamental  causes  of  the 
emergency  situation  that  exists. 

"The  increased  cost  of  labor  and  material  is  absolutely  at  the  foundation  of  the  problem. 
It  is  the  cause  of  increased  fares,  it  is  the  cause  of  receiverships  and  the  lack  of  prosperity 
on  the  part  of  the  companies.  I  believe  the  increased  cost  of  the  materials  could  have  been 
handled  and  can  be  handled  by  the  company.  The  increased  cost  of  labor,  I  see  no  definite 
way  of  handling.  I  do  not  know  any  way  in  which  it  can  be  dealt  with  until  the  people  who 
are  inconvenienced  by  strikes,  the  people  who  are  the  ones  who  have  to  pay  the  tremendoiis 
increased  burden  of  these  fares,  until  those  people  rise  up  and  educate  those  who  represent 
them  in  legislative  bodies  to  the  fact  that  some  authoritative  tribunal  must  pass  upon  these 
matters  and  that  the  public  convenience  must  be  considered  in  dealing  with  these  things,  and 
somebody  must  stand  up  and  definitely  and  finally  decide  what  shall  be  a  fair  wage ;  and 
strikes  of  the  people  after  such  a  decision,  or  organized  attempts  to  interfere  with  the  carrj'- 
ing  on  of  business  should  be  punished  according  to  law.  That  may  be  the  ultimate  way  out 
of  it.  Under  the  present  conditions  I  do  not  see  any  immediate  prospect  of  relief,  but  I  think 
all  of  us  must  realize  that  it  is  a  disorderly  way  of  dealing  with  the  problem  of  the  vrages  of 
men  employed  in  street  railway  employment,  to  force  the  public  to  suffer  the  inconvenience 
of  strikes." 

It  was  Stoutly  contended  by  witnesses  on  behalf  of  the  Amalgamated  Asso- 
ciation of  Street  and  Electric  Railway  Employes  that  the  wage  awards  made 
by  the  National  War  Labor  Board  were  moderate  to  the  point  of  conservatism. 
At  pages  43  and  44  of  the  Argtiment  and  Brief  filed  by  him  on  behalf  of  the 
employes,  Mr.  W.  Jett  Lauck,  former  secretary  of  the  War  Labor  Board,  said: 

"There  is  a  popular  idea  that  the  Xational  War  Labor  Board  in  its  wage  awards  to  street 
railway  employes  gave  the  finishing  push  that  sent  the  companies  upon  the  financial  rocks, 
but  that  is  not  the  truth,  -These  awards  affected  the  trainmen  directly  far  more  than  they 
affected  other  employes,  and  yet  Chart  A  shows  that  in  1918.  when  the  great  majority  of  the 
awards  were  made,  the  ratio  of  trainmen's  wages  to  total  salaries  and  wages  remained  at  the 
same  point   (49.1  per  cent)  that  it  was  at  in  1917. 

"During  the  year  1918  (and  the  first  few  months  of  1919)  the  National  War  Labor 
Board  made  wage  awards  on  about  90  street  railways,  including  a  good  many  of  the  leading 
companies  of  the  United  States.  Based  upon  the  increase  in  the  maximum  of  the  wage  scale, 
the  increase  per  company  (unweighted)  amounted  to  23}/^  per  cent,  while  the  weighted  increase 
per  trainman  amounted  to  22y2  per  cent. 

"But  from  December,  1917,  to  December,  1918.  the  weighted  cost  of  living  rose  from  141 
to  172  (the  base  being  July.  1914),  an  increase  of  22  per  cent,  so  the  awards  of  the  National 
War  Labor  Board  barely  kept  up  with  the  increase  in  the  cost  of  living  and  did  not  enable 
the  trainmen  to  catch  up  with  the  loss  they  had  already  sustained  since  1914.  to  say  nothing 
of  the  loss  from  1902  to  1914. 

"In  rendering  a  decision  upon  the  case  of  the  Bay  State  Street  Railway  of  Massachusetts, 
in  December,  1918.  Chairman  William  Howard  Taft  pointed  out  that  wages  in  the  electric- 
railway  industry  were  low  and  that  the  employes  were  underpaid.  But  in  spite  of  that  well- 
founded  opinion  the  Board  did  not  do  anything  to  rectify  the  injustice  it  found  to  exist 
except  in  a  few  of  the  more  grossly  underpaid  roads  such  as  New  Orleans. 

"The  awards  of  the  National  \\'ar  Labor  Board  were  not  of  as  much  effect  upon  the 
electric-railway  industry  as  the  increases  that  simultaneously  took  place  in  the  other  costs. 
This  is  shown  by  Charts  D  and  D-5.  In  1917  the  wages  of  trainmen  amounted  to  31.1  per 
cent  of  the  total  operating  expenses;  in  1918  they  amounted  to  30.9  per  cent.  In  1917  they 
were  as  large  as  45.1  per  cent  of  the  other  operating  expenses  (exclusive  of  trainmen's 
wages)  ;  in  1918  they  were  only  44.7  per  cent  as  large.  In  other  words,  during  the  year  from 
1917  to  1918,  trainmen's  wages  increased  17.6  per  cent  in  the  aggregate,  while  the  other  ex- 
penses increased   18.7  per  cent. 

"The  primary  duty  of  the  National  War  Labor  Board  was  to  keep  the  industries  of  the 
country  running  during  the  period  of  the  war.     It  well  fulfilled  that  duty.     But  in  the  case 


12  Electric  Railway  Problem 

of  the  street  railways,  at  least,  it  fulfilled  it  with  only  moderate  ad\-3nces  to  the  trainmen, 
assisted  by  the  patriotism  and  the  moderation  of  the  trainmen  themselves.  There  is  no  ground 
for  any  of  the  statements  which  have  been  made  to  the  effect  that  the  awards  of  this  Board 
were  excessive,  or  that  they  crippled  the  street  railway  industry." 

The  itnportance  of  the  labor  factor  in  the  cost  of  street  railway  operation 
was  discussed  at  length  by  Prof.  Mortimer  E.  Coolcy,  Dean  of  the  College  of 
Engineering  and  Architecture  of  the  University  of  Michigan,  a  witness  on  behalf 
of  the  companies.  His  views  appear  at  pages  269  and  270  of  the  Proceedings, 
as   follows : 

"Now  the  fact  appears  to  be  that  if  we  were  to  build  properties  within  the  last  year,  say, 
or  quite  recently,  we  would  have  to  pay  fully  SO  per  cent  more  to  secure  the  same  property, 
I  think  50  per  cent  is  a  very  conservative  estimate,  and  that  of  course  is  for  the  cost  of  the 
jiropcrty.  It  is  due  to  the  advance  in  labor  and  materials  and  other  elements  which  come  in. 
Now  when  you  come  to  operate  that  property  of  course  there  are  the  platform  expenses  of 
the  motorman  and  conductor  and  all  the  labor  has  advanced  tremendously;  1  think  in  some 
instances  doubled,  perhaps,  and  with  a  request  for  a  trebling. 

"The  importance  of  that  labor  element  alone,  that  wage  element  alone  almost  is  con- 
clusive answer,  because  under  pre-war  conditions  as  I  recall  the  fig^Jres  about  50  per  cent  of 
the  gross  operating  ex|x;nses  were  retiuired  to  pay  the  labor,  the  platform  expenses  and  the 
other  help  that  entered  into  it.  This  whole  operating  cost  excluding  taxes  was  about  one-half 
the  gross  income.  So  one-quarter  of  the  gross  income  was  labor  and  wages.  Now  suppose 
you  double  them,  that  25  per  cent  bc-comes  50  per  cent.  Suppose  you  treble  them,  see  where 
you  go.  You  have  simply  absorl)od  all  the  difference  l)etween  the  original  50  per  cent  that  you 
have  to  pay  for  taxes,  depreciation  fund  and  interest  on  the  capital,  on  the  funded  debt 
and  the  other  things  that  had  to  be  paid  out  of  the  income  over  and  above  the  cost  of  opera- 
tion per  se.     Now  you  double  the  cost  of  operation,  you  have  wiped  out  everything." 

Dr.  Thomas  Conway,  professor  of  finance  in  the  University  of  Pennsyl- 
vania, another  witness  for  the  Electric  Railway  Association,  referred  to  the 
sharj)  increase  in  the  cost  of  materials  in  1916,  and  then  took  up  the  problem 
of  labor  cost  at  page  944  and  page  947  of  the  Proceedings,  as  follows: 

"Then  the  labor  phase  of  the  situation  became  acute,  and  what  I  call  the  first  crisis  in  the 
labor  clement  was  reached  last  summer,  when  the  War  Labor  Board  was  called  upon  to  re- 
adjust wages  in  order  to  offset  the  increased  cost  of  living. 

"Now,  as  you  doubtless  know,  the  greater  part  of  the  expenses  of  an  electric  railway  is 
labor.  My  recollection  is  that  the  census  of  1912  shows  that  over  60  per  cent  of  the  total 
operating  expense  of  electric  railways  were  wages  and  salaries,  and  that  only  a  little  over 
1  per  cent  represents  the  salaries  of  officers.  A  recent  careful  study  of  the  cost  of  operation 
of  the  Public  Service  Fvailway  Company  for  the  12  months  ending  July  1st  of  this  year  showed 
that  over  75  per  cent  of  the  operating  expenses  were  labor,  and  since  that  time  the  War  Labor 
Board  has  raised  wages.  1  have  not  figured  it  out.  but  it  must  be  practically  80  per  cent  now 
of  the  operating  expcn.ses  of  that  company  are  labor. 

"The  increased  wages  which  the  War  I-ilxjr  Board  granted  to  the  men  l)eginning  last 
summer  and  extending  through  the  fall  and  winter  brought  a  very  serious  problem,  and  as  I 
see  it  the  companies  have  not  even  yet  lieen  able  to  readjust  their  fares  and  their  income  to 
take  up  these  increased  expenses  represented  by  the  increased  wages  granted  to  the  men  last 
summer  and   fall  anil  early  winter. 

"Niiw,  we  arc  alxiut  to  enter,  in  my  opinion,  the  third  phasse.  It  is  here.  It  is  on  us. 
We  are  just  coming  into  it.  and  that  from  the  standpoint  of  the  companies  is  the  most  serious 
of  all.  on  the  theory  that  it  is  the  last  straw  that  breaks  the  camel's  back. 

"You  know  the  wages  of  trainmen,  and  they  carry  with  them  collateral  increases  for 
other  classes  of  employes,  have  recently  Ix-en  increased,  by  one  methixl  or  another,  and 
the  pnx-ess,  as  I  see  it,  of  a  second  general  rcidjustment  is  here. 

"1  call  attention  to  the  recent  increase  in  Detroit  from  -(8  cents  to  60  cents  an  hour,  and 
in  rii-velaiul  4S  cents  to  60  cents  an  hour. 


"Now  if  I  am  correct  in  my  assumption  that  these  increases  in  wages  which  have  come 
about  in  the  last  few  days  are  the  forenmners  of  another  general  advance,  such  as  occurred 
in  the  late  summer,  then  all  of  these  increased  rates  are  going  to  be  as  inadequate,  or  almost 
as  inadei|ua(e,  as  wrre  the  rates  prior  t.i  the  tiinr  ..f  the  last  increases.  We  have  got  to  get 
over  another  mountain." 


Importance  of  Labor 


13 


Specific  figures  showing  the  increase  in  the  average  rate  per  hour  paid  to 
trainmen,  from  1906  to  1919,  were  presented  by  Mr.  James  W.  Welsh,  statisti- 
cian of  the  American  Electric  Railway  Association.  At  page  111  of  the  Pro- 
ceedings he  introduced  Chart  C-133  based  upon  the  average  rate  per  hour  paid 
by  about  sixty  companies  having  over  100  miles  of  single  track  each.  The  figures 
accompanying  this  chart  are  given  at  page  112  of  the  Proceedings,  as  follows: 


Rate 

Per  Cent 

"Year 

Per  Hour 

Increase 

1906  .... 

23.03 

100. 

1907  .... 

24.11 

104.69 

1908  .... 

24.75 

107.47 

1909  .... 

24.57 

106.69 

1910  .... 

25.85 

112.24 

1911   ... 

26.10 

113.33 

1912  .... 

26.89 

116.76 

Rate 

Per  Cent 

Year 

Per  Hour 

Increase 

1913   ... 

27.74 

120.45 

1914  ... 

28.14 

122.23 

1915  ... 

28.62 

124.27 

1916  ... 

29.25 

127.01 

1917  ... 

31.57 

137.08 

1918  ... 

33.92 

147.29 

1919  ... 

44.43 

192.92" 

Mr.  Welsh  explained  that  the  rate  per  hour  shown  in  each  year  was  the  aver- 
age rate  of  all  the  companies  based  upon  the  rates  paid  to  the  men  oldest  in  service. 
These  figures  indicate  a  wage  increase  of  92.92%  from  1906  to  1919,  but  the 
increase  from  1914  to  1919  was  only  57.88%.  Mr.  Bently  Warren,  counsel  for 
the  Association,  stated  in  this  connection  that  an  investigation  by  a  Massachusetts 
company  with  which  he  was  familiar  showed  an  increase  of  105%  in  the  weighted 
average  prices  of  materials  and  supplies  from  1914  to  1918.  This  and  other 
evidence  produced  before  the  Commission  tended  to  show  that  trainmen's  wages 
had  not  increased  nearly  as  much  as  the  prices  of  street  railway  commodities. 
It  is  shown  at  page  67  of  the  brief  submitted  on  behalf  of  the  employes  that  the 
cost  of  the  workingmen's  budget  rose  from  $979  in  1914  to  $1,653  in  1919.  This 
was  an  increase  of  68.8%.  On  page  43  of  this  brief,  it  is  claimed  that  "wage 
rates  have  not  advanced  as  fast  as  the  cost  of  living."  In  support  of  this  claim, 
a  chart  is  presented  which  shows  that  from  1914  to  January,  1917,  wage  rates 
advanced  8%  while  the  cost  of  living  advanced  16%  ;  that  by  January,  1918,  wage 
rates  had  advanced  15%  and  the  cost  of  living  41%  ;  and  by  January,  1919,  the 
wage  rate  increase  had  reached  48%  and  the  cost  of  living  increase  72%.  In  its 
general  conclusions  the  employes'  brief  maintains  that  "the  present  plight  of 
the  electric  railway  industry  is  not  brought  about  by  any  increase  that  has  been 
made  in  the  wages  paid  to  the  trainmen,"  and  contends  that  "quite  to  the  con- 
trary, the  trainmen  have  not  received  an  increase  that  is  at  all  commensurate 
with  the  great  increase  that  has  taken  place  in  the  cost  of  living."  The  employes 
further  contend  that  the  average  annual  earnings  at  the  1919  rates  of  pay, 
amounting  to  about  $1,300,  should  be  increased  to  a  minimum  of  $2,000  to  cover 
a  living  wage  under  present  conditions.  They  maintain  that  before  the  war  they 
were  underpaid,  and  that  now  they  are  still  more  underpaid.  This  indicates  that 
if  labor  is  to  be  induced  to  do  its  work  efficiently  in  the  electric  railway  field, 
further  wage  increases  and  improvements  in  working  conditions  are  likely  to 
be  necessary. 

The  fact  that  both  the  employing  companies  and  the  riding  public  have 
heretofore  too  much  neglected  the  human  element   in  considering  the  problem 


14  Electric  Railway  Problem 

of  street  railway  labor  is  strikingly  set  forth  at  page  55  of  the  employes'  brief 
in  the  following  discussion  of  "the  old  theory  of  wages" : 

"During  the  past  few  years  there  has  been  a  complete  change  in  the  principles  which 
have  previously  been  put  forward  as  the  economic  justification  for  wage  determinations.  The 
old  thcor)'  was  that  wages  were  determined  by  the  law  of  supply  and  demand.  Labor,  in  other 
words,  was  viewed  as  a  commodity  whose  value  was  determined  in  the  same  way  as  other 
commodities  such  as  wheat,  coal,  and  iron  and  steel.  Little,  ii  any.  consideration  was  given 
by  the  economists  of  past  years  to  the  human  or  ethical  elements  in  the  wage  problem.  Their 
point  of  view  was  that  the  supply  of  labor  as  a  iiroductive  factor  increased  in  geometrical 
ratio.  Through  the  placing  of  this  supply  at  any  time  over  against  the  demand  for  labor,  the 
rate  of  pay  to  labor  was  determined.  In  the  event  of  any  dislocation  to  or  collapse  in  industry, 
labor  was  the  residual  sufferer.  The  evils  arising  from  unrestrained  competition,  the  cutting 
of  prices,  decreased  indu.strial  demand  and  industrial  depression  or  collapse  were  by  the  alleged 
immutable  laws  of  economics  imposed  upon  the  wage-earner.  It  is  no  cause  for  wonderment 
that  industrial  workers  came  under  these  pronouncements  to  look  upon  economics  as  the 
dismal  science  of  despair,  I'nder  its  principles  they  were  without  hope.  Their  only  oppor- 
tunities for  ad\-ancing  their  well-lx-ing  lay  in  producing  goods  faster  than  the  labor  supply 
increased,  in  reducing  the  birth  rate.  or.  in  the  advent  of  some  fortuitous  pestilence,  plague, 
or  earthquake,  or  war,  whicii  would  decimate  the  labor  supply  and  thus  give  labor  a  greater 
bargaining  power  in  dealing  with  employers. 

"But  the  enlightened  opinion  of  mankind  refused  to  continue  to  give  its  sanction  to  such 
a  hopeless  thcor)-  of  wage  determination.  More  consideration  came  to  be  extended  to  labor 
as  a  human  and  moral  being.  Gradually  the  conception  was  evolved  that  human  welfare  was 
superior  to  considerations  of  relentless,  economic  selfishness.  Industry  came  to  be  considered 
as  existing  for  men  and  not  men  for  industry-.  Industr>-,  it  was  concluded,  should  be  the 
sers-ant  and  not  the  master  of  humanity.  The  verdict  was  accepted  that  any  industrj-  which 
could  not  o[)erate  under  these  humane  and  ethical  limitations  was  anti-social.  Labor  was  no 
longer  to  be  considered  as  a  raw  material  of  industry  or  to  be  used  and  have  its  price  de- 
termined as  raw  material." 


Chapter  IV 

CREDIT  AND  COOPERATION  THE  COORDINATE  NEEDS 
OF  THE  ELECTRIC  RAILWAYS 

It  is  clear  from  the  preceding  analysis  that  the  two  big  things  in  the  electric 
railway  situation  today  are  the  need  of  credit  and  the  need  of  cooperation. 
Credit  will  enable  the  electric  railways  to  rehabilitate  themselves,  to  adjust  their 
capital  accounts  through  the  process  of  normal  replacements  to  the  higher  price 
levels  of  the  time,  and  to  grow  with  their  job.  The  cooperation  of  labor  will 
enable  them  to  render  continuous  and  popular  service,  to  effect  operating  econo- 
mies and  to  get  into  their  treasuries  the  full  amount  of  revenue  collected  from 
the  riding  public.  First  class  credit  and  the  full  cooperation  of  their  employes, 
if  properly  utilized  in  rendering  adequate  public  service,  would  give  the  electric 
railways  a  well-night  impregnable  position  in  their  relations  to  the  public,  and 
would  enable  them  to  disarm  and  overcome  the  prevailing  antagonism  against 
them.  With  capital  and  labor  doing  their  respective  parts  freely  and  well, 
restrictive  regulation  would  be  unpopular  and  the  demand  for  the  substitution 
of  public  ownership  and  operation  for  private  management  would  shrink  into 
relative  insignificance.  The  test  of  private  ownership  and  management  lies  in 
the  solution  of  these  two  problems  of  credit  and  cooperation.  These  problems 
must  be  solved,  and  if  no  solution  of  them  is  practicable  under  the  present 
ownership  and  control,  then  the  only  course  open  is  the  complete  transformation 
of  the  electric  railway  industry  into  a  governmental  business.  It  may  be  that 
credit  and  labor  cooperation  cannot  be  secured  without  the  cooperation  of  the 
public  in  a  readjustment  of  the  public  relations  of  the  industry,  and  it  may  be, 
on  the  other  hand,  that  public  cooperation  in  bringing  about  such  a  readjustment 
cannot  be  had  until  the  companies  have  secured  the  necessary  credit  and  the 
necessary  cooperation  of  labor.  If  this  proves  to  be  the  case,  then  the  "vicious 
circle"  of  influences  cannot  be  broken  except  by  the  discharge  of  the  existing 
agencies  and  the  liquidation  of  the  public's  obligations  to  them  preparatory  to 
a  new  regime  in  the  electric  railway  world.  It  would  appear  that  the  Commis- 
sion's problem  is  to  analyze  the  factors  afifecting  street  railway  credit  and  the 
cooperation  of  labor,  with  a  view  to  determining  by  what  policies  and  measures 
these  essential  conditions  of  effective  public  service  can  be  brought  about. 


15 


Chapter  V 

CONDITIONS  IN  ELECTRIC  RAILWAY  OPERATION 
NORMALLY  FAVORABLE  TO  CREDIT 

During  the  past  two  decadts  the  electric  railway  industry  has  gone  through 
a  period  of  remarkable  development.  The  special  Census  report  for  the  year  1902 
showed  4,774,000.000  revenue  passengers  carried  and  the  Census  report  for  1917 
showed  11,304,000,000  revenue  passengers  carried,  an  increase  of  nearly  137%. 
The  net  capitalization  of  electric  railways  reported  by  the  Census  Bureau  grew 
during  the  same  period  from  $2,117,000,000  to  $4,889,000,000,  an  increase  of 
about  131%.  The  Census  figures  also  show  that  the  mileage  of  single  track 
grew  from  22.577  in  1902  to  44.835  in  1917,  an  increase  of  just  under  1007c. 
The  testimony  before  the  Commission  even  indicated  that  in  certain  localities, 
notably  in  New  England,  the  street  railways  were  overbuilt  during  the  first 
years  after  the  introduction  of  electricity  as  a  motive  power. 

After  a  period  of  rapid  growth,  such  as  that  which  has  characterized  electric 
railway  development  during  the  past  20  years,  it  would  seem  that  the  rate  of 
expansion  might  slow  down  in  a  crisis,  and  that  the  demand  for  new  capital 
might  be  greatly  reduced  over  a  considerable  period  of  years  if  financial  conditions 
were  unfavorable.  In  fact,  this  process  of  curtailment  in  capital  expenditures 
was  enforced  during  the  war  by  Federal  action,  as  well  as  by  the  inherent 
difficulty  of  securing  new  materials  and  money  to  buy  materials  during  that 
time.  It  is  true  that  the  readjustments  of  industry  and  population  in  connection 
with  war  activities  required  extensions  and  additional  facilities  in  certain  spots 
and  that  these  particular  extensions  and  improvements  were  imperative.  In 
many  of  these  cases,  however,  the  Federal  Government  felt  warranted,  as  a 
part  of  its  war  program,  in  advancing  the  funds  required. 

So  far  as  credit  requirements  in  normal  times  are  concerned,  certain  charac- 
teristics of  the  electric  railways  and  certain  conditions  under  which  they  operate 
tend  to  make  their  credit  easy  and  almost  unlimited.  In  the  first  place,  they 
have  enjoyed  a  monopoly  of  the  most  convenient  form  of  local  transportation 
during  a  period  of  rapid  industrial  development  and  of  rapid  increase  in  urban 
population.  They  have  a  continuous  and  immediate  market  for  their  "goods." 
They  sell  transportation  as  it  is  produced.  While  electric  railway  traffic  fluctu- 
ates somewhat  fnim  year  to  year  according  to  the  degree  of  business  prosperity 
that  prevails,  and  fluctuates  somewhat  from  season  to  season,  from  week  to 
week  and  from  day  to  day,  these  fluctuations  are  relatively  unimportant.  The 
business  of  transportation  goes  on  every  day  in  the  year.  Local  transportation 
is  a  necessity  that  grows  out  of  the  conditions  of  urban  life,  and  the  demand 
for  it  will  not  be  greatly  diminished  except  by  industrial  and  social  changes 

16 


Conditions  Favorable  to  Credit  '  17 

that  result  in  reducing  the  population  of  cities  or  in  radically  changing  the 
habits  of  the  people.  I  have  already  referred  to  the  steady  growrth  of  the  riding 
habit  in  the  metropolitan  district  of  New  York  over  a  period  of  60  years  and 
to  the  growth  in  the  riding  habit  on  the  Stone  &  Webster  properties  in  the  South 
and  West. 

The  increase  in  revenues  of  the  electric  railways  is  a  product  of  three 
factors,  all  of  which  are  going  up.  These  are  the  increase  in  urban  population, 
the  increase  in  the  riding  habit  and  the  increase  in  the  rate  of  fare.  The  gross 
operating  revenues  of  the  electric  railways  grew  from  $247,000,000  in  1902  to 
$650,000,000  in  1917,  an  increase  of  163%.  For  a  number  of  years,  particularly 
during  the  first  decade  of  the  century,  there  was  a  strong  tendency  toward  fare 
reductions  in  many  urban  communities,  but  the  figures  just  given  show  that 
for  the  country  at  large  the  total  amount  of  electric  railway  operating  revenues 
increased  by  a  much  greater  per  cent  than  the  number  of  revenue  passengers 
during  the  15  years  ended  with  1917.  Since  the  latter  date,  there  has  been  a 
strong  upward  tendency  in  street  railway  fares.  Statistics  covering  75%  of 
the  street  railway  traffic  of  the  country  indicate  an  increase  of  nearly  14%  in 
the  average  fare  paid  from  1917  to  1919,  and  an  increase  of  about  22%  in  pas- 
senger earnings  during  this  2-year  period.  Without  a  doubt,  the  enjoyment  by 
the  electric  railway  industry  of  a  steady  inflow  of  revenue,  of  rapidly  increasing 
volume,  assured  by  the  most  fundamental  conditions  of  modern  life  and  the 
strongly  developed  habits  of  the  people,  is  a  condition  extremely  favorable  to 
credit.  In  what  other  industry  could  investments  be  made  with  greater  assurance 
of  security  and  continued  earning  power? 

But  this  is  by  no  means  the  only  condition  in  the  electric  railway  industry 
favorable  to  credit.  The  tracks  for  the  most  part  are  in  the  public  streets  where 
everybody  can  see  them.  The  operation  of  the  cars  is  most  conspicuous.  It 
would  be  hard  to  find  another  industry  where  the  investment  is  so  completely 
visible  and  so  easily  observed  by  the  entire  local  population.  If  publicity  of 
operation  is  a  guaranty  against  the  waste  or  disappearance  of  capital,  then  the 
position  of  the  electric  railway  where  everybody  can  observe  it  every  day,  is 
surely  conducive  to  the  development  and  retention  of  credit.  From  this  point 
of  view,  how  different  is  a  street  railway  investment  from  an  investment  in 
mining  stock,  or  in  fruit  lands  of  the  Far  West,  or  even  in  manufacturing  enter- 
prises in  one's  home  city ! 

Another  thing  that  under  normal  conditions  strengthens  the  credit  of  the 
electric  railway  business  is  its  relatively  small  need  for  "fluid"  or  working  capital. 
In  this  respect  it  occupies  a  position  more  independent  than  that  of  any  other 
utility  or  any  ordinary  private  industry.  It  does  a  cash  business.  Almost  100% 
of  its  revenues  are  collected  in  advance,  through  the  sale  of  tickets,  or  at  the 
very  time  when  the  service  is  rendered,  through  the  collection  of  fares  on  the 
cars.  The  money  flows  into  its  coffers  day  by  day  in  a  relatively  even  stream. 
Before  it  pays  the  wages  of  its  employes  or  the  salaries  of  its  officers ;  before 
it  pays  the  claims  resulting  from  injuries  and  damages;  before  it  pays  rentals 
for  the  use  of  property  or  interest  and  dividends  on  its  investment ;  generally 
before  it  pays  its  taxes  to  the  municipality  or  the  state,  it  has  already  collected 


18  Electric  Railway  Problem 

from  its  patrons  in  cash  full  compensation  for  the  service  rendered.  It  does 
not  have  to  manufacture  and  store  up  large  quantities  of  service  in  advance  of 
the  demand  for  such  sT\ice.  It  does  not  have  to  render  the  service  for  a  month, 
or  a  quarter,  or  6  months,  and  then  send  out  bills  to  its  patrons  and  wait  an 
indefinite  period  thereafter  before  receiving  its  revenue.  It  has  no  uncollectable 
accounts  to  write  off  because  of  "dead-beat"  customers.  While  it  has  to  purchase 
in  advance  a  certain  amount  of  materials  and  supplies  for  use  in  operation 
and  maintenance,  and  in  some  cases  pays  a  fraction  of  its  taxes  in  advance,  these 
prepayments  attributable  to  the  cost  of  service  at  a  given  period  are  under  all 
ordinary  conditions  much  more  than  ofTset  by  the  payments  deferred  until 
after  the  revenues  are  in.  Under  these  conditions,  a  street  railway  operated  on 
a  sound  business  basis  with  conser\'ative  management  would  have  ver>'  little 
need  of  working  capital  and  would  have  no  difficulty  whatever  in  securing  it 
in  an  emergency. 

Moreover,  it  is  now  well  recognized  by  street  railway  operators,  valuation 
engineers  and  utility  experts  that  a  street  railway  in  the  usual  course  of  its 
development  is  renewed  and  replaced  piece-meal.  Its  individual  parts  have 
different  useful  lives  and  are  replaced  from  time  to  time  individually.  After  a 
certain  number  of  years  a  street  railway,  under  normal  conditions  of  operation. 
will  settle  down  to  a  depreciated  condition,  which  in  the  phraseology  of  valua- 
tion engineers  will  be,  perhaps,  70%  of  cost  new.  By  proper  maintenance,  it 
can  be  held  in  approximately  that  condition  permanently.  The  protection  of 
the  original  investment  demands  either  that  the  difterence  between  the  100% 
originally  put  into  the  property  when  new  and  the  70%  remaining  in  it  after  it 
has  reached  a  normally  dei)reciated  condition  shall  be  taken  out  of  the  earnings 
and  returned  to  the  investors,  with  a  corresponding  reduction  in  capital,  or  else 
that  a  depreciation  reserve  equivalent  to  this  difference  shall  be  accumulated 
and  held  as  a  fund  for  use  by  the  company  in  connection  with  the  maintenance 
and  expansion  of  its  facilities.  It  is  not  usually  regarded  as  practicable  to 
reduce  capitalization  to  take  care  of  this  accrued  depreciation.  Most  electric 
railways  are  growing,  and  it  is  usually  more  advantageous  to  re-invest  the 
de|)reciation  reserve  in  additions,  extensions  and  improvements  than  to  pay  it 
back  to  the  investors,  reduce  the  capitalization  and  then  turn  around  and  increase 
it  again  in  order  to  secure  new  money  for  such  jnirposes.  On  account  of  these 
conditions,  a  sound  financial  policy  would  result  in  the  accumulation  of  a  reserve 
available  for  minor  extensions  and  betterments  and  thus  relieve  the  street  railways 
of  the  necessity  of  going  into  the  market  for  new  money  at  unfavorable  times. 
ICvcii  if  the  funds  in  such  a  ilei)reciation  reserve  were  invested  promi)tly  in  the 
property  so  that  the  cash  accumulations  at  any  given  time  were  small,  the  fact 
that  the  total  physical  property  had  been  kept  u])  to  a  level  with  the  par  value 
of  the  capital  account,  or  of  the  securities  outstanding  against  it,  would  immensely 
strengthen  the  companies'  credit  in  a  time  of  general  financial  stringency,  and 
the  street  railways  would  be  in  the  |M)sition  of  a  favored  applicant  for  such  new 
capital   as  they  imperatively  required. 

The  capital  st(Kk  of  electric  railways  does  not  require  to  be  refunded, 
and  under  a  .sound  financial  policy  the  proportion  of  stock  to  bonds  outstanding 


Conditions  Favorable  to  Credit  19 

would  undoubtedly  be  much  greater  than  has  usually  been  the  case.  This  is 
well  illustrated  by  the  pohcy  of  the  Cleveland  Railway  under  the  service-at-cost 
franchise  that  has  been  in  force  in  that  city  during  the  past  10  years.  There 
the  amount  of  bonds  outstanding  at  the  time  the  Tayler  settlement  became  effec- 
tive in  1910  has  been  greatly  reduced,  and  the  amount  of  capital  stock  outstanding 
representing  cash  at  par  has  been  greatly  increased,  with  the  result  that  at  the 
present  time  the  Cleveland  Railway  has  only  about  $5,000,000  of  bonds  out,  as 
against  $28,000,000  of  capital  stock.  On  this  point  significant  testimony  was 
presented  at  page  1587  of  the  Proceedings  by  Mr.  Thos.  L.  Sidlo,  of  Cleveland, 
who  for  several  years  was  associated  with  the  city  street  railroad  commissioner, 
and  later  became  counsel  for  the  Cleveland  Railway  Company.     He  says : 

"It  is  unnecessary  to  rehearse  the  difficulties,  embarrassments  and  tragedies  in  street 
railway  history  that  have  resulted  from  financing  by  means  of  mortgage  indebtedness.  It  is 
pretty  generally  agreed  by  everybody  who  has  made  a  study  of  street  railway  finances  that 
it  will  be  a  happy  day  when  the  lienholder  is  eliminated  from  street  railway  ownership.  His 
presence  has  been  as  hurtful  to  the  company  as  to  the  community.  He  has  been  the  chief 
cause  of  the  spirit  of  absenteeism  in  street  railway  management  and  has  probably  done  more 
to  bring  the  industry  into  disrepute  than  the  old-fashioned,  'Public-be-damned'  operator.  But 
how  eliminate  him?  With  an  efficient  cost-of-service  plan,  mortgage  bonds  are  unnecessary 
as  a  mode  of  financing.  A  property  can  be  financed  by  selling  shares  exclusively.  And  these 
can  be  sold  to  purchasers  living  in  the  community  in  which  the  utility  is  located,  and  should 
be  so  sold.  The  property  will  thus  acquire  an  alert,  informed  body  of  owners,  who  will 
desire,  along  with  security  and  certainty  of  return  on  their  investment,  that  proper  and  adequate 
service  shall  be  rendered  the  community.  Such  a  body  of  security  holders,  and  none  other, 
will  see  to  it  that  the  property  has  a  management  that  recognizes  and  is  able  to  administer 
the  profit-making  aspect  of  the  job  not  only,  but  the  public  service  aspect  as  well.  The  value 
of  this  sort  of  ownership  arrangement  has  been  eminently  demonstrated  in  Cleveland.  The 
fact  that  at  the  present  time  there  is  relatively  no  bonded  indebtedness  but  on  the  contrary 
a  predominant  body  of  resident  share-holders,  is  making  the  Cleveland  plan  a  success  as  much 
as  any  other   factor." 

It  is  true  that  under  the  old  methods  of  promotion,  street  railway  properties 
were  financed  chiefly,  if  not  wholly,  through  the  proceeds  of  bond  sales,  but 
in  those  days  bonus  stock  was  issued  to  the  purchasers  of  the  bonds,  and  the 
amount  of  capital  stock  in  the  nominal  capitalization  often  greatly  exceeded  the 
amount  of  bonds  outstanding.  Later  on,  when  state  regulation  became  effective, 
the  issuance  of  bonus  stock  was  no  longer  permitted,  and  the  condition  of  the 
companies'  existing  capitalization  made  it  impossible  to  sell  additional  capital 
stock  under  the  terms  prescribed  by  state  commissions,  so  that  during  the  past 
10  years  the  amount  of  street  railway  bonds  outstanding  has  increased  much 
more  rapidly  than  the  amount  of  stock.  With  this  shifting  in  the  nature  of  the 
securities,  the  importance  of  refunding  operations  in  street  railway  finance  has 
been  increased. 

Under  a  conservative  financial  policy,  refunding  difficulties  would  be  almost 
negligible.  The  portion  of  the  investment  represented  by  capital  stock  would 
not  have  to  be  refunded,  and  the  relatively  smaller  portion  of  the  investment 
represented  by  bonds  could  be  refunded  as  a  matter  of  course,  on  account  of 
the  unusual  security  that  would  attach  to  street  railway  bond  issues.  It  is 
true  that  if  market  conditions  had  changed  from  the  time  when  the  original 
bonds  were  issued  it  might  be  necessary  in  refunding  to  change  the  rate  of 
interest.  In  times  past,  street  railway  bonds  bearing  6%  or  7%  interest  have 
often  been  refunded  at  4^4%  or  5%.     In  like  manner  bonds  bearing  4-^2%  or 


20  Electric  Railway  Problem 

5%  might  have  to  be  refunded  at  6%,  if  at  the  time  of  their  maturity  the  rate 
of  interest  had  gone  up.  The  process  of  refunding  does  not  call  for  new  capital. 
With  an  adjustment  of  the  rate  of  interest  in  accordance  with  the  conditions  of 
the  money  market,  an  investor  who  already  has  his  money  in  an  electric  railway 
would  be  satisfied  to  leave  it  there  rather  than  go  to  the  trouble  of  taking  it  out 
and  investing  it  somewhere  else  at  the  same  rate  of  interest.  The  thing  that 
makes  refunding  operations  difficult  in  an  electric  railway  enterprise  is  some 
condition  of  insecurity  or  fear  of  insecurity  that  has  intervened  since  the  original 
bonds  were  issued.  But  the  bondholders'  sense  of  security  would  be  strongly 
maintained,  even  in  a  great  emergency,  if  a  street  railway  had  been  conducted 
up  to  that  time  on  the  basis  of  conservatism  and  sound  finance,  with  a  proper 
depreciation  reserve  invested  in  betterments  and  a  large  proportion  of  the  actual 
cost  of  the  property  represented  by  shares  of  stock. 

If  street  railway  credit  is  languishing  or  dead  it  must  be  the  result  of  an 
extraordinary  combination  of  causes,  for  in  the  entire  industrial  field  it  would 
be  hard  to  find  a  business  in  which  the  inherent  conditions  are  more  favorable 
to  robust  and  long  life  so  far  as  credit  is  concerned. 


I 


Chapter  VI 

CONFLICTING  EVIDENCE   AS   TO   AMOUNT   OF   NEW   CAPITAL 

REQUIRED  ANNUALLY  IN  THE  ELECTRIC 

RAILWAY  INDUSTRY 

General  Guy  E.  Tripp,  Chairman  of  the  Committee  of  One  Hundred  ap- 
pointed by  the  American  Electric  Railway  Association  to  prepare  and  present 
to  the  Commission  the  testimony  on  behalf  of  the  companies,  in  his  opening 
statement,  referred  to  the  electric  railway  industry  as  having  "an  investment 
capital  of  something  like  seven  billion  dollars  and  an  annual  income  of 
$730,000,000"  and  as  being  "in  extreme  danger  of  complete  collapse  and  dissolu- 
tion" (page  67  of  the  Proceedings).  He  also  referred  to  the  electric  railways 
as  "an  industry  which  requires  $200,000,000  of  new  capital  each  year  and  a  larger 
sum  than  that  for  its  refunding  operations,"  and  stated  that  this  industry 
"cannot  indefinitely  remain  in  its  present  condition  without  an  effect  upon  the 
financial  system  of  the  country"  (page  67  of  the  Proceedings). 

Mr.  Henry  G.  Bradlee,  President  of  the  Stone  &  Webster  Corporation, 
presented  a  diagram  showing  the  amount  of  capital  required  in  various  industries 
to  carry  on  a  business  of  $100,000  in  gross  earnings  (page  202  of  the  Proceed- 
ings). This  diagram  had  been  prepared  by  Stone  &  Webster  as  a  result  of  an 
investigation,  undertaken  about  three  years  ago  and  extending  over  a  period  of 
about  a  year,  to  determine  "the  amount  of  capital  required  for  various  branches 
of  industry."  Referring  to  this  diagram,  Mr.  Bradlee  testified  at  pages  202  and 
203  of  the  Proceedings : 

"You  will  see  from  this  diagram  that  the  amount  of  capital  required  to  carry  on,  for 
example,  the  construction  business,  that  is  a  contractor,  is  low.  A  capital  of  less  than  $50,000 
will  do  $100,000  of  business.  The  same  is  true  in  what  we  have  termed  the  trading;  that 
means  retail  and  wholesale  business.  In  manufacturing,  the  capital  appears  to  just  about  equal 
the  gross  annual  business  transacted.  In  mining,  due  to  the  large  amount  of  investment  in 
mining  lands,  mineral  lands,  the  investment  materially  increases.  Then  we  come  to  the  group 
of  public  utilities,  telephone,  gas,  electric  light,  street  railway  and  steam  railway,  in  which 
the  capital  required  is  from  four  hundred  thousand  to  five  hundred  thousand  dollars  at  least 
to  carry  on  $100,000  of  gross  earnings.  Last  of  all  is  agriculture,  which  is  even  higher  than 
public  utilities. 

******** 

"There  is  no  other  industry  which  apparently  requires  an  operating  plant  equal  to  its 
annual  gross  earnings.  The  public  utility  requires  a  plant  several  times  its  annual  gross 
earnings,  from  four  to  five  times. 

"Now  this  has  a  direct  bearing  on  the  earnings  of  the  utility,  the  necessary  earnings. 
If  a  retail  merchant  is  able  to  turn  over  his  capital  three  times  a  year  and  in  turning  it  over 
makes  y,^  per  cent  profit  on  each  turn-over  he  will  make  10  per  cent  a  year  on  his  entire 
investment.  A  public  utility,  on  the  other  hand,  will  turn  its  capital  over  only  once  in  every 
four  to  five  years  and  in  order  to  make  a  reasonable  return  on  that  capital  or  rather  to  make 
the  same  10  per  cent,  if  it  were  10  per  cent,  it  would  be  necessary  to  pay  out  from  40  to  SO 
per  cent  of  the  gross  earnings  as  a  return  on  the  investment.  In  other  words,  the  trader  or 
merchant  may  get  along  with  3%  per  cent  profit  and  earn  10  per  cent  on  his  capital  whereas 
the  public  utility  must  pay  out  40  to  SO  per  cent  of  its  gross  to  earn  an  equal  return  on  the 
public  utility  capital. 

21 


22  Electric  Railway  Problem 

"The  capital  rc(|uircments  of  the  r"blic  \itility  are  not  as  they  are  soinetimcs  supposed, 
paid  in  in  the  creation  of  a  property  at  the  start  and  then  continued  at  a  more  or  less  uniform 
rate.  On  the  contran,-,  there  must  be,  as  Mr.  Stuart  told  you.  a  continual  contribution  of 
capital  ■>ear  by  year  and  month  by  month.  The  public  utilities  in  all  parts  of  this  country 
^re  growing  and  growing  steadily,  and  there  is  continually  increased  demand  for  service  due 
to  increased  population  and  also  to  increased  demand  per  capita  in  a  given  population,  and  to 
meet  this  increase  in  service  it  is  necessary  lor  the  public  utility  to  continually  add  to  its 
investment. 

"The  addition  of  capital  follows  very  closely  the  increase  in  business.  I  have  brought 
with  me  here  two  charts  of  one  of  our  street  raijway  companies ;  they  are  identical,  .^nd  on 
those  charts  you  will  sec  two  lines.  The  black  line  shows  the  increased  investment  in  the 
property,  starting  at  the  beginning  of  the  period,  and  then  running  through  the  long  series 
of  years,  adding  each  year  the  new  capital  which  was  invested  that  year,  in  that  way  produc- 
ing the  black  line  which  you  see  on  the  cur\'c.  The  green  line  is  four  times  the  increase  in 
gross  business,  and  those  two  curves,  as  you  will  .see.  run  very  closely  together,  showing  that 
we  have  invested  year  by  year  four  dollars  of  new  capital  for  each  dollar  of  increased  gross 
business,  and  that  it  has  been  necessary  to  do  that  in  order  to  adequately  carry  on  that  business 
and  serve  the  public." 

At  page  203  of  the  Proceedings  Mr.  Bradlee  introduced  a  statement  with 
respect  to  the  gross  earnings  and  expenditures  for  construction  of  Stone  & 
Webster  companies  for  each  year  from  1902  to  1918.  showing  construction 
expenditures  aggregating  $91,852,000  as  compared  with  gross  earnings  of 
$334,485,000.    The  figures  in  detail  are  as  follows: 

".'>lPPRC)X1M.\TE    GKO.SS    E.\RNIXGS    .\N'n    .\PPROXlM.\TE    EXPENDITURES 
FOR  CONSTRUCTION  OE  STONE  &  WEBSTER  COMPANIES  FOR  THE 
YEARS  1902  TO  1918,  INCLUSIVE 

Construclion 
Year  Gross  Earnings  Exfcndilures 

1902     $3,5a\000.00  $2,750,000.00 

1903    6.338,0(X).00  3.623.(»00.(X) 

1904    8.4S2.000.00  2.414.(K10.00 

1905    9,504,000.00  2,900,000.00 

1906    12,212,000.00  5.(XKUKK).(H) 

1907    13,776,000.00  a.^OO.OOtUXI 

1908    16,357.000.00  6.962.000.00 

1909    19,133.000.00  5.703.000.00 

1910    20,747.000.00  7.286.000.00 

1911     21,389.000.00  9,077.000.00 

1912 23,925.000.00  5.467 .(XIO.OO 

1913    26,305.000.00  7.531.000.00 

1914     28.881. 0(X).00  6,840.000.00 

1915    27,044.000.00  3.371.(X)0.00 

1916    29.456.000.(X1  3.736.(XK).0O 

1917    31,029.000.(X)  5,001.000.00 

1918    36,322,000.00  5,691,000.00 

$334,485,000.00  $91,852,000.00" 

Mr.  Bradlee  stated  that  the  figures  above  given  were  for  ,ill  cif  tlie  utilities 
operated  by  Stone  &  Webster,  including  street  railway,  gas  and  electric  light 
properties.  Out  of  a  total  of  approximately  thirty-five  companies  about  twenty- 
five  were  either  street  railway,  or  combined  street  railway  and  light  companies. 
He  thought  that  these  Stone  &  Webster  companies  "are  reasonably  typical  of 
what  has  occurred  in  the  industry."  At  page  206  of  the  Proceedings  he  gave 
the  following  additional  testimony: 

"The  Chairman :  Do  you  feel  that  the  other  companies  have  been  devoting  about  as  much 
money  to  new  constnution  annually  as  you  have? 

"Mr.  Uradlcc:  .Mnnit  a  year  ago  a  report  was  made  to  Mr.  John  Skolton  \Villiams  out- 
lining the  conditions  in  the  street  railway  industry.  If  I  remcmlier  the  figures  correctly,  the 
gross  earnings  of  the  street  railways  were  placed  in  that  report  at  $l,500,tXK).000.  It  was 
estimated   that   the  annual   expenditures    for   extensions   and    improvements    would    be    from 


Conflicting  Evidence  on  New  Capital  23 

$600,000,000  to  $700,000,000  a  year.  That  would  correspond  verj'  closely  to  those  figures. 
Those  figures  would  figure  out  just  about  $600,000,000  a  year  on  a  gross  business  of  $1,500,- 
000,000,  so  that  the  statistics  which  were  gathered  for  all  the  companies  correspond  very 
closely  with  those  for  that  group." 

Later  on,  in  response  to  questions  asked  by  Commissioner  Gadsden  and  Mr. 

Warren,  the  witness  explained  that  his  Stone  &  Webster  charts  included  three 

utilities  and  then  referred  specifically  to  the  capital  needs  of  the  street  railway 

industry  as  distinguished  from  those  of  other  utilities.     This  testimony  is  found 

at  pages  207  and  208  of  the  Proceedings: 

"Commissioner  Gadsden :  This  statement  you  have  rendered  is  a  combined  statement  of 
the  three  utilities,  gas,  street  railways  (.'water,'  in  the  original),  and  electricity,  is  it  not? 

"Air.  Bradlee :     Yes. 

"Commissioner  Gadsden;  If  it  were  made  up  entirely  of  street  railways  as  you  have  in 
the  first  chart  the  proportion  of  capital  would  be  larger? 

"Mr.  Bradlee:  The  proportion  of  capital  would  be  larger  on  the  street  railway  than  on 
the  other  two. 

"Commissioner  Gadsden:     This  chart  shows  a  proportion  of  about  four  and  a  half  to  one. 

"Mr.  Bradlee:     Yes. 

"Mr.  Warren:  That  proportion  holds  true  as  regards  additional  or  increasing  earnings 
and  increasing  capital  expenditures,  as  I  take  it. 

"Mr.  Bradlee :     Y'es. 

"Mr.  Warren  :  The  proportion  is  larger  than  that,  is  it  not,  as  regards  the  original  or 
initial  capital? 

"Mr.  Bradlee:     In  some  cases  yes,  and  in  some  ca.ses  it  would  be  about  the  same. 

"Mr.  Warren:     In  some  cases  it  would  run  five  or  seven  to  one,  would  it  not? 

"Mr.  Bradlee:  Yes,  it  certainly  would.  I  might  say  that  those  figures  you  will  under- 
stand are  average  figures.  We  have  one  public  utility,  a  large  water  power,  which  was  built 
entirely  new  and  in  which  the  investment  is  10  to  1.  So  that  those  figures  should  not  be  used 
or  considered  as  applying  definitely  to  any  particular  industry.  They  simply  represent  the 
average  of  the  group. 

"Now  to  meet  the  requirements,  such  as  those,  we  must  sell  securities.  There  is  no  other 
way  to  meet  them.  The  earnings  of  the  properties  are  not  adequate  to  even  meet  operating 
expenses.  I  am  speaking  of  street  railways  now — to  meet  operating  expenses,  taxes  and  in- 
terest on  bonds  in  many  cases.  There  is  nothing  left  there  to  apply  to  extensions  and  im- 
provement. It  must  all  be  obtained  from  the  investor  in  some  form  and  unless  it  is  obtained 
from  the  investor  it  will  be  hopeless  for  the  street  railways  to  attempt  to  adequately  serve 
the  public.  The  service  today  is  inadequate.  It  will  continually  grow  more  and  more  in- 
adequate unless  some  means  is  found  to  improve  the  credit  of  the  street  railways  and  enable 
them  to  raise  the  money  needed  to  meet  these  demands  for  further  service,  and  that  amount  of 
money  as  is  indicated  in  these  figures  is  a  very  large  sum  in  proportion  to  the  gross  earnings 
of  the  company. 

"The  railway  industry  as  a  whole  must  in  some  way,  if  it  is  to  fairly  serve  the  public, 
raise  six  or  seven  hundred  million  dollars  a  year  for  new  work  and  in  addition  it  must  provide 
for  the  refinancing  of  maturing  ohiications  to  an  anioimt  varyini:  from  $250,000,000  to  $300,- 
000,000  a  year,  so  that  there  is  approaching  a  billion  dollars  a  year  to  be  raised  in  some  way 
for  the  street  railway  industry  in  order  to  adequately  serve  the  public." 

Subsequent  to  the  close  of  the  hearings,  in  response  to  a  request  from  the 
Executive  Secretary  for  infonnation  as  to  the  basis  for  General  Tripp's  estimate 
of  $200,000,000  as  the  average  amount  of  new  capital  required  by  the  street 
raifways,  Mr.  James  W.  Welsh,  statistician  of  the  American  Electric  Railway 
Association,  submitted  the  following  data  said  to  have  been  taken  from  the 
advance  sheets  of  the  1917  special  electric  railway  census: 

YEARLY   CAPITAL   ADDITIONS   BASED   ON    INCREASE   IN 
NET   CAPITALIZATION 

Year  Net  Capitaliaation  Yearly  Increase 

1902    $2,117,619,302  .    .'. 

1907    3,400,107,899  $256,498,000 

1912    4,243.317,727  168,700,000 

1917    4,889,962,096  129,400,000 

Average  Yearly  Increase  taken  as $200,000,000 


24  Electric  Railway  Problem 

A  reference  to  the  last  available  special  census  report  on  street  and  electric 
railways  shows  that  the  "net  capitalization"  figure  is  arrived  at  in  the  following 
manner:  The  total  capital  stock,  both  common  and  preferred,  the  funded  debt, 
and  the  floating  debt  and  real  estate  mortgages  are  added  to  obtain  the  total 
capitalization.  From  this  total  is  deducted  the  amount  of  stocks  and  bonds  of 
other  electric  railway  companies  held  and  the  treasury  securities.  This  leaves 
the  figure  described  in  the  census  report  as  "net  capitalization."  From  this, 
further  deductions  are  made  for  "investments  in  other  securities  and  non-railway 
properties"  and  also  for  "floating  debt  and  real  estate  mortgages."  In  this  way 
a  gross  capitalization  of  $5,010,827,183  in  1912  was  brought  down  to  the  $4,243,- 
317,727  figure  used  by  Mr.  Welsh  in  the  data  submitted  as  shown  above.  It 
will  be  noted  that  this  figure  includes  only  the  net  capitalization  as  reflected  in 
capital  stock  and  funded  debt.  If  floating  debt  and  real  estate  mortgages  were 
added,  as  perhaps  they  should  be,  the  net  capitalization  figure  for  1912  would 
be  $4,545,576,769,  or  approximately  7  per  cent  greater  than  the  figure  used  by 
Mr.  Welsh  for  that  year.  However,  on  the  basis  of  the  figures  which  he  used, 
it  will  be  observed  that  the  average  yearly  increase  in  net  capitalization  for  the 
first  five  year  period — from  1902  to  1907 — was  $256,498,000;  for  the  second 
five  year  period,  $168,700,000;  and  for  the  third  five  year  period,  ended  with 
1917,  $129,400,000.  The  average  for  the  entire  fifteen  years  figured  out  $184,- 
822,853,  which  is  nearly  50  per  cent  more  than  the  average  for  the  five  years 
from  1912  to  1917.  Clearly,  the  use  of  the  outstanding  securities  as  a  measure 
of  new  capital  retiuired  is  at  best  a  very  rough  and  uncertain  way  of  estimating 
the  actual  cash  requirements  of  the  industry. 

If  it  could  be  assumed  that  all  new  securities  issued  in  recent  years  repre- 
sented new  cash  investment  at  par,  the  results  derived  by  Mr.  Welsh's  comparison 
would  still  be  untrustworthy.  This  is  true  because  of  the  eflfect  of  reorganizations 
following  receiverships  and  other  means  by  which  the  nominal  capitalization  of 
individual  properties  has  been  reduced  at  different  times.  The  amount  of  new 
capital  indicated  by  a  comparison  of  the  census  figures  would  fall  short  of  the 
actual  amount  of  new  capital  required  during  any  given  intcr-census  period  to 
the  extent  that  securities  outstanding  at  the  beginning  of  the  period  disappeared 
through  dccapitalization  before  the  end  of  the  period.  The  census  figfures  of 
net  capitalization  indicate  a  steadily  decreasing  annual  average  of  increase,  and 
if  these  figures  were  reliable  it  would  be  entirely  inappropriate  to  use  a  sum 
in  excess  of  the  liftccn  year  average  as  an  estimate  of  future  requirements  when 
the  figures  show  that  the  annual  requirements  are  steadily  and  rapidly  decreasing, 
but  for  the  reasons  given  a  comparison  based  on  net  capitalization  is  wholly 
unreliable  for  the  purijoso  of  drtcrmining  the  amount  of  new  money  required 
each  year. 

In  the  memoranda  submitted  to  lion.  John  Skelton  Williams,  Comptroller 
of  the  Currency,  under  date  of  January  8,  1918,  by  a  committee  representing  the 
American  Electric  Railway  Association,  the  National  Electric  Light  Association, 
the  American  Gas  Institute,  and  the  National  Commercial  Gas  Association,  the 
following  statement  is  made : 


Conflicting  Evidence  on  New  Capital  25 

"The  electric  railway,  gas  and  electric  light  and  power  companies  up  to  tlie  beginning 
of  the  war  were  spending  between  $600,000,000  and  $700,(XK),000  in  new  construction.  Shortly 
after  the  outbreak  of  the  war  a  drastic  policy  of  retrenchment  was  generally  adopted. 

"They  are  now  faced  with  the  necessity  of  raising  from  $100,000,000  to  $200,000,000  in 
new  capital  to  furnish  additional  railway,  gas  and  electric  power  and  lighting  facilities  to 
shipyards,  munition  plants,  cantonments,  navy  yards,  and  industry  generally  to  meet  the 
exigencies  of  the  war  program." 

It  was  also  stated  in  these  memoranda  that  the  funded  obligations  of  public 
utilities  maturing  in  1918  were  estimated  at  approximately  $232,000,000,  and 
that  the  public  utilities  would  also  have  to  pay  or  extend  bills  payable,  in  the 
form  of  corporate  unsecured  paper  held  by  banks,  of  approximately  $250,000,000 
during  the  year  1918.  The  amount  of  bonds  and  other  public  indebtedness  of 
the  public  utilities  to  mature  in  1919  was  estimated  at  $265,000,000.  In  these 
memoranda  the  electric  street  and  interurban  railroads  are  referred  to  as  "moving 
upwards  of  20,000,000,000  passengers  annually." 

Mr.  Bradlee,  in  the  testimony  quoted  above,  attributed  an  annual  require- 
ment of  $600,000,000  or  $700,000,000  of  new  capital,  and  of  $250,000,000  to 
$300,000,000  of  refinancing  to  the  electric  railways  alone,  whereas,  substantially 
these  same  figures  presented  to  the  Comptroller  of  the  Currency  by  the  com- 
mittee in  January,  1918,  referred  to  the  three  utilities — electric  railways,  electric 
light  and  power,  and  gas.  The  reliability  of  the  committee  figures  is  brought  in 
question  to  a  certain  extent  by  its  statement  that  the  electric  railways  carry 
upwards  of  20,000,000.000  passengers  per  annum,  whereas,  the  United  States 
Census  figures  for  the  year  1917  showed  only  14.506,914.573  passengers  in  all, 
the  revenue  passengers  alone  numbering  11,304,660,462.  The  figures  submitted 
by  Mr.  Welsh  for  the  year  1918,  based  on  reports  from  the  companies  who  are 
members  of  the  American  Electric  Railway  Association,  indicated  that  the  total 
number  of  passengers  carried  in  1918  was  somewhat  less  than  the  number  carried 
in  1917.  It  is  clear  from  this  evidence  and  from  other  data  collected  for  the 
Commission  after  the  close  of  the  hearings,  that  the  traffic  in  1918  remained  at 
practically  the  same  figure  as  in  1917,  the  last  census  year.  Without  having  all 
of  the  data  upon  which  the  committee  representing  the  three  utilities  made  up 
their  estimates  of  new  capital  requirements,  it  is  impossible  to  say  how  much 
dependence  should  be  placed  upon  the  figures. 

On  account  of  the  discrepancies  between  estimates  of  new  capital  require- 
ments given  by  General  Tripp  and  Mr.  Bradlee  in  their  testimony  before  the 
Commission,  the  Executive  Secretary  called  the  matter  to  Mr.  Bradlee's  atten- 
tion and  received  from  him,  in  a  letter  dated  December  8,  1919,  a  further 
statement  on  the  subject  matter: 

"My  statement  that  the  new  capital  required  per  annum  for  all  public  utilities  is  approxi- 
mately $700,000,000  was  based  primarily  on  certain  memoranda  and  data  prepared  in  January, 
1918,  and  submitted  to  ofHcials  of  the  Treasury  Department  for  their  information.  This  data 
was  prepared  under  the  direction  of  Messrs.  Gadsden,  Hall  and  Crowell,  and  was  finally 
printed  in  pamphlet   form. 

******** 

"On  page  4  of  this  pamphlet,  under  item  6,  you  will  notice  an  estimate  of  annual  capital 
expenditures.  Since  this  pamphlet  was  published,  I  have  made  some  further  inquiries  as  to 
capital  requirements,  and  while  I  have  obtained  nothing  in  definite  form  which  would  be  of 
value  to  you,  all  of  the  information  which  I  did  obtain  tends  to  confirm  the  figure  of 
$700,000,000  as  being  approximately  correct. 

"As  to  street  railways,  I  enclose  herewith  a  typewritten  statement  giving  figures  obtained 


26  Electric  Railway  Problem 

from  the  United  States  Industrial  Census  of  1917  and  from  the  Street  Railway  Journal  of 
the  samt.-  year.  These  figures  give  the  total  gross  earnings  and  estimated  capital  investment 
for  the  street  railway  industry  lur  the  years  lyU2,  1907,  1912  and  1917.  Comparing  the  capital 
investment  m  these  several  years,  it  appears,  as  is  indicated  on  the  enclosed  sheet,  that  there 
has  been  an  average  increase  in  capital  investment  during  the  15  years  irom  VA)!  to  1917  of 
approximately  $20(),U00,U00  (should  be  $267,000,UOO— D.F.VV.;  per  year,  an  increase  during  the 
lU  year  period  irom  1907  to  1917  oi  approximately  ^230,000,000  per  year,  and  for  the  5  years 
irom  1907  to  1912  approximately  $210,000,000  per  year.  This  corresponds  quite  closely 
with  General  Tripp's  statement  that  the  street  railway  industry  requires  $200,00t),000  of 
new  capital  per  annum,  and  compared  with  the  data  in  the  report  to  the  Treasury  Department 
would  show  that  the  new  capital  required  for  electric  light  and  gas  is  from  $400,000,000  to 
$500,000,000  per  year. 

"Comparing  ihe  enclosed  figures  as  to  capital  invested  in  the  street  railway  industrv-  with 
the  figures  tor  the  entire  public  utility  indu.stry  given  in  the  report  to  the  Treasury  Depart- 
ment, It  appears  that  the  total  amount  invested  in  the  street  railway  industry  is  about  half  that 
invested  in  all  public  utilities.  I  think  this  is  consistent  with  the  estimates  of  increased  capital 
required  per  year.  The  street  railway  industry,  as  we  all  know,  has  not  increased  in  earnings 
and  capital  requirements  during  the  past  decade  as  rapidly  as  has  the  electric  light,  power 
and  gas  iiidustr>',  esi)ccially  the  electric  light  and  power  industry.  Ten  or  fifteen  years  ago 
most  electric  light  and  power  companies  obtained  a  very  large  percentage  oi  their  gross 
earnings  irom  electric  light  and  a  small  percentage  irom  power.  Through  the  introduction  of 
the  steam  turbine  and  economies  brought  atwut  through  its  use,  and  the  establishment  ni  large 
central  power  plants,  it  has  been  possible  to  sell  power  to  manuiacturers  cheaper  than  the 
cost  oi  production  with  a  small  power  plant  on  the  manuiacturer's  own  premises.  This  has 
brought  about  a  rapid  expansion  in  the  power  business  oi  central  stations  so  that  today  many 
electric  light  and  power  comianies  are  doing  more  power  than  lighting  business  and  some 
have  reached  the  point  where  lighting  is  almost  a  by-product  oi  power.  This  has  resulted  in 
an  abnonnal  growth  of  the  light  and  power  business  and  more  than  ordinary  demand  for 
increased  capital  expenditures.  1  think,  therefore,  that  General  Tripp's  statement  is  con- 
servative and  that  we  may  reasonably  say  that  the  amount  of  new  capital  required  for  the 
street  railway  industry  is  in  the  vicinity  oi  $200,000,000,  possibly  running  a  little  over  this 
amount. 

"The  requirements  for  new  capital  during  the  next  few  years  for  street  railways  may 
somewhat  exceed  this  figure  because  during  the  war  most  street  railways  have  been  forced 
to  postpone  needed  extensions  and  development  and  have  been  crowding  their  cars,  track  and 
power  plants  to  an  unreasonable  extent  and  giving  inadequate  service.  To  bring  the  street 
railway  back  to  the  efficiency  and  character  of  service  which  existed  before  the  war,  this 
postponed  expenditure  must  be  made  up  as  well  as  providing  for  future  requirements. 

"1  would  also  call  your  attention  to  item  10  on  page  5  in  the  pamphlet  submitted  to  the 
Treasury  Department.  .Ml  public  utilities  have  maturing  txmds  and  notes  to  take  care  of 
each  year,  as  well  as  providing  for  new  capital.  You  will  see  under  item  10  that  it  is  estimated 
that  maturing  obligations  oi  this  kind  for  the  entire  utilitv  industrv  would  be  during  1918 
$232,000,000.  and  during  1919  $265,000,000.  During  the  war  such  fin'ancing  as  has  l)cen  done 
has  ticen  largely  on  short  tcnn  notes  which  will  iall  due  and  retiuire  refinancing  during  the 
next  icw  years.  The  credit  oi  public  utilities  must  Ix;  put  into  such  shape  as  to  provide  ior 
this  refinancing  on  a  more  permanent  l>asis  as  well  as   for  new  capital. 

"You  ask  in  your  letter  what  1  mean  by  capital  requirements.  It  is  mv  idea  that  this 
covers  only  money  needed  for  extensions  and  additions  to  meet  requirements  for  additional 
sei;vicc  It  docs  not  include  replacements  or  renewals  oi  existing  property.  In  all  .•\merican 
cities,  there  is.  as  you  know,  a  constant  increase  in  demand  ior  public  utility  service.  This  is 
created  partly  hy  an  increase  in  population  and  partly  by  an  actual  increase  in  use  per  capita. 
In  the  letter  which  I  sent  you  .some  weeks  ago  I  called' attention  to  the  fact  that  the  number 
of  rides  per  capita  on  the  street  railways  in  which  we  are  interested  have  increased  during 
the  past  decade  nearly  25'7r,  and  that  in  addition  to  this  there  has  been  a  further  increase  in 
riding  due  tn  approximately  -W^r  increase  in  population  in  the  cities  concerned.  Because  of 
this  steadily  increasing  demand  the  normal  coiulilion  of  the  public  utility  industry  is  one  of 
growih.  In  this  it  differs  iuiidamentally  from  a  manuiacturing  enterprise.  A  manuiacturing 
plant  may  successiully  continue  ior  many  years  without  im-rea<ic  in  capacity,  and  when  an 
increase  in  rapacity  is  made  Ihe  owners  of  the  property  arc  iree  to  extend  the  plant  when  and 
as  they  think  tx-st  and  to  sclirt  a  time  when  construction  and  financial  conditions  are  favor- 
able. The  public  utility  on  the  other  hand,  because  it  is  a  natural  monopniv  must  constantly 
meet  every  increased  demand  for  ser\-ice  if  Ihe  public  is  to  be  adcquatelv  ser\ed  This  means 
that  there  muM  Ik-  .nddilions  to  the  plant  every  year  and  such  additions  occur  at  a  more  or 
les«  uniform  rale,  ripeciallv  if  average.1  over  a  considerable  numt)cr  of  properties  This  is 
indicated  by  Ihe  enrlos«l  fiRure-;  in  reference  to  street  railwavs  The  public  utilitv  there- 
fore. IS  not  free  to  make  extensions  when  and  as  it  thinks  l>esi  and  to  select  favorable  con- 
stniction  and  financing  periodv  Ii  must  have  credit  sufficient  for  constant  growth  in  good 
time^  and  f«d.  and  must  consider  the  raising  of  new  capital  and  sale  of  additional  securities 
as  much  a  part  of  its  regular  business  as  the  operation  of  its  property.     This  is  a  peculiar 


Conflicting  Evidence  on  New  Capital  27 

feature  of  the  industr}'  which  is  not  always  understood,  but   it  is  inherent   in  the  nature  of 
the  business  and  cannot  be  avoided. 

"To  return  a  moment  to  the  question  of  replacements  and  renewals.  Most  street  railways 
at  this  time  are  not  earning  sufficient  to  make  adequate  provisions  for  such  replacernents  and 
renewals.  They  must,  therefore,  for  the  immediate  future  and  until  net  earnings  are  improved, 
issue  additional  securities  (perhaps  temporary  in  character)  to  provide  cash  needed  for  this 
purpose,  or  they  must  allow  their  property  and  service  to  deteriorate.  This  means  for  the 
next  few  years  the  sale  of  securities  for  this  purpose  as  well  as  for  actual  new  capital  require- 
ments and  for  refinancing  maturing  bonds  and  notes.  It  is  hard  to  estimate  just  what  the 
requirements  may  be  for  this  purpose,  but  I  think  they  may  easily  be  3%  of  the  gross  earnings 
of  the  industry  or  approximately  $25,000,000  per  year.  Of  course  this  expenditure  may  be 
postponed  by  permitting  the  properties  to  further  deteriorate,  but  this  is  undesirable  from 
all  points  of  view  if  it  can  be  avoided." 

The  separate  tj'pewritten   statement  with   respect   to  street   railways  alone, 
which  Mr.  Bradlee  attached  to  his  letter,  is  as  follows : 

ELECTRIC   RAILWAYS    IN    UNITED  STATES 

(Data  from  U.  S.  Industrial  Census  of   1917  and   Street  Railway  Journal,   1917.) 

ig02  igo7                   igi3                   igiy 

Total    Gross    Earnings    $250,000,000  $430,000,000        $586,000,000        $730,000,000 

Capital    Investment    2,560,000,000  4,263,000,000  5,315,000,000       6,570,000,000* 

$6,570,000,000 
2,560,000,000 


$4,010,000,000  IS  years  (1902  to  1917) 

$206,000,000  per  year  (should  be  $267,000,000  per  year— D.F.W.) 

$6,570,000,000 
4,263,000,000 


$2,307,000,000  10  years  (1907  to  1917) 

$230,000,000  per  year 

$5,315,000,000 
4,263,000,000 

$1,052,000,000    5  years   (1907  to  1912) 

$210,000,000  per  year. 

*  Estimated. 

It  will  be  observed  that  the  figures  representing  the  capital  investment  used 
by  Mr.  Bradlee  are  quite  different  from  the  figures  used  by  Mr.  Welsh  in  the 
data  submitted  by  him.  For  example,  for  the  year  1912  Mr.  Bradlee  gives 
$5,315,000,000,  whereas  Mr.  Welsh  gives  $4,243,317,727  as  the  net  capitalization. 
A  reference  to  the  special  census  report  for  1912  shows  that  Mr.  Bradlee's  figures 
are  not  the  net  capitalization,  nor  the  construction  cost,  but  a  combination  of 
the  gross  capitalization  and  current  liabilities.  If  net  capitalization,  based  on 
street  and  electric  railway  property,  plus  floating  debt  and  real  estate  mortgages, 
had  been  used,  the  census  figure  would  have  been  $4,545,576,769,  or  about 
$770,000,000  less  than  the  figure  used  by  Mr.  Bradlee  for  that  year.  It  will  also 
be  observed  that  Mr.  Bradlee  uses  for  1917  an  estimated  figure  of  $6,570,000,000, 
as  compared  with  Mr.  Welsh's  census  figure  of  $4,889,962,096.  The  final  census 
figures  show  that  the  gross  capitalization  and  current  liabilities  were  $6,115,- 
804,332  in  1917,  instead  of  $6,570,000,000  as  estimated  by  Mr.  Bradlee.  This 
indicates  an  exaggeration  of  approximately  $454,000,000  in  his  estimate.     Upon 


28  Electric  Railway  Problem 

the  basis  of  net  capitalization,  including  real  estate  mortgages  and  floating  debt, 
the  figure  shown  by  the  census  is  $5,056,554,324,  or  $1,513,445,676  under  the 
figure  used  by  Mr.  Bradlee. 

In  reducing  the  figures  to  annual  averages  he  compares  the  entire  fifteen 
year  period  from  1902  to  1917  with  the  ten  year  period  from  1907  to  1917,  and 
the  five  year  period  from  1907  to  1912,  but  does  not  show  the  average  for  the 
five  year  period  from  1912  to  1917,  which,  on  the  basis  of  the  figures  used  by  him, 
would  be  approximately  $250,000,000.  Moreover,  in  figuring  the  average  yearly 
increase  in  investment  for  the  entire  fifteen  year  period  Mr.  Bradlee  evidently 
made  an  error  of  computation.  The  result  he  gives  is  $206,000,000,  whereas  by 
a  correct  division  the  result  would  be  S267 .000.000.  The  different  results  obtained 
by  Mr.  Welsh  and  Mr.  Bradlee  by  the  use  of  census  figures  will  be  seen  from 
the  following  comparison: 

AVERAGE  YEARLY   IN'CREASE  IN   CAPITAL 

Period                                                       Welsh's  Figures  Bradlee's  Figures 

1902  to  1907     $256,498,000  $340,600,000 

1907  to  1912    168.700,000  210.400.000 

1912  to  1917     129,400.000  251.000,000 

Entire  period  1902  to  1917 $1&»,800.000  $267,300,000 

Obviously,  nothing  can  be  made  out  of  this  without  an  independent  checking  of 
the  sources  of  information.  If  the  basic  census  figures  used  by  Mr.  Welsh  be 
modified  to  include  floating  debt  and  real  estate  mortgages,  the  results  will  be 
approximately  as  follows: 

Xet  Capitalization  Inclusive  of  Az'erage  Annual 

Year  Floating  Debt  and  Real  Estate  Mortgages      Increase 

1902 $2,200,000,000      (Estimated)     

1907    3.()Ri.()94.8()l  $296,600,000 

1912    4,545.576.769  172,400.000 

1''17    5,056.554.324  102.200.000 

Kntire  period  1902  to  1917 $190,000,000 

In  passing,  it  should  be  stated  that  the  figures  for  "total  gross  earnings"  used 
by  Mr.  Bradlee  are  not  "gross  passenger  earnings"  or  "total  railway  operating 
revenues"  but  include  also  the  electric  railway  companies'  "income  from  other 
sources,"  or  what  is  usually  termed  "revenue  from  other  operations"  and  "non- 
operating  income." 

On  the  assumption  that  for  every  dollar  of  annual  increase  in  revenue  new 
capital  to  the  extent  of  four  or  five  dollars  is  required,  it  would  appear  from  Mr. 
Bradlee's  figures  that  the  electric  railways  during  the  fwc  vcars  period  from  1912 
to  1917  should  have  required  from  $576,000,000  to  $720,000,000  of  new  capital, 
whereas  the  increase  in  capital  investment  estimated  by  him  was  $1,255,000,000. 
This  tends  to  show  that  the  basic  figures  used  in  the  estimate  of  new  capital 
requirements  have  been  very  loosely  compiled,  or  that  the  yard  sticks  by  which 
such  requirements  have  been  measured  are  very  unreliable. 

The  data  compiled  for  the  Commission  showing  passenger  revenues  on 
systems  fining  75  per  cent  of  the  electric  railway  business  in  the  country  in  1917 
and  1919  indicate  an  increase  of  more  than  20  per  cent  in  gross  earnings  in  this 
two  year  period.    This  is  at  the  rate  of  about  $75,000,000  a  year,  and  according 


Conflicting  Evidence  on  New  Capital  29 

to  Mr.  Bradlee's  rule  of  thumb  would  call  for  new  capital  of  at  least  $300,000,000 
annually. 

It  is  noteworthy  that  even  the  investment  bankers  have  been  confused  by 
the  testimony  presented  before  the  Commission  with  respect  to  the  annual  capital 
requirements  of  the  electric  railway  industry.  This  is  indicated  by  the  annual 
report  of  the  committee  on  public  service  securities  of  the  Investment  Bankers 
Association^  submitted  by  O.  B.  Willcox,  Chairman,  in  October,  1919,  at  the 
meeting  of  the  Association  in  St.  Louis.  After  referring  to  the  appointment  of 
the  Federal  Electric  Railways  Commission,  and  the  hearings  which  the  Com- 
mission held,  the  report  proceeds: 

"The  street  railways  have  needed  about  $300,000,000  each  year  to  refund  maturing  obliga- 
tions and  between  $600,000,000  and  $700,000,000  new  capital  each  year  for  improvements  and 
extensions  to  meet  the  demands  of  industry  and  commerce  for  local  transportation.  The 
destruction  of  street  railway  credit  has  effectually  checked  expansion  and  the  deadening  in- 
fluences will  be  increasingly  felt  in  every  branch  of  industry  throughout  the  country,  until 
some  new  foundation  for  credit  and  investment  has  been  found  which  will  permit  the  profitable 
operation  and  the  renewed  and  continuous  expansion  of  street  railw^ay  systems." 

The  confusion  of  the  electric  railway  industry  with  the  entire  group  of 
utilities  whose  needs  were  laid  before  the  Treasury  Department  in  January, 
1918,  has  extended  to  the  estimates  with  respect  to  refunding  operations  as  well 
as  to  the  needs  for  new  capital.  In  the  report  just  quoted  the  refunding  require- 
ments of  the  street  railways  are  put  at  $300,000,000  per  year.  This  estimate  is 
not  borne  out  by  the  evidence  presented  to  the  Commission  nor  by  other  available 
information.  In  the  Electric  Railway  Journal  of  December  29,  1917,  appears 
an  article  taken  from  the  Wall  Street  Journal,  purporting  to  show  that  the 
aggregate  of  public  utility  securities  to  mature  in  1918  amounted  to  $210,427,780, 
of  which  $126,817,030  was  the  total  for  the  railways.  Nearly  one-half  of  this 
entire  amount  was  represented  by  the  $57,735,000  Brooklyn  Rapid  Transit  notes 
maturing  in  July.  It  was  stated  in  this  article  that  the  aggregate  amount  of 
public  utility  securities  maturing  in  1918  was  $126,500,000  more  than  matured 
in  1917,  and  was  "larger  than  any  amount  in  the  past  five  years." 

In  the  preparation  of  the  estimates  of  new  capital  requirements  presented 
to  the  Commission,  the  witnesses  for  the  American  Electric  Railway  Association 
appear  to  have  given  no  consideration  to  the  possible  reduction  in  the  require- 
ments for  new  capital  due  to  the  abandonment  of  unprofitable  street  railway 
lines  and  curtailments  of  service  resulting  from  decreases  in  traffic  due  to  increases 
in  fare. 

On  the  other  hand,  little  or  no  attention  seems  to  have  been  given  to  the  fact 
that  with  the  present  high  level  of  prices  a  given  amount  of  new  construction 
will  require  a  much  larger  amount  of  new  capital  than  in  the  days  before  the  war. 
This  fact,  if  givei:  consideration,  would  tend  to  swell  the  estimates. 

Moreover,  on  account  of  the  prevailing  high  prices,  new  capital  is  required 
in  considerable  amounts  in  connection  with  the  continuous  process  of  replace- 
ments. No  matter  how  well  a  street  railway  may  be  constructed  and  maintained, 
and  no  matter  how  sound  the  financial  policies  pursued  with  respect  to  it  inay 
be,  the  replacements  required  from  year  to  year  in  an  era  of  high  prices  will 
have  to  be  made  at  a  cost  in  excess  of  the  original  cost  of  the  items  replaced. 


30  Electric  Railway  Problem 

If,  at  the  present  time,  rails,  cars  and  other  elements  of  street  railway  property 
cost  twice  as  much  as  they  did  ten  years  ago.  then  a  new  car  or  a  new  piece  of 
track  installed  at  the  present  time  in  place  of  an  identical  car  or  piece  of  track 
that  is  worn  out  will  require  twice  as  much  capital  as  was  originally  required. 
Under  the  system  of  accounts  prescribed  by  the  Interstate  Commerce  Commission 
and  generally  by  the  public  service  commissions  of  the  states,  the  difference  be- 
tween the  present  cost  of  the  new  item  and  the  original  cost  of  the  old  item, 
even  though  the  new  item  is  identical  in  size  and  capacity  with  the  old,  has  to 
be  charged  to  capital  account.  The  result  is  that  in  the  process  of  making 
replacements  during  a  period  of  high  prices,  the  capital  account  is  gradually 
adjusted  to  the  higher  price  level,  and  for  this  purpose  new  capital  must  be 
provided  even  though  no  expansion  or  enlargement  of  street  railway  facilities 
is  going  on.  Mr.  Bradlee  stated  in  his  letter  of  December  8,  1919,  that  according 
to  his  understanding  replacements  were  not  included  in  the  figures  submitted 
showing  new  capital  requirements.  It  is  clear,  however,  that  the  portion  of  the 
cost  of  replacements  charged  to  capital  account  and  represented  by  capital  securi- 
ties or  other  corporate  obligations  would  be  included  in  the  census  figures  used 
by  Mr.  Bradlee  as  a  basis  for  his  estimates.  His  rough  figure  of  $25,000,000 
based  on  an  allowance  of  3  per  cent  of  gross  earnings  for  replacements  apparently 
refers  to  expenditures  that  ought  to  be  taken  care  of  out  of  earnings,  and  not 
to  the  portion  of  the  cost  of  replacements  that  is  properly  capitalized. 


Chapter  VII 

AMOUNT    OF    NEW    CAPITAL    REQUIREMENTS    NOT    CLEARLY 

SHOWN,    BUT    NECESSITY    FOR    RESTORATION 

OF  CREDIT  PROVEN 

It  may  be  assumed  that  the  tendency  of  the  representatives  of  any  industry, 
when  they  are  endeavoring  to  enlist  public  interest  and  cooperation  in  its  condition 
or  affairs,  will  be  to  exaggerate  its  importance.  In  the  case  of  the  electric  railways 
the  uniform  systems  of  accounts  prescribed  by  the  Interstate  Commerce  Commis- 
sion and  the  various  state  commissions  during  the  period  of  public  regulation 
ought  to  have  resulted  in  such  a  clarification  of  the  financial  transactions  of  the 
industry  as  to  remove  the  excuse  for  loose  or  exaggerated  figures.  Most  electric 
railway  companies  have  for  several  years  been  required  to  submit  detailed  annual 
reports  in  accordance  with  forms  prescribed  by  the  commissions.  In  addition  to 
this  they  have  been  called  upon,  in  many  cases,  to  compile  and  present  financial 
statements  to  the  commissions  in  connection  with  applications  for  the  approval 
of  security  issues  or  for  fare  increases.  In  view  of  these  facts,  it  is  somewhat 
astonishing  that  the  figures  presented  to  the  Federal  Electric  Railways  Commission 
with  respect  to  so  fundamental  a  matter  as  the  annual  requirements  of  new  capital 
should  be  so  conflicting  and  unreliable.  The  need  for  the  restoration  and  mainte- 
nance of  street  railway  credit  is  the  cornerstone  of  the  companies'  case.  It  is 
fortunate  for  them,  and  perhaps  also  for  the  public,  that  the  proof  of  the  need 
for  a  continuous  inflow  of  new  capital  into  the  industry  is  not  dependent  upon 
the  unsatisfactory  and  uncertain  figures  presented.  The  fact  that  new  capital  is 
required  at  the  present  time  and  will  be  required  in  the  future  is  shown  with  suffi- 
cient clearness  both  by  the  general  testimony  of  the  witnesses  and  by  the  basic 
conditions  of  the  industry  that  are  brought  to  light  by  analysis. 

I  have  already  referred  to  the  increasing  demand  for  street  railway  facilities 
and  service.  Urban  population  continues  to  grow  apace ;  the  riding  habit  develops. 
While  the  evidence  shows  that  in  certain  parts  of  the  country  the  street  railways 
have  been  overbuilt  and  that  a  considerable  mileage  of  lines  has  already  been 
or  is  likely  to  be  abandoned  in  the  present  process  of  readjustment,  and  while  it 
is  unquestionably  true  that  in  many  cities  unnecessary  trackage  was  constructed 
in  the  early  days  because  of  the  competition  of  rival  companies,  nevertheless,  these 
facts  do  not  warrant  the  conclusion  that  extensions  and  additions  are  no  longer 
required.  The  overbuilding  in  many  cases  has  been  in  locations  where  the  lines 
can  never  be  used  to  their  full  capacity,  and  in  some  cases  the  shifting  of  population 
and  business  has  even  rendered  lines  relatively  useless  that  at  one  time  were  in 
the  highest  degree  useful.  The  shifting  and  spreading  out  of  population,  as  well 
as  the  increase  of  population,  are  responsible  for  the  demand  for  additional  trans- 

31 


32  Electric  Railway  Problem 

portation  facilities.  While  the  electric  railway  industry  during  a  period  of  finan- 
cial distress  may  properly  curtail  its  program  of  extensions  and  improvements, 
this  curtailment  cannot  be  prolonged  indefinitely.  It  is  a  matter  of  common 
knowledge  that  the  year  1919  witnessed  an  immense  revival  of  street  railway 
traffic  following  the  return  of  the  soldiers  from  France  and  the  demobilization 
of  the  National  Army.  It  may  well  be  that  the  experiences  of  the  war  have 
made  the  population  of  the  country  more  mobile  and  that  in  the  future  traffic  will 
increase  even  more  rapidly  than  in  the  past.  At  any  rate,  there  is  no  sign  that  for 
the  country  as  a  whole  the  business  of  local  transportation  by  street  railways  is 
on  the  decline,  or  that  the  future  requirements  for  additional  transportation 
facilities  will  be  materially  less  than  the  requirements  of  the  past. 

It  is  a  well-known  fact  that  in  the  bitter  controversies  which  have  arisen 
between  the  street  railway  companies  and  the  public  in  most  American  cities,  one 
of  the  principal  causes  of  public  hostility  has  been  the  failure  or  refusal  of  the 
companies  to  make  extensions  and  improvements  as  rapidly  as  the  people  de- 
manded. This  has  been  particularly  true  of  companies  operating  under  limited- 
term  franchises  at  times  when  their  existing  franchises  had  only  a  few  more 
years  to  run.  While  it  may  be  contended  that  the  necessary  extensions  and 
betterments  should  be  built  out  of  depreciation  reserves  and  that  under  certain 
conditions  they  might  properly  be  built  out  of  surplus  earnings,  it  is  clear  that 
such  a  policy  is  less  feasible  now  than  it  would  have  been  a  few  years  ago,  since 
the  electric  railways  are  at  the  present  time  so  greatly  impoverished  that  many 
of  them  have  difficulty  in  meeting  out  of  revenues  their  ordinary  operating  charges 
and  bond  interest.  It  is  hardly  to  be  expected  that  depreciation  reserves  can  be 
built  up  during  these  abnormal  times  to  make  good  the  depreciation  which  has 
already  accrued.  If  such  reserves  are  sufficient  to  take  care  of  depreciation  now 
accruing,  it  is  about  all  that  can  be  expected  of  them.  But  when  a  street  railway 
has  settled  down  to  an  equilibrium  on  the  basis  of  the  normal  condition  of  an  old 
property,  the  appropriation  to  depreciation  reserve  from  year  to  year  will  be 
approximately  oft'sct  by  the  calls  upon  the  reserve  for  necessary  replacements. 
Thus  it  is  not  to  be  expected  that  capital  for  extensions  and  additional  facilities 
can  be  taken  from  depreciation  reserves  to  any  considerable  extent,  at  least  not 
until  the  electric  railway  industry  has  been  put  upon  a  sound  financial  basis  and 
has  had  several  years  in  which  to  get  itself  into  good  running  order  financially. 

1  have  previously  called  attention  to  the  fact  that  in  an  era  of  high  prices 
new  capital  is  required  in  the  ordinary  process  of  rci)laccnients.  At  a  period  like 
the  present  when  the  cost  of  materials  and  labor  entering  into  construction  is 
about  double  what  it  was  before  the  war,  the  replacement  of  the  entire  property 
would  mean  a  doubling  of  the  capital  account.  If  the  high  prices  continue 
through  a  complete  cycle  of  street  railway  life,  this  doubling  of  the  capital 
account  will  be  effected  by  degrees. 

In  1918  the  Board  of  Public  I'tility  Commissioners  of  New  Jersey  passed 
upon  the  emergency  application  of  the  Public  Service  Railway  Company  for  the 
approval  of  an  increase  in  fares.  In  the  report  of  the  Hoard  dated  July  10,  1918,' 
an  analysis  of  the  company's  appropriations  to  depreciation  reserve  and  of  its 
expenditures  from  the  reserve  for  the  5  years  from  1913  to  1917  is  given.    This 


New  Capital  Required  33 

analysis  shows  that  for  the  5-year  period  the  cost  of  replacements  charged  to 
depreciation  reserve  amounted  to  about  one-half  of  one  per  cent  per  annum  on 
the  total  fixed  capital  of  the  company  as  shown  by  its  books.  In  figures,  the 
amount  taken  out  of  the  depreciation  reserve  for  replacements  averaged  for  the 
5-year  period  $447,862  per  annum.  These  are  figures  for  a  company  which  had 
approximately  850  miles  of  single  track.  They  indicate  an  annual  expenditure  of 
a  little  over  $500  per  mile  of  track  for  replacements  charged  to  reserve.  If  it  be 
assumed  that  under  the  prices  of  the  present  year  the  same  replacements  would 
cost  twice  as  much  money,  then  it  would  be  necessary  to  secure  new  capital  to 
cover  this  increase  in  cost  amounting  to  another  $500  per  mile.  If  we  apply  this 
figure  to  the  entire  electric  railway  mileage  of  the  country  we  get  as  a  rough 
estimate  of  the  amount  of  new  capital  required  in  connection  with  current  replace- 
ments approximately  $22,000,000  a  year.  In  this  connection  the  question  may  arise 
as  to  whether  the  method  of  financing  replacements  prescribed  by  the  uniform 
systems  of  accounts  is  the  most  advantageous  one.  In  Qeveland,  under  the  terms 
of  the  Tayler  franchise,  a  different  policy  obtains.  There  the  entire  cost  of 
new  replacements  is  taken  out  of  earnings  and  the  capital  account  is  not  increased, 
no  matter  how  great  the  difference  may  be  between  the  cost  of  the  new  article 
and  the  original  cost  of  the  article  which  it  replaces.  Under  the  Cleveland  plan 
this  particular  source  of  the  continuing  demand  for  new  capital,  and  for  the  credit 
with  which  to  procure  it,  does  not  exist.  But  the  Qeveland  plan  tends  to  swell 
operating  expenses  and  could  not  easily  be  adopted  by  street  railways  generally 
in  a  period  of  financial  distress  resulting  from  the  shrinkage  of  the  net  income. 
The  need  of  credit  is  in  large  measure  created  by  the  conditions  and  practices  that 
have  destroyed  it,  and  the  conditions  and  practices  that  would  restore  it  would  at 
the  same  time  diminish  the  need  of  it.  Thus,  the  Cleveland  Railway,  having 
reorganized  its  aflfairs  some  years  ago,  and  put  them  on  a  sound  financial  basis, 
has  now  no  need  of  credit  in  connection  with  this  particular  aspect  of  street 
railway  development,  but  other  street  railways  have  the  need  and  cannot  readily 
at  the  present  time  take  the  steps  that  Cleveland  took  to  do  away  with  it. 

Another  factor  entering  into  the  present  need  of  the  electric  railway  industry 
for  credit  and  the  capital  that  credit  brings  is  the  run-down  condition  of  many 
of  the  street  railway  properties.  For  example,  the  Bay  State  Street  Railway 
system  of  Massachusetts  was  found  to  be  in  need  of  general  rehabilitation,  and 
when  the  act  was  passed  in  1918  providing  for  the  appointment  of  a  board  of 
public  trustees  to  operate  the  Bay  State  lines,  the  State  of  Massachusetts  deemed 
it  necessary  to  provide  $4,000,000  of  capital  for  this  purpose  on  the  credit  of 
the  state.  It  may  be  admitted  that  rehabilitation  is  not  a  capital  charge.  An 
electric  railway  that  has  been  properly  maintained  out  of  earnings  would  not 
have  to  be  rehabilitated.  The  need  for  rehabilitation  arises  from  an  extraordinary 
waste  of  capital  resulting  from  neglect.  Theoretically,  it  is  unsound  to  maintain 
the  old  capital  account  intact  and  to  increase  it  by  the  amount  of  new  capital 
required  in  rebuilding  a  street  railway  property.  Such  a  policy  results  in  the 
inflation  of  the  capital  account  and  is  particularly  indefensible  where  the  history 
of  the  enterprise  has  shown  its  inability  to  take  care  of  itself.  Nevertheless,  many 
electric  railways  are  now  confronted  by  a  condition  and  not  a  theory.     Their 


34  Electric  Railway  Problem 

property  has  been  neglected  and  a  portion  of  their  capital  is  gone  beyond  recovery. 
They  have  no  reserve  or  other  sources  upon  which  to  draw  for  the  funds  required 
to  put  the  property  back  in  shape  where  it  can  be  maintained  and  operated  so  as 
to  give  adequate  and  continuing  service.  In  such  cases,  even  though  the  original 
capital  account  has  been  written  down  to  the  extent  of  the  accrued  depreciation, 
the  money  for  rehabilitation  can  be  secured  only  from  new  capital.  That  many 
of  the  electric  railways  of  the  country  are  in  a  condition  where  general  rehabili- 
tation in  the  near  future  will  be  necessary,  was  clearly  shown  by  the  testimony. 

Irrespective,  therefore,  of  the  fact  that  the  evidence  laid  before  the  Commis- 
sion did  not  furnish  an  accurate  measure  of  the  amount  of  new  capital  required 
to  keep  the  electric  railways  going  and  to  enable  them  to  function  properly,  it  is 
clear  that  new  capital  is  essential  for  the  construction  of  extensions  and  better- 
ments to  meet  the  constantly  increasing  demands  of  population  and  traffic;  to 
provide  for  the  adjustment  of  the  capital  account  to  the  prevailing  high  prices 
through  the  process  of  replacement  and  to  provide  for  the  general  rehabilitation 
of  properties  where  a  portion  of  the  original  capital  has  been  lost  through  neglect. 


Chapter  VIII 

WHY  HAS  ELECTRIC  RAILWAY  CREDIT  BEEN   LOST? 

I  have  pointed  out  the  fact  that  the  witnesses  representing  public  regulatory 
bodies  and  those  representing  the  general  pubHc  were  in  substantial  agreement 
with  the  witnesses  for  the  companies  with  respect  to  the  present  deplorable  con- 
dition of  street  railway  credit.  They  also  agreed  that  the  problem  before  the 
Commission  could  not  be  solved  unless  some  plan  could  be  found  for  restoring 
such  credit.  We  have  already  referred  to  the  factors  inherent  in  the  street  railway 
business  that  are  favorable  to  the  establishment  and  maintenance  of  credit,  and 
have  concluded  that  although  the  claims  of  the  companies  with  respect  to  new 
capital  requirements  are  inexact  and  may  be  greatly  exaggerated,  nevertheless 
there  is  no  escape  from  the  conclusion  that  under  conditions  now  prevailing,  and 
that  are  bound  to  prevail  in  the  immediate  future,  a  continuous  flow  of  new  capital 
into  the  industry  will  be  required  if  it  is  to  perform  its  full  function  and  render 
adequate  service  to  the  public.  No  rehabilitation  of  credit  can  be  successfully 
undertaken  without  an  understanding  of  the  causes  which  have  led  to  its  present 
debilitated  condition.  If  the  credit  of  this  industry,  with  everything  in  its  favor, 
has  failed,  an  analysis  of  the  causes  of  failure  must  precede  the  formulation  of 
any  plan  for  restoring  it  to  health  and  vigor.  For  these  causes  we  must  look 
to  the  financial  policies  which  have  prevailed  in  electric  railway  management,  and 
for  which  the  electric  railway  companies  themselves  may  be  held,  in  large  measure, 
responsible;  also  to  the  policies  of  public  regulation  with  respect  to  this  industry, 
for  which  the  companies  and  the  general  public  may  be  regarded  as  jointly  respon- 
sible ;  and  finally,  to  changes  in  economic  conditions  that  have  fundamentally 
affected  the  conditions  of  street  railway  operation,  or  of  street  railway  finance. 
For  these  latter  changes,  neither  the  companies  nor  the  car  riding  public  can  be 
held  responsible,  except  indirectly  and  to  a  minor  degree. 


35 


Chapter  IX 
OVERCAPITALIZATION  A  CAUSE  OF  THE  FAILURE  OF  CREDIT 

Upon  the  assumption  that  new  capital  is  to  be  secured  mainly  through  the 
sale  of  additional  securities,  it  requires  no  argument  to  show  that  overcapitalization 
is  a  disease  that  strikes  at  the  foundation  of  credit.  Street  railway  stocks  and 
bonds  can  have  no  value  except  as  they  re]>resent  actual  property  or  actual  earning 
power.  The  fact  of  overcapitalization  in  the  early  days  of  the  electric  railway 
industry  was  affirmed  by  many  of  the  witnesses,  admitted  by  others  and  assumed 
by  still  others,  but  there  was  a  wide  divergence  of  opinion  as  to  the  proper  dis- 
tribution of  the  historical  blame  for  it  and  as  to  its  present  importance  as  a  factor 
in  the  existing  financial  distress  of  the  companies.  The  attitude  generally  assumed 
by  the  spokesmen  of  the  companies  is  that  even  if  overcapitalization  existed  as 
a  result  of  unsound  financial  methods  in  the  early  days  of  the  industry,  we  should 
now  forget  about  it  and  "let  bygones  be  bygones"  in  an  attempt  to  get  together 
for  a  solution  of  the  acute  problems  of  the  present  day.  Clearly,  overcapitalization 
cannot  now  be  ignored  in  consideration  of  the  problem  of  credit  unless  it  has 
ceased  to  exist  or  through  some  change  in  methods  of  financing  has  ceased  to 
have  significance  in  that  connection.  The  claim  is  made  by  some  that  the  original 
overcapitalization  has  been  overcome  by  the  enhancement  of  the  value  of  the 
physical  property  or  by  the  recognition  of  intangible  values  which  fill  up  the  gap 
between  the  physical  value  and  the  par  value  of  the  securities.  Here  we  must 
distinguish  between  an  actual  increase  in  the  value  of  the  property  which  may 
have  resulted  from  appreciation  in  land  and  construction  materials,  or  through 
enlargements  made  out  of  earnings,  and  a  mere  putative  or  fictitious  increase  in 
value  due  to  the  invention  and  formal  recognition  of  various  incorporeal  elements. 
Credit  cannot  be  conjured  up  for  an  overcapitalized  concern  by  a  mere  fiat  of 
regulatory  authority.  "Let  there  be  value,  and  there  is  value,"  will  not  satisfy 
new  investors. 

Public  regulation  is  not  supposed  to  pay  much  attention  to  the  capitalization 
of  a  utility.  It  limits  earning  jMiwer  to  a  fair  return  upon  the  recognized  value 
of  the  property.  The  owners  are  allowed  so  much  as  return  on  the  investment 
and  often  they  are  at  liberty  to  distribute  this  sum  in  any  way  they  see  fit  among 
the  security  holders.  Thus,  under  regulation,  if  a  company  were  allowed  an  8 
per  cent  return  upon  a  value  of  $1,000,000,  it  could  pay  fixed  charges  of  5  per 
cent  on  $1,500,000  of  bonds  and  still  have  a  margin  of  $50,000  for  the  stock. 
A  company  in  this  condition  would  be  greatly  overcapitalized,  but  its  capitalization 
might  he  ignored  in  the  fixing  of  its  charges  for  service.  Sometimes  these  facts 
have  led  to  a  confusion  of  thought.  Public  regulation  of  rates  may  ignore  capi- 
talization, but  that  does  not  mend  a  company's  credit  when  new  capital  is  needed. 

36 


Overcapitalization  37 

Bonds  are  insecure  unless  the  value  of  the  property  is  considerably  greater  than 
the  face  value  of  its  obligations.  Stock  is  relatively  worthless  even  though  offered 
for  cash  at  par  under  public  utility  regulation,  if  it  has  to  take  its  place  beside 
shares  already  outstanding  that  have  no  intrinsic  value.  It  is  also  maintained 
that  in  many  cases  initial  overcapitalization  has  long  since  been  overcome  by 
reorganizations  in  foreclosure  proceedings,  but  even  so,  it  cannot  be  doubted  that 
a  trail  of  financial  failure  running  through  its  past  history  is  not  conducive  to 
present  credit  for  a  street  railway  company. 

The  question  we  have  to  answer  here  is  this :  Has  overcapitalization  been 
a  potent  influence  in  the  undermining  of  electric  railway  credit?  and,  if  so,  do 
we  need  to  say  anything  about  it  now? 

Ex-President  Taft,  in  his  opening  statement  to  the  Commission,  referred  at 
page  4  of  the  Proceedings  to  the  matter  of  overcapitalization.    He  said : 

"It  is  charged  that  there  has  been  a  good  deal  of  watered  stock,  and  doubtless  there 
has  been — not  of  ver\-  recent  years,  I  should  think,  because  watered  stock,  to  be  useful,  has 
to  be  disposable ;  and  I  do  not  think  anybody  can  dispose  of  street  railway  stock  except  in 
banks  that  are  nm  by  gentlemen  that  have  an  optimism  that  would  justify  their  being  removed 
from  the  bank  trust.  That,  of  course,  makes  it  most  important  that  the  situation  should  be 
considered  in  a  large  way."' 

Later  on,  at  page  15  of  the  Proceedings,  in  response  to  questions  by  Commis- 
sioner Meeker,  he  expressed  himself  as  follows : 

"I  think  you  ought  to  take  into  consideration  that  these  properties  do  change  hands,  and 
that  the  people  who  are  now  sweating  are  not  the  people  generally,  who  were  guilty  of  those 
original  'rich'  investments  that  have  so  reflected  on  the  character  of  the  investment,  in  stirring 
up  the  hostility  of  the  people.     *     *     * 

"In  other  words,  I  think  that  those  people  who  water  stock  and  engage  in  other  transac- 
tions that  give  property  a  meretricious  value,  get  out  from  under  the  load  as  promptly  as 
possible,  and  allow  others  to  bear  it.  I  think  that  is  generally  the  history  of  these  transactions. 
That  cannot  be  defended." 

Still  further  on,  in  response  to  qtiestions  by  Commissioner  Sweet,  Mr.  Taft 
testified  at  pages  17  and  18  of  the  Proceedings: 

"Commissioner  Sweet :  In  view  of  your  quasi-parental  relation  to  this  Commission,  would 
you  recommend  that  we  should  go  at  all  into  the  subject  of  past  profits  of  these  companies? 

"Mr.  Taft:     If  you  do,  you  will  never  get  down  to  business.     I  can  tell  you  that. 

"Commissioner  Sweet:  Can  you  see  any  profit  in  an  inquiry  of  that  kind,  in  relation  to 
the  question  that  we  are  really  to  consider? 

"Mr.  Taft :  I  do  not  mean  to  say  that  there  may  not  be  instances  in  which  you  ought 
to  go  back,  just  to  determine  the  facts  that  you  are  trying  to  find  out;  but  to  entertain 
evidence  of  the  corruption  and  the  methods  of  ten  years  ago,  or  twenty  years  ago,  and  the 
historj'  of  transactions  that  have  been  made  the  basis  for  hostility  to  street  railway  companies, 
will  occupy  all  your  time,  so  that  you  will  never  get  down  to  the  real  question,  and  I  think  you 
could  separate  the  two  by  finding  out  what  is  the  actual  money  that  is  invested  now. 

"Commissioner  Sweet :  The  real  question  now  has  very  little  relation  to  big  profits  or 
corruption  that  may  have  been  received  or  practiced  years  ago? 

"Mr.  Taft :     Except  in  its  psychological  effect  upon  the  attitude  of  the  public. 

"Commissioner  Sweet:     Is  it  not  an  old  sore  that  had  better  be  left  alone? 

"Mr.  Taft :     We  declined  to  go  into  it. 

"Commissioner  Sweet:     Don't  vou  think  we  should  decline  to  go  into  it? 

"Mr.  Taft :     Yes,  I  do." 

General  Tripp  frankly  admitted  on  behalf  of  the  electric  railway  companies 
that  overcapitalization  in  the  past  had  been  responsible  for  losses  to  investors  and 
the  development  of  public  hostility  toward  the  companies.  His  testimony  is  found 
at  page  154  of  the  Proceedings,  where  he  refers  to  the  financial  history  of  the 


38  Electric  Railway  Problem 

Metropolitan  Street  Railway  Company  of  Xew  York.     This  was  in  response  to 
questions  by  Commissioner  Sweet,  as  follows : 

"Commissioner  Sweet :  How  do  you  account  for  the  prejudice  in  the  public  mind  against 
these  railway  corporations?     There  is  such  a  prejudice,  is  there  not? 

"Gen.  Tripp :  Ves ;  and  it  is  perfectly  clear  why  it  should  exist.  The  Metropolitan 
Street   Railway  Company  wa.s  largely  overcapitalized. 

"Commissioner  Sweet :  .\nd  overcapitalization  is  one  of  the  reasons  why  the  public  is 
prejudiced  against  these  companies? 

"Gen.  Tripp:     Yes.     Large   fortunes  were  made. 

"Commissioner  Sweet:     Yes? 

"Gen.  Tripp:  They  were  made,  however,  out  of  capitalizing  its  future  and  selling  the 
securities,  and  not  out  of  the  5-cent  fare  rider.  The  5-cent  fare  never  produced  more  than  a 
fair  return  upon  the  fair  investment  of  the  property,  but  hoiK-s  were  capitalized,  and  _hopes 
were  sold,  and  the  investors  have  lost  money.     But  the  car  riders  have  not  paid  for  it." 

Mr.  J.  K.  Newman,  street  railway  engineer  and  banker,  also  a  witness  for 
the  companies,  was  perfectly  frank  in  his  description  of  early  promotion  methods 
and  the  processes  of  inflation.  Mis  testimony  on  these  points  is  found  at  pages 
554  and  555  of  the  Proceedings,  where  he  says: 

"Now,  the  one  tiling  that  was  uppcnnost  in  my  mind  always  was  the  franchise;  and  I 
wanted  to  be  sure  that  there  was  a  5-cent  fare  in  the  franchise,  and  that  I  had  a  franchise  for 
as  long  a  term  as  possible.  1  have  rei>eatedly  refused  to  be  interested  in  street  railway 
propositions  that  did  not  emlxxly  a  S-cent  fare  and  a  lonu-term  franchise.  This  franchise 
gives  an  enormous  value  to  the  property,  over  and  above  its  physical   worth. 

"The  bankers  were  keen  to  see  that.  I  want  to  confess  to  being  a  banker  also,  or  I  try 
to  be  a  banker. 

"Taking  advantage  of  the  situation,  we  commenced  to  capitalize.  We  capitalized  the 
earning  power,  because  we  had  a  monopoly.  If  we  did  not  have  a  monopoly,  we  went  on 
and  bought  the  other  road,  and  put  them  togetlicr  as  a  basis  of  some  additional  capitalization. 

"The  Chairman:     Are  you  speaking  now  about  the  bankers? 

"The  bankers  and  the  street  railway  men.  They  work  together  always,  and  the  result  was 
that  it  was  about  as  lucnilive  a  business  as  there  was  in  this  country.  The  public  got  the  idea, 
and  it  has  it  tixlay,  that  the  street  railway  men  and  the  liankers  associated  with  them  made 
enormous  profits,  and  that  is  tnie  only  on  paper.  It  was  true,  in  reality,  in  the  early  stage 
of  the  game,  and  the  securities  became  vcr)'  desirable.  l>ccame  generally  distributed,  and.  next 
to  steam  railroad  securities,  were  the  most  piipular  form  of  investment  on  the  part  of  the 
general  public." 

Mr.  Sisson,  of  the  Guaranty  Trust  Company  of  New  York,  in  discussing 
the  attitude  of  the  public  toward  the  street  railways,  at  page  327  of  the  Proceed- 
ings, said : 

"It  is  in  part  justified,  and  in  part  blind,  unreasoning  ignorance  oi  >cli-interest.  It  is 
justified  in  a  measure,  by  s-imc  had  practices — t)ad  financial  practices  and  operating  practices 
in  the  past,  thai  have  aroused  resentment,  and  proper  resentment,  but  from  which  the  public 
have  reacted  to  a  point  of  antagonism  that  is  just  as  unfair  and  unwarranted  and  unjustified 
as  the  actions  whicli  they  themselves  have  criticised." 

And  further  on,  at  page  328,  in  presenting  an  apology  for  overcapitalization, 
he  adds : 

"In  the  development  of  any  new  industry,  like  a  railway  or  public  utility,  the  in\-estment 
Kinker  ver>'  often  finds  it  necessary,  in  order  to  secure  direct  investment  in  the  obligation 
of  the  company,  to  give  a  profit  sharing  interest  in  the  future  of  that  com|>aiiv.  in  the  form 
of  a  stix-k  Ninus,  in  order  to  induce  investment.  Where  these  things  are  a  haz.ird.  their  profit 
earning  is  all  estimated  as  a  matter  of  guess-work,  the  speculative  possibility  in  the  situation 
is  the  only  thing  that  attracts  the  investor,  and  stock  bonuses  have  been  given  simply  to  make 
the  direct   oflfering  attractive." 

Another,  but  somewhat  milder,  apolog>'  for  overcapitalization  was  presented 
by  Mr.  Bradlec  at  page  220  of  the  Proceedings,  where  he  said: 

"The  question  of  issuing  Ixnius  slock  as  I  see  it  has  liecn  this:  rightfully  or  wrongfully 
the  practice  develoiK-d  of  selling  bonds  in  a  new  company  and  of  selling  preferred  stock  and 


Overcapitalization  39 

givinK  the  purchaser  of  the  bonds  and  the  preferred  stock  a  certain  amount  of  common  as  a 
bonus;  the  idea  being  that  the  bonds  and  the  preferred  stock  would  represent  their  invest- 
ment, the  common  stock  would  represent,  as  Mr.  Tripp  .said  this  moniing.  their  hopes;  and  if 
the  proposition  worked  well,  the  common  stock  might  be  worth  something;  if  it  did  not  work 
out  well,  it  would  have  no  value. 

"Now  that  practice  grew  up.  I  do  not  know  when  it  started  or  where,  but  it  did  grow  up, 
and  there  was  a  time  when  it  was  practically  impossible  to  finance  a  new  corporation  without 
following  that  practice.  You  were  in  competition  with  that  method,  and  the  investor  liked  it, 
and  if  you  were  going  to  get  the  investor's  money  and  get  him  interested  in  the  enterprise 
you  were  more  or  less  forced  to  fall  in  line  to  a  greater  or  less  extent  with  that  method  of 
handling  the  business. 

"I  think  the  public  utility  people  recognized,  perhaps  not  at  the  start,  but  many  years  ago, 
the  fallacy  of  that  method  of  financing.  I  think  most  of  them  would  have  done  away  with 
it  many  years  ago  if  it  had  been  in  their  power  to  do  away  with  it  and  go  on  and  develop  the 
business.  But  it  has  taken  time,  and  it  is  onlv  gradually  that  the  public  have  been  perhaps 
educated  up  to  a  greater  extent  to  handle  the  financing  of  such  corporations  in  that  way." 

It  remained  for  Mr.  William  J-  Oark,  of  the  General  Electric  Company, 
who  stated  that  he  built  the  first  electric  street  railway  in  the  world,  to  enter  a 
qualified  denial  by  saying  that  this  question  of  overcapitalization  is  much  over- 
stressed,  and  that  it  does  not  exist  to  the  degree  generally  claimed.  His  views 
appear  at  pages  137  and  138  of  the  Proceedings : 

"To  speak  plainly,  gentlemen. — I  know  the  accusation  has  been  made — there  is  far  less 
water  in  the  capitalization  of  the  street  railways  than  is  generally  supposed.  There  is  some, 
but  what  now  may  seem  excessive  capitalization  has  been  created  to  a  greater  extent  through 
this  continual  change,  change,  change,  through  advancement  in  the  art  to  better  meet  the 
requirements  of  the  public  in  the  way  of  service. 

"Now.  turning  back,  electricity  did  not  bring  about  a  manipulation  of  finance  into  the 
electric  railway  field.  It  began  long  before  that,  as  I  could  trace  for  you  if  I  had  certain  data, 
which  I  will  have  here  tomorrow.  A  very  large  part  of  what  may  be  considered  over- 
capitalization today  can  be  traced  back  to  those  periods. 

"In  the  horse-car  days,  there  were  certain  contracting  concerns  who  used  to  do  this  thing 
in  a  sort  of  a  wav.  They  disappeared,  almost  all  of  them,  with  the  advent  of  electricity. 
They  were  the  fellow^s  who  built  track  with  a  20  or  25  pound  rail.  As  long  as  they  had 
something  to  run  cars  over,  on  which  to  sell  securities,  bonds  especially,  they  were  contented. 

"That,  as  I  said,  was  more  common  in  the  days  before  the  advent  of  electricity  than 
afterwards." 

So  far  as  overcapitalization  is  concerned,  the  state  of  Massachusetts  appears 
to  be  about  the  only  bright  spot  in  the  country,  as  the  result  of  anti-stock  watering 
laws  enacted  many  years  ago.  In  fact,  the  capitalization  of  Massachusetts  electric 
railways  is  frequently  used  as  a  yardstick  to  prove  capitalization  elsewhere.  For 
example.  Mr.  Lauck,  in  his  Argument  and  Brief,  filed  on  behalf  of  the  labor 
interests,  cited  the  fact  that  in  1912  the  street  railways  of  the  United  States  gen- 
erally were  capitalized  at  an  average  of  $104,930  per  mile,  while  the  figure  for 
Massachusetts  was  only  $57,786  per  mile.  From  this  comparison,  he  inferred  a 
total  overcapitalization  of  45  per  cent  or  $2,119,000,000  in  the  country  at  large. 
Yet  the  testimony  shows  that  the  Massachusetts  lines  have  led  the  procession  in 
the  great  Parade  of  Distress  that  has  been  going  on  during  the  past  few  years, 
and  some  of  the  apologists  for  overcapitalization  appear  to  get  considerable  com- 
fort out  of  this  fact.  Yet  it  is  shown  that  even  in  Massachusetts  there  was  con- 
siderable initial  overcapitalization  in  certain  cases.  Instances  are  cited  at  page  10 
of  Mr.  Lauck's  brief,  and  Mr.  Homer  Loring,  Chairman  of  the  Board  of  Public 
Trustees  operating  the  Bay  State  lines,  refers  to  the  matter  at  page  1642  of  the 
Proceedings,  where  he  says: 

"In  the  so-called  Bay  State  valuation  in  1916,  the  Public  Service  Commission  very  liberally 
slashed  capitalization  to  take  care  of  what  they  thought — they  thought  there  was  evidence  of 
an  inflation  in  the  early  days  of  the  company,  so  they  took  that  out  with  great  care.     Of 


40  Electric  Railway  Problem 

course,  wc  have  had.  as  you  understand,  stock  watering  laws  in  Massachusetts  which  have 
been  fairly  effective  since  1892,  is  it  not.  Mr.  Warren? 

"Mr.  Warren  ;     So  far  as  street  railways,  it  runs  hack  ai  far  as  1874  on  the  stock. 

"Mr.  Loring  :  Yes,  but  in  the  early  days  water  did  creep  in  in  some  few  instances  and 
the  Public  Service  Commission  in  making  its  actual  cost  appraisal,  as  they  did,  took  out  many 
millions  which  they  suspected,  and  1  have  no  doubt  rightfully  so,  was  water." 

Upon  the  question  as  to  whether  the  Commission  in  its  consideration  of  the 
present  crisis  in  the  electric  railway  industry  and  the  possible  remedies  for  existing 
evils  should  gloss  over  the  redolent  past,  Interstate  Commerce  Commissioner 
Eastman's  testimony  is  illuminating,  particularly  as  he  is  fresh  from  several  years 
of  intensive  study  of  the  Massachusetts  situation  and  of  practical  administrative 
responsibility  for  the  formulation  of  public  policies  in  that  state.  At  page  2064 
of  the  Proceedings,  he  says  that,  in  considering  what  he  would  do  if  he  were 
a  member  of  the  Federal  Electric  Railways  Commission,  he  reached  the  conclusion 
that  he  would  start  otT  by  enlarging  upon  and  describing  the  importance  of  street 
railway  transportation,  and  adds : 

"Then  I  think  I  should  frankly  state  the  past  evils  from  which  many  of  the  companies 
still  suffer.  I  do  not  think  it  is  desirable  in  any  way  to  gloss  those  over.  There  is  no  doubt 
that  overcapitalization  has  taken  place  in  many  cases,  there  have  been  extortionate  rentals; 
bad  financial  policy;  mismanagement  in  various  respects.  In  some  cases  the  history  of  the 
street  railways  in  this  country  has  been  absolutely  disreputable,  as  we  all  know.  These  facts 
ought  to  be  frankly  stated.  .\t  the  same  time,  1  think  you  ought  to  make  clear  that  not  all 
companies  have  Ix'cn  guilty  of  those  practices  in  the  past,  and  that  some  of  them  have  done 
penance  by  reorganization,  getting  down  to  basic  facts." 

That  overcapitalization  cannot  be  considered  merely  as  a  "bygone,"  having 
no  pertinency  at  the  present  time,  is  clearly  set  forth  by  Chairman  William  U.  B. 
Ainey,  of  the  Pennsylvania  Public  Service  Commission.  .Xt  pages  1390  and  1391 
of  the  Proceedings,  he  says: 

"When  an  epidemic  touches  a  locality  its  effect  upon  the  individual  depends  in  part  upon 
any  organic  or  fundamental  physical  weakness  which  that  individual  possesses.  It  is  an  a.xiom, 
I  think,  that  disease  usually  makes  its  most  sinister  attack  upon  the  weaker  organ  of  the 
patient.  A  physician  in  diagnosis  would  be  recreant  if  he  did  not.  therefore,  take  into  con- 
sideration these  iundamcntal  difficulties  in  each  patient.  While  analogies  are  not  always 
logical,  it  is  without  question  that  the  high  costs  of  labor  and  material,  the  lessened  purchasing 
power  of  the  dcpllar,  perhaps  the  changing  riding  habits  of  the  people,  have  borne  down 
u|»n  the  electric  railway  interests  of  the  land  most  heavily  in  places  where  there  are  funda- 
mental  weaknesses  in  cnr|iorate  historx.  n;.iMaginient   ur   gcninil  oonditidns. 

"Shall  we  stop  short  of  inquiring  into  these  weaknesses?  If,  then,  these  higher  costs  are 
liable  to  be  continued,  the  companies  in  order  to  survive  and  meet  the  responsibilfies  of  the 
new  conditions  under  which  they  are  called  upon  to  operate  must  not  deceive  tliemselves. 
They  must  not  gloss  over  any  organic  difficulties  if  they  e.>tist.  but  even  at  the  expense  of 
much  travail  subject  thenvselvcs  to  rigid  sell-examination.  It  has  been  remarked  lx;fore  you, 
I  understand,  that  some  companies  have  capitalized  'hopes.'  It  would  be  inexpedient  for  me 
to  name  or  even  have  in  mind  particular  companies,  but  making  a  ciim|H>site  statement  of 
several  to  which  my  attention  has  been  directed,  let  me  iiKiuire  what  you  would  recommend 
to  public  service  commissions  who  were  seeking  to  determine  the  fair  return  in  the  cases  of 
companies  which  on  outlays  of  from  two  million  to  three  million  dollars  without  an  additional 
rail,  spike,  car  or  dollar  of  inveslment  capitalized  such  properties  at  seven  or  eight  million 
dollars.  Where  increases  were  not  made  on  the  Ivisis  of  money  invested  or  upon  the  physical 
value  of  the  proiHTty  devoted  to  public  service,  but  the  then  or  anliqi|>ated  net  incomes  Were 
capitalized,  these  incomes  have  necrssarily  Ix^en  lessened  by  the  increased  costs.  Naturally 
such  conijianies  do  not  wish  to  rcadjnvt  ilieir  capital  issues  to  meet  present  net  incomes  on  the 
kivis  ihev  were  established,  hut  they  now  desire  to  increase  their  income  to  meet  their  former 
increases  in  capital. 

"The  payment  hy  the  public  of  a  fair  return  upon  watereil  stock  on  the  ground  that  that 
stock  h.id  passed  into  the  hands  of  widows  and  ori>hans,  no  matter  how  just  or  equitable  it 
might  .-ipprar  to  the  advocate  of  such  a  policy,  nor  how  stronglv  entrenched  in  law,  nor 
persuasive  the  argument  as  an  ad  linminrm  appeal,  would  with  difficultv  secure  a  consenting 
riding  public  to  supi>ort  it  and  would,  of  course,  re<iuire  changes  in  the  organic  law  of  every 


I 


Overcapitalization  41 

state  regulator}'  tiody  of  the  land,  for  valuation  for  rate-making  purposes  is  by  law  based 
primarily  upon  original  costs  and  reproduction  costs  new,  neither  of  which  would  respond 
to  such  a  suggestion.  Moreover,  we  would  then  be  confronted  by  a  situation  in  which  the 
company  whose  capital  issues  bore  fair  relationship  to  the  value  of  its  property  devoted  to 
public  service  would  be  faring  much  worse  than  the  one  burdened  with  watered  stock." 

Dr.  Milo  R.  Maltbie,  who  for  many  years  was  a  member  of  the  Pubhc  Service 
Cominission  for  the  First  District  of  New  York,  also  lays  emphasis  upon  the  evil 
efTects  of  overcapitalization  on  credit.  His  testimony  is  found  at  pages  2091  and 
2092  of  the  Proceedings  : 

"The  street  railway  companies  at  the  present  time  are  laboring,  among  other  things,  under 
a  great  disadvantage  in  any  attempt  to  secure  new  capital  for  equipment  which  could  be 
operated,  possibly,  at  less  expense  to  the  company  and  greater  advantage  to  the  public.  One 
of  the  things  to' which  I  wish  to  call  your  attention  as  an  explanation  of  that  situation,  and 
something  which  prevents  readjustments  being  made  that  ought  to  be  made,  is  the  fact  that 
in  many  instances  the  companies  have  been  overcapitalized ;  that  is,  they  are  capitalized  for  a 
par  value  of  stocks  and  bonds  very  greatly  in  excess  of  either  the  cost  of  the  property  as  it 
stands  today,  or  the  value  of  the  property.  Of  course,  in  such  instances  it  is  difficult  to  raise 
money,  because  those  who  are  asked  to  accept  the  new  securities  fear  that  when  the  rates 
come  before  a  public  body  for  review,  a  public  service  commission,  for  example,  the  value 
of  the  property  will  be  found  at  less  than  the  par  value  of  the  securities,  and  that  some  of  the 
securities — of  course,  the  junior  securities — will  be  placed  in  such  a  position  that  they  do  not 
get — not  a  fair  return — but  do  not  get  an  amount  appreciably  toward  a  fair  return,  and 
consec|ucntly  there  being  no  one  to  take  the  securities,  there  not  being  earnings  sufficient  to 
provide  funds  for  their  paying  fixed  charges  and  to  purchase  the  property  that  is  needed, 
there  is  no  way  of  securing  funds  which  might  be  used  to  advantage  in  the  operation  of  the 
company,  and  the  companies  are  compelled  to  go  on  with  rolling  stock,  for  e.xample,  which 
is  not  well  adapted  to  the  conditions  that  exist  today." 

The  psychological  effect  of  overcapitalization  upon  the  employes  as  well  as 
upon  the  riding  public  is  clearly  illustrated  by  the  character  of  the  argument  sub- 
mitted on  behalf  of  the  Amalgamated  Association.  That  document  dwells  upon 
the  fact  of  overcapitalization  at  length  and  cites  many  specific  instances  and 
methods  of  inflation.  It  exhibits  resentment  that  the  present  crisis  in  street 
railway  finances  should  be  so  generally  attributed  to  advances  in  wages.  Upon 
this  point,  at  pages  9  and  10  of  the  brief,  Mr.  Lauck  states: 

"Exaggeration  of  the  degree  to  which  the  present  plight  of  the  street  railways  of  the 
United  States  is  due  to  overcapitalization  and  to  improper  or  unwise  financial  management 
would  be  difficult,  if  not  impossible.  No  structure  can  stand  whose  foundation  is  rotten  and 
whose  framework  is  weak  and  loosely  reared,  and  every  examination  that  has  been  made  of 
the  street  railway  business  of  this  country  shows  it  to  be  such  a  structure.  The  testimony 
adduced  is  overwhelmingly  conclusive,  for  there  is  no  one  so  ignorant  or  so  audacious  as  to 
deny  that  there  have  been  overcapitalization  and  financial  mismanagement.  There  have  been, 
it  is  true,  apologists  for  the  practices  responsible  for  this  phase  of  the  condition  of  the  street 
railways.  There  are  those  who  minimize  its  importance  in  connection  with  the  problem  now 
before  this  commission,  and  there  are  others  who  will  agree  with  the  Honorable  William  H. 
Taft  in  his  statement  to  you  that  'the  subject  is  an  old  sore  and  should  be  left  alone  except 
in  some  cases  where  it  will  be  necessary  to  go  back  and  take  judicial  notice  of  the  facts 
involved.'  When  as  a  result,  however,  of  all  the  evils  of  indirect,  unregulated,  absentee  owner- 
ship and  through  the  application  of  the  gambler's  methods  to  the  control  and  maninulation 
of  the  properties,  we  have  almost  universal  excess  capitalization,  inflated  claims  of  value, 
and  reckless  financiering  in  all  its  aspects,  and  the  effort  is  made  to  attribute  the  predicament 
of  the  street  railways  to  increased  and  undue  labor  costs,  we  submit  that  the  public  is  entitled 
to  the  facts." 

It  is  true  that  Mr.  Warren  filed  with  the  Commission  on  behalf  of  the  Amer- 
ican Electric  Railway  Association  a  document  entitled  "Comparison  of  Valuation 
and  Capitalization  of  26  electric  railways  based  upon  letters  to  the  A.  E.  R.  A. 
and  records  of  valuation  and  fare  cases,"  dated  August  11,  1919,  purporting  to 
show  that  the  aggregate  capitalization  of  these  26  companies  was  only  10.8  per 


42  Electric  Railway  Problem 

cent  in  excess  of  the  valuations.  This  exhibit  was  vigorously  attacked  by  Mr. 
Stiles  P.  Jones,  of  Minneapolis,  who  for  many  years  has  been  a  close  student  of 
public  utility  affairs  throughout  the  country,  and  who  appeared  as  a  witness  for 
the  labor  interests.  Following  Mr.  Jones's  testimony,  Mr.  Warren  withdrew  the 
capitalization  exhibit  for  rechecking  and  such  correction  as  might  be  found  neces- 
sary. It  was  somewhat  revised  and  subsequently  refiled  with  the  Commission, 
bearing  the  date  of  November  18,  1919.'  This  document  does  not  even  purport 
to  disprove  the  charges  of  initial  overcapitalization  made  against  the  electric  rail- 
ways. It  merely  tends  to  show  that  at  the  present  time  most  of  this  early  over- 
capitalization may  have  been  absorbed  by  the  increased  cost  of  reproduction  and 
by  the  recognition  in  certain  cases  of  franchise  and  other  intangible  values  in 
recent  valuations. 

The  evidence  is  clear,  uncontroverted,  and  almost  unanimous  that  overcapi- 
talization was  a  policy  of  the  electric  railways  in  the  early  days,  that  its  ultimate 
effect  upon  credit  was  disastrous,  and  that  both  cause  and  effect  persist  at  the 
present  day.  During  the  war  period  and  even  now,  one  of  the  urgent  points  made 
for  the  relief  of  the  industry  by  means  of  rate  increases,  by  removal  of  tax  bur- 
dens, by  public  subsidies,  or  otherwise,  is  the  paramount  importance  of  saving 
the  financial  structure  of  the  industry  by  keeping  the  companies  out  of  receivers' 
hands.  This  appeal  in  effect  asks  that  the  public  condone  the  past  sins  of  the 
companies,  and  guarantee  them  against  the  normal  results  of  the  mistakes  they 
have  made  and  the  unsound  policies  they  have  adopted.  The  companies  say: 
Do  not  punish  us,  but  forgive  us  and  carry  our  losses.  This  raises  an  issue  that 
makes  a  satisfactory  adjustment  of  the  relations  of  the  public  to  the  industry  and 
a  restoration  of  electric  railway  credit  most  difficult.  The  old  sore  has  never 
healed ;  it  is  still  draining  the  vitality  of  the  industry.     It  cannot  be  ignored. 


Chapter  X 
NEGLECT  TO   AMORTIZE   EXCESS   CAPITALIZATION 

Another  cause  for  the  break-down  of  the  credit  of  the  electric  railways  may 
be  found  in  the  fact  that  they  have  steadily  and  stoutly  resisted  as  a  matter  of 
policy  any  general  writing  off  of  initial  excess  capitalization  as  their  earnings 
have  developed.  Their  aim  has  been  to  "make  the  common  stock  pay,"  not  to 
get  rid  of  it.  It  is  quite  conceivable  that  under  favorable  circumstances  an  electric 
railway,  starting  out  with  the  handicap  of  inflated  securities,  might  nevertheless 
by  a  rigid  policy  of  conservatism  gradually  reduce  its  capitalization  or  build  up 
its  property  out  of  earnings  so  as  ultimately  to  overcome  the  original  unsoundness 
of  its  financial  structure  and  get  upon  a  living  basis.  It  is  doubtless  true  that 
some  electric  railways  have  invested  earnings  in  improvements  and  extensions. 
It  is  also  true  that  in  some  cases,  in  later  years,  the  bankers  have  insisted  in 
connection  with  new  bond  issues  that  sinking  funds  be  established  to  provide  for 
the  ultimate  retirement  of  the  bonds.  Nevertheless,  it  may  be  confidently  stated 
that  up  to  this  time  street  railway  bonds  have  almost  never  been  paid  except 
through  a  process  of  refunding.  The  street  railways  have  adopted  no  effective 
policy  for  the  reduction  of  their  capitalization  through  the  process  of  amortization. 
Of  course,  receiverships  have  resulted  in  a  number  of  cases  in  reductions  of 
capitalization,  and  occasionally,  in  the  process  of  consolidation,  a  little  "water" 
has  been  squeezed  out  where  it  was  obvious  that  the  amount  of  outstanding 
securities  representing  no  investment  did  not  even  have  "hopes"  to  sustain  them, 
but  in  general  every  element  of  intangible  value  or  claim  of  value  that  has  once 
found  its  way  into  capitalization  has  been  religiously  retained  and  defended  by 
the  street  railway  interests. 

On  this  particular  point  comparatively  little  evidence  was  produced  before 
the  Commission.  Undoubtedly,  the  "water"  in  street  railway  securities  is  for  the 
most  part,  though  not  entirely,  represented  by  capital  stock,  which  never  falls  due. 
The  companies  have  known  no  easy  way  of  reducing  excessive  stock  issues,  and 
ordinarily  have  not  tried  to  find  any.  Where  they  have  felt  the  necessity  of  doing 
something  to  overcome  the  baneful  effects  of  initial  overcapitalization  on  credit, 
their  policy  has  been  to  build  up  earning  power  by  scamping  service  or  by  other 
devices,  and  to  pay  dividends,  or  else  to  "forego"  them  for  a  time  so  that  the 
surplus  earnings  could  be  put  into  the  building  up  of  the  property.  In  the  latter 
case,  the  hollow  shell  of  capitalization  furnished  by  the  investors  would  be  filled 
up  out  of  the  car  riders'  contributions,  and  the  stockholders  would  graciously 
defer  the  declaration  of  dividends  until  the  public  had  supplied  the  real  capital 
on  which  the  dividends  could  be  paid.  From  the  bondholders'  point  of  view, 
a  safer  way  of  filling  in  the  capital  account  would  have  been  by  the  accumulation 

43 


44  Electric  Railway  Problem 

of  a  sinking  fund  out  of  earnings  for  the  retirement  of  the  bonds  when  due.  By 
this  policy  the  cost  of  the  companies'  property,  represented  by  bonds,  would  be 
gradually  paid  off  from  the  contributions  of  the  public,  and  the  stockholders  who 
contributed  little  or  no  capital  to  the  enterprise  would  ultimately  find  themselves 
in  possession  of  it  free  of  debt.  The  bondholders,  in  this  case,  would  be  treated 
as  temporary  investors  in  the  street  railway  business.  They  would  "hold  the  fort" 
until  the  public  could  be  induced  or  compelled  to  pay  for  the  property  and  g^ve  it 
to  the  stockholders.  But  even  this  device  for  overcoming  initial  overcapitalization 
was  seldom  adopted. 

At  page  344  of  the  Proceedings,  in  response  to  a  question  about  the  adequacy 
of  the  5-cent  fare  for  the  establishment  of  depreciation  reserves,  Mr.  Sisson  refers 
to  the  general  failure  of  the  companies  to  pay  off  their  debts.  The  question  and 
answer  are : 

"Commissioner  Gadsden:  If  they  (the  electric  railways)  had  set  up,  as  they  should  have, 
a  proper  provision  (or  depreciation,  and  cxtraordinar>'  obsolescence,  is  it  not  questionable 
whether  the  5-ccnt  fare  ever  was  an  adequate  compensation? 

■'.\Ir.  .Sisson:  Yes.  and  as  a  Ijankcr  I  very  frankly  think  they  should  have  gone  further 
than  that  and  set  np  sinking  funds  which  would  have  provided  for  the  liquidation  of  their 
indebtedness,  which  almost  none  of  them  have  done,  and  they  could  not  do  it,  as  a  matter 
gf   fact,  out  of  the  5-ccnt  fare." 

The  question  as  to  whether  the  companies  could  have  amortized  a  portion 
of  their  securities  out  of  earnings  will  not  stay  answered  in  the  negative  by  mere 
assertions  to  that  effect  at  this  late  day,  for  the  whole  history  of  the  industry 
proves  that  those  in  control  of  its  policies  have  not  tried  to  amortize,  but  have 
been  intent  on  increasing  capitalization  at  every  opportunity.  A  notable  illus- 
tration of  the  refusal  to  cut  capitalization  down  to  bed  rock,  even  after  bankruptcy, 
is  found  in  the  attitude  assumed  by  the  reorganizers  of  the  Metropolitan  Street 
Railway  and  the  Third  Avenue  Railroad  cc'm|)anies  in  New  York.  In  these  cases 
when  the  Public  Service  Commission  tried  to  enforce  upon  the  reorganizers  the 
rule  that  the  securities  to  be  issued  should  not  exceed  the  fair  value  of  the  prop- 
erty, tiic  jurisdiction  of  the  commission  was  successfully  contested  in  the  courts 
and  its  orders  disobeyed.  These  men  preferred  to  take  lluir  chances  t)n  the 
possible  development  of  future  earning  power  to  support  an  excessive  amount  of 
securities,  rather  than  content  themselves  with  an  amount  of  securities  no  greater 
than  the  v.ilue  of  the  ])roperty  at  the  time.  General  Tripp,  in  telling  the  history 
of  the  Metropolitan  Street  Railway  reorganization  at  pages  147  and  148  of  the 
Proceedings,  stated  that  the  par  value  of  securities  issued  by  the  new  company 
was  less  than  the  physical  value  of  the  property,  and  cited  an  appraisal  bv  Ford, 
Bacon  &  Davis  to  i)rove  this  assertion.  He  made  no  reference  to  the  fact  that  the 
Public  Service  Commission  found  quite  the  contrary.  The  methods  by  which 
appraisal  engineers  interested  in  i)romotion  and  finance  often  build  up  values  to 
fit  capitalization  arc  from  the  public  point  of  view  and  from  the  point  of  view 
of  conservative  street  railway  policy  one  of  the  scandals  of  public  service  regu- 
lation of  the  present  day. 

Some  light  can  he  tliri>wn  upon  the  general  policy  of  the  street  railways  to 
foster  and  maintain  their  overcapitalization  by  a  study  of  certain  of  the  prop- 
erties listed  in  the  schedule  filed  on  behalf  of  the  Electric  Railway  Association 


Excess  Capitalization  Not  Amortized  45 

comparing  capitalization  with  valuation.  For  example,  there  is  the  Kansas  City 
Railways  Company,  a  reorganization  of  the  Metropolitan  Street  Railway  of 
Kansas  City.  The  total  capitalization  is  given  as  $28,353,300,  which  is  shown 
to  be  nearly  $5,000,000  less  than  the  reproduction  cost  new  of  the  property  as 
fixed  by  the  Missouri  Public  Service  Commission  in  1918.  The  property  was 
not  new  at  the  time  of  the  valuation.  As  to  the  capitalization,  the  exhibit  shows 
the  capital  stock  to  be  only  $100,000,  as  against  $28,253,300  of  funded  debt.  A 
reference  to  Moody's  Manual  reveals  the  fact  that  this  nominal  issue  of  $100,000 
has  been  made  the  basis  of  62,716.7  Preferred  and  63,620.5  Common  certificates 
of  participation  of  no  par  value.  If  these  certificates  be  counted  at  $100  apiece, 
the  $100,000  of  capital  stock  swells  into  $12,633,720  of  participating  certificates. 
The  persistent  overcapitalization  of  the  Chicago  Surface  Lines  could  also 
be  cited  in  support  of  the  point  here  being  emphasized.  The  New  York,  Kansas 
City  and  Chicago  companies  should  have  learned  better  by  their  own  previous 
experiences  with  overcapitalization,  shattered  credit,  and  the  ruin  of  bankruptcy. 
Many  representatives  of  the  electric  railway  companies  still  cite  with  indignation 
the  enforced  reduction  of  the  capital  stock  of  the  Cleveland  Railway  in  1910, 
although  it  is  now  admitted  on  all  sides  that  the  Cleveland  Railway  Company 
today  enjoys  much  better  credit  than  the  other  street  railway  companies  of  the 
country. 

Even  in  the  Cleveland  settlement,  with  its  conservative  valuation  of  the 
property,  the  value  of  unexpired  franchises,  superseded  by  the  new  arrangement, 
was  permanently  capitalized  at  $3,615,843,  and  pavement  which  belonged  to  the 
city  was  permanently  capitalized  at  $1,897,357  plus  the  general  overheads.  In 
the  recent  arbitration  upon  the  demand  of  the  Qeveland  Railway  Company  that 
the  rate  of  return  upon  its  capital  stock  be  increased  from  6  per  cent  to  7  per 
cent,  witnesses  for  the  company  called  attention  to  the  fact  that  these  items  for 
franchise  and  pavement  value  are  still  in  the  capital  account,  and  referred  to  this 
fact  as  constituting  a  serious  impairment  of  the  stockholders'  security.  And  in 
fact  the  Board  of  Arbitration  unanimously  recommended  an  amendment  of  the 
franchise  to  provide  for  the  accumulation  of  a  reserve  of  not  less  than  $300,000 
per  annum,  to  be  held  in  trust  for  at  least  ten  years.  Then,  if  the  franchise  is 
renewed,  this  accumulation  of  not  less  than  $3,000,000  would  be  put  into  better- 
ments and  extensions  without  being  capitalized,  and  the  process  of  building  up 
the  reserve  during  another  ten-year  period  would  be  begun  forthwith.  If  the  city 
failed  at  the  end  of  any  ten-year  period  to  renew  the  franchise,  then  this  reserve 
would  be  held  for  the  liquidation  of  the  capital  stock  upon  the  expiration  of  the 
franchise  15  years  later  on.' 

If  the  Qeveland  Railway,  with  its  most  unusual  conservatism  in  capitaliza- 
tion, is  still  in  need  of  a  reserve  fund  for  the  amortization  of  intangibles  in  order 
that  its  credit  may  be  properly  maintained,  what  may  we  not  allege  as  to  the 
effect  upon  credit  of  the  millions  of  dollars  of  franchise  values,  promoter's  re- 
muneration, superseded  property  and  cumulative  deficiencies  that  are  depended 
upon  in  most  of  the  electric  railway  properties  as  a  warrant  for  the  perpetuation 
of  excessive  capitalization? 


Chapter  XI 
FAILURE  TO  AMORTIZE  NORMAL  ACCRUED   DEPRECIATION 

Still  another  cause  of  loss  of  credit  which  had  its  foundation  in  the  specu- 
lative spirit  that  controlled  the  electric  railway  industry  and  in  the  lack  of  business 
foresight,  or  in  the  carelessness  of  future  business  results,  was  the  almost  uni- 
versal practice  of  neglecting  depreciation.  We  have  discussed  initial  overcapi- 
talization and  the  subsequent  failure  of  the  industry  to  adopt  a  policy  of  reducing 
the  capitalization  and  of  working  the  intangible  and  speculative  elements  out  of  it 
as  the  earnings  developed.  On  account  of  the  failure  to  provide  for  depreciation 
the  credit  of  the  business  was  further  undermined  by  the  gradual  deterioration 
and  partial  disappearance  of  the  physical  assets  representing  the  actual  original 
investment.  The  electric  railways  appear  to  have  assumed  that  the  gradual  attri- 
tion of  their  physical  property  would  not  decrease  its  value  so  long  as  it  continued 
to  be  serviceable.  The  particles  rubbed  off  in  the  process  of  wear,  in  their  opinion, 
constituted  a  sort  of  halo  of  intangible  value  which  stayed  with  the  physical  prop- 
erty and  left  the  assets  securing  the  original  investment  unimpaired.  Indeed,  this 
theory  was  even  carried  to  the  extent  of  covering  with  its  mantle  of  hope  the 
superseded  mules,  abandoned  cables  and  other  wreckage  that  marked  the  pathway 
of  mechanical  progress  in  the  development  of  the  local  transportation  industry. 

The  great  confusion  that  exists  with  respect  to  depreciation  and  particularly 
with  respect  to  the  distinction  between  the  normal  accrued  depreciation  found 
in  a  well-maintained  old  property  and  the  current  depreciation  that  results  from 
neglect  of  maintenance  was  referred  to  by  Professor  Mortimer  E.  Cooley  in  his 
testimony.  Dean  Cooley  belongs  to  the  school  of  engineers  which  maintains  that 
for  rate  purposes  no  deduction  whatever  should  be  made  on  account  of  normal 
accrued  depreciation.  His  discussion  of  the  diflference  between  the  two  kinds  of 
depreciation  is  found  at  pages  263  to  265  of  the  Proceedings,  where  he  says : 

"The  subject  of  depreciation  is  prolKihly  as  little  umierstoixl  as  any  subject  connected 
with  a  iniblic  utility.  It  is  almost  imimssible,  apparently,  for  even  well-informed  men  to  Ret 
a  clear  conception  of  what  is  meant  by  depreciation  in  connection  with  a  utility  company, 
particularly  with  an  electric  street  railway  property.  I  think  the  Ixjst  way  to  present  it  is 
like  this : 

"When  we  build,  when  you  gentlemen  b\iild  a  street  railroad  property,  all  the  elements 
are  brand  new,  the  ties  and  the  rails  and  cars,  power  houses,  engines,  dynamos,  overhead 
wire,  evcnthinK  is  new.  brand  new ;  it  stands  in  what  we  call  a  1(10  per  cent  condition.  Some 
of  these  elements  are  long  lived,  some  are  short  lived.  .\n  engine  may  last  thirty  years,  a 
lie  may  last  six.  eight  or  ten  years;  a  car  may  last  in  between  .somewhere  But  the  elements 
have  different  lengths  of  lives  and  it  becomes  necessary-  to  replace  them  at  different  intervals. 
After  the  property  has  Iwen  nmning  for  ten  or  twelve  vears.  say,  or  fifteen  years,  it  will  be 
made  up  of  items  some  of  whicJi  are  brand  new,  some  of  which  are  partly  worn  out  and  some 
of  which  are  all  worn  out.  .-Xfter  it  has  l>een  running  through  twenty-five  to  thirty  years,  the 
length  of  the  longest  lived  element,  it  will  be  made  up  of  elements  of  all  conditions  as  to 
the  length  of   remaining  life. 

"Thus,  when  y<iu  make  an  appraisal  you  examine  these  different  elements  and  you  find 
some  standing  at    100  per  cent,  some  standing  at  75  per  cent,  some  standing  at   50  per  cent 

40 


Accrued  Depkeciation  Neglected  47 

and  some  standing  at  zero.  But  when  you  have  taken  the  weighted  average  of  all  these 
elements  you  tind  they  stand  somewhere  between  80  and  90  per  cent  of  the  original  100.  In 
other  words,  there  has  been,  say,  15  per  cent  of  accumulated  wear,  (jr  wear  that  lias  come  into 
the  elements,  so  that  the  IWI  per  cent  condition  is  represented  liy  an  85  per  cent  condition. 

"Now  here  comes  the  point  that  is  so  hard  to  understand.  It  makes  no  difference  if  the 
property  lasts  a  thousand  years,  the  per  cent  condition  in  which  it  remains  after  it  has  come 
through  its  longest  cycle  remains  practically  constant,  say,  85  per  cent.  You  cannot  raise 
that  85  per  cent,  if  that  is  the  mean,  because  in  order  to  raise  it  you  have  got  to  throw  away 
property  before  it  is  worn  out.  A  tie  will  not  be  entirely  worn  out,  a  car  may  not  be  worn  out, 
and  if  you  replace  them  too  soon  you  will  bring  up  the  average  condition  at  the  expense  of 
property  still  usable. 

"Likewise,  you  cannot  let  that  property  drop  very  much  below,  because  then  it  becomes 
dangerous  to  operate  and  it  does  not  render  the  service  for  which  it  is  designed.  Then  the 
conclusion  is  this :  that  the  85  per  cent  condition  that  I  am  speaking  of  for  all  practical  pur- 
poses throughout  all  life,  whether  ten  years  or  thirty  years  or  a  thousand  years,  is  the  100 
per  cent  operating  condition. 

"Now  you  cannot  have  that  85  per  cent  except  you  buy  it  with  100  per  cent.  Thus  you 
must  allow  the  100  per  cent  as  the  basis  for  rate  making  and  not  the  85  per  cent.  You  cannot 
have  the  85  except  you  pay  100  for  it.  It  is  the  cost  of  the  85  per  cent  condition  which 
is  the  maximum  practical  operating  condition.  All  this  money  that  comes  into  the  treasury 
of  the  railroad  comes  through  a  property  that  necessarily  exists  at  an  85  per  cent  condition. 

"Now  that  is  one  kind  of  depreciation.  You  might  call  that  a  fixed  depreciation.  And 
the  proper  way,  if  you  are  not  going  to  allow  the  100  per  cent  as  an  earning,  is  to  allow  out 
of  earnings  something  in  the  nature  of  a  sinking  fund.  You  must  contribute  to  this  sinking 
fund  through  an  annuity  taken  out  of  earnings  which  in  a  given  time,  say  the  life  of  the 
franchise,  will  bring  you  back  the  difference  between  85  and  100  per  cent.  So  whether  you 
allow  the  100  per  cent  or  allow  the  annuity,  its  equivalent,  it  comes  out  of  earnings. 

"Now  the  second  depreciation 

"Mr.  Warren :  May  I  ask  one  question  there.  Suppose  instead  of  a  determinate  fran- 
chise you  had  an  indeterminate  franchise,  would  you  allow  15  per  cent? 

"Air,  Cooley  :  There  would  be  difficulty  in  an  indeterminate  franchise  to  determine  what 
the  annuity  would  be. 

"Mr.  Warren :  Because  if  a  property  was  expected  to  last  forever  you  would  never 
make  up  the  15  per  cent? 

"Mr.  Cooley  :  Not  at  all,  and  so  I  say  we  should  always  figure  our  rate  of  return  on 
what  it  costs  to  get  that  property  in  its  working  condition. 

"Now  with  regard  to  this  second  depreciation  item.  In  order  to  keep  this  property  in 
the  85  per  cent  condition  you  have  got  to  renew  elements  as  they  wear  out.  Cars,  engines, 
boilers,  rails,  ties,  they  all  have  to  be  renewed  from  time  to  time  as  they  wear  out,  and  you 
have  to  put  aside  a  sum  of  money  to  do  that  work,  to  make  these  renewals.  A  car  may 
wear  out  or  it  may  become  obsolete  even  when  it  is  in  splendid  working  condition,  as  was 
the  case  in  Detroit  with  the  old  single-truck  cars.  They  stood  at  a  physical  condition  close 
onto  80  per  cent  and  yet  every  last  one  of  them  was  scrapped  because  the  public  demanded 
double-truck  cars  and  they  had  to  throw  them  away. 

"Now;'  this  second  fund  that  I  speak  of.  to  keep  the  property  in  the  85  per  cent  condition, 
has  likewise  to  come  out  of  earnings,  and  it  is  a  much  bigger  amount  than  people  think.  And 
I  could  give  you  a  demonstration  of  that.  If  you  will  take  all  the  elements  of  the  physical 
property  which  can  wear  out  and  take  the  length  of  life  of  those  different  elements  and  per- 
form the  arithmetical  computations,  you  w-ill  find  that  the  average  life  of  the  elements  that 
can  wear  out  is,  say,  12.  13  or  14  years,  something  of  that  sort,  the  composite  life.  So  that 
it  is  necessary  to  put  into  this  fund  for  renewals  somewhere  around  6,  7  or  8  per  cent  of  the 
items  that  wear  out. 

"Now  it  happens  that  the  items  that  wear  out  are  only  about  nne-third  or  perhaps  one- 
quarter  of  the  total  cost  of  the  property.  So  when  you  spread  this  6,  7  or  8  per  cent  over  the 
total  cost  it  means  anywhere  from  114.  2  or  2>4  per  cent  of  the  total  cost  of  property  has 
got  to  go  into  this  renewal  fund,  or  what  is  ordinarily  spoken  of  as  a  depreciation  fund, 
being  a  different  fund  from  the  one  I  first  spoke  of,  namely,  the  one  that  makes  up  the 
difference  between  the  85  and  100  per  cent." 

I  have  cited  Dean  Cooley's  testimony  at  length  becau.se  it  states  so  admirably 
the  difference  between  the  permanent  depreciation  here  being  considered  and  the 
current  depreciation  that  will  be  considered  in  the  next  chapter  of  this  report.  In 
quoting  Dean  Cooley  upon  these  points,  I  do  not  wish  to  be  understood  as  assent- 
ing to  his  percentages  or  his  theories  as  to  the  proper  treatment  of  accrued 
depreciation.  From  his  own  description  of  the  nature  of  permanent  depreciation, 
it  ought  to  be  obvious  that  any  ordinary  street  railway  property  cannot  be  kept 


48  Electric  Railway  Problem 

permanently  in  anything  like  an  85  per  cent  condition.  The  Tayler  franchise 
prescribes  70  per  cent  of  reproduction  value  as  the  standard  of  maintenance  for 
the  Cleveland  Railway  property.  In  the  recent  arbitration  proceeding,  Mr.  Henry 
J.  Davies,  Secretary  and  Treasurer  of  the  Cleveland  Railway  Company,  testified 
that  in  his  judgment  the  condition  of  the  property  was  nearer  65  per  cent  than 
70  per  cent;  yet  he  regarded  the  Cleveland  Railway  as  the  finest  street  railway 
property  in  the  United  States.  His  testimony  on  these  points  was  given  before 
the  Board  of  Arbitration  at  Oeveland  on  September  18,  1919.  It  was  brought 
out  upon  cross-examination  by  Judge  Fielder  Sanders,  City  Street  Railroad  Com- 
missioner, who  had  appeared  a  few  weeks  earlier  as  a  witness  before  the  Federal 
Electric  Railways  Commission.    The  Cleveland  arbitration  record  shows: 

Cross-examination  by  Judge  Sanders. 

Transcript,  pages  74  to  75.  ,        ,      ^     ,  ^. 

"Q.  Now,  in  the  nine  years  of  operation  under  the  Tayler  grant,  fifteen  or  sixteen  million 
of  new  stock  has  Ix-en  issued,  that  is  correct,  isn't  it,— renewal  stock? 

"A.     Yes,  fourteen  or  fifteen  million. 

"Q.     \'arious  improvements  and  additions  have  been  made,  haven't  they? 

"A.     Yes. 

"Q.     The  property  has  developed  into  a  fine  railroad  property,  hasn  t  it? 

"A.     It  is  a  good  railroad  property. 

"Q.    Do  you  know  of  a  better  surface  street  railroad  company? 

"A.     I  do  not. 

"Q.     It  is  the  finest  surface  street  railroad  property  in  the  United  States,  isn  t  it? 

"A.     1  am  willing  to  admit  it,  you  needn't  argue  it." 
Pages  78  to  79. 

"Q.     What  percentage  of  its  reproduction  value  do  you  think  the  system  is  at  now? 

"A.     I  think  it  is  at  a  little  less  than  seventy,  nearer  sixty-five  than  seventy. 

"Q.  Is  it  possible,  Mr.  Davies,  to  keep  a  system  physically  at  a  reproduction  value  of 
one  hundred  per  cent? 

"A.  No,  unless  you  regard  as  i>art  of  the  physical  property  a  proper  reserve  in  cash  or 
otherwise  to  take  care  of  the  depreciation. 

"Q.  What  is  the  usual  standard  of  reproduction  value  maintained  by  street  railroad 
systems  ? 

"A      Exclusive  of  any  reserve   for  depreciation? 

"Q.    Yes. 

"A.     I  think  less  than  seventy  per  cent. 

"Q.    It  is  about  fifty  per  cent,  isn't  it? 

"A.  If  the  system  were  not  a  growing  .system,  a  system  to  which  additions  were  made 
from  time  to  time,  the  average  would  be  alxjut  fifty  plus  the  sal\-age  value,  the  value  of  the 
property  as  scrap,  which  might  he  ten  per  cent.  In  a  growing  city  where  investment  is  made, 
additional  investment  ever\-  year,  on  a  system  to  which  additions  are  made  every  year,  in 
tracks  and  cars  and  power  plant,  in  other  property,  the  average  would  be  higher,  approximating 
sixty-five,  possibly  seventy  per  cent;  because  in  the  first  case  we  may  assume.  I  think,  the 
property  is  one-half  worn  out,  while  in  the  latter  case  the  depreciation  on  the  new  propert> 
does  not  get  down  to  fifty  per  cent  until  the  new  property  has  been  in  use  eight  or  ten  years 
possibly. 

"Q  I'"'t  it  !»  fa<^  that  the  best  maintained  public  utilities  including  the  best  maintained 
street  "railways  are  not  at  more  than  fifty  to  fifty-five  per  cent  of  their  reproduction  value, 
isn't  that  a   fact  ? 

".'\,     I  think  that  they  are  at  a  higher  average  \'alue  than  that,  if  you  include  in  it  the 
scrap  value." 
Page  80. 

"Q.  Your  jiKlgmcnt  is  that  the  present  street  railway  in  Cleveland  is  maintained  at 
sixty-five  per  rent  or  seventy  per  cent? 

".•\.      Nearer   sixty-five   than   seventy. 

"Q.     The  ordinance,  then.  bn<  been  sub'^tantiallv  complied  with? 

"A,     Yes.  except   for  that  ditTerence  iK'tween  sixty-five  and  seventy." 

In  its  findings,  published  in  December.  1919.  the  Board  of  .Arbitration  in  the 
Oeveland  case  stated  that  "the  valuation  fixed  upon  the  physical  property  at  the 
time  the  franchise  was  passed  was  conservative  and  unquestionably  by  subsequent 


Accrued  Depreciation  Neglected  49 

improvements  and  betterments  and  liberal  expenditures  for  upkeep,  the  property 

has  greatly  increased   in  value."     In   the   memorandum  opinion   signed   by   the 

majority  of  the  arbitrators,  consisting  of  the  chairman  of   the  board  and  the 

company's  representative,  the  condition  of  the  property  is  described  as  follows : 

"The  evidence  shows  that  this  railway  property  has  been  maintained  at  a  high  standard ; 
that  it  justly  enjoys  the  reputation  of  being  the  best  managed,  best  equipped  and  most  suc- 
cessful street  'Car  enterprise  in  the  country.  We  have  been  shown  that  a  higher  percentage 
of  expenditure  for  maintenance  and  upkeep  has  been  in  force  here  than  in  other  cities.  Ex- 
perts have  analyzed  the  situation  and  presented  the  conclusion  to  us  that  by  reason  of  efficient 
and  intelligent  executive  management,  and  by  reason  of  the  high  rate  of  upkeep  and  main- 
tenance, a  large  appreciation  in  the  value  of  the  property  has  resulted." 

Mr.  James  D.  Mortimer,  President  of  the  Milwaukee  Electric  Railway  and 
Light  Company,  and  also  (at  that  time)  of  the  North  American  Company,  testified 
before  the  Commission  on  July  24th,  and  again  on  October  3,  1919.  His  earlier 
testimony  had  primarily  to  do  with  his  experience  in  Milwaukee  with  state  regula- 
tion, and  his  theories  with  respect  to  depreciation.  Upon  his  later  appearance,  he 
gave  an  extended  analysis  and  criticism  of  the  Cleveland  service-at-cost  plan,  with 
particular  relation  to  what  he  characterized  as  its  failure  to  include  adequate  provi- 
sion for  depreciation  in  the  cost  of  service  and  the  rates.  He  also  severely  criticised 
on  the  same  score  the  Philadelphia  Rapid  Transit  Company's  claims  of  profitable 
operation  on  a  5-cent  fare.  Mr.  Mortimer  does  not  clearly  distinguish  between 
the  perinanent  accrued  depreciation  and  the  "second  depreciation"  described  by 
Dean  Cooley.  Apparently,  he  does  not  share  Dean  Cooley's  view  that  accrued 
depreciation  leaves  the  investment  unimpaired.  It  appears  from  Mr.  Mortimer's 
testimony  that  Milwaukee  is  a  shining  exception  to  the  general  rule  of  electric 
railways  with  respect  to  the  accumulation  of  a  reserve  to  offset  permanent  accrued 
depreciation.     At  page  812  of  the  Proceedings,  he  says : 

"We  have,  by  the  practical  setting  up  of  22%  of  the  operating  revenues  of  the  urban  and 
suburban  system,  been  able  to  accumulate,  in  the  case  of  the  Milwaukee  Electric  Railway  & 
Light  Company,  a  replacement  reserve  approximately  equal  to  the  estimated  accrued  deprecia- 
tion, or  the  difference  between  reproduction  cost  new  and  so-called  depreciated  value,  so  that, 
so  far  as  utility  capital  accounts  are  concerned,  the  utility  has  been  maintained  intact,  and 
we  have,  as  a  rule,  carried  through  that  practice,  irrespective  of  the  return  we  were  actually 
earning  on  this  utility.  We  have  shaded  it  in  some  years.  Tliat  is.  in  the  last  year  we  did  so, 
when  it  was  necessary  to  show  a  sufficient  margin  over  bond  interest." 

Just  before  this,  Mr.  Mortimer  had  explained  to  Commissioner  Meeker  at 
considerable  length  his  idea  of  the  purpose  of  a  depreciation  reserve,  and  had 
indicated  that  a  reserve  equivalent  to  the  full  amount  of  accrued  depreciation 
is  necessary  in  order  to  preserve  the  balance  of  the  balance  sheet.  This,  of  course, 
is  necessary  only  where  the  plant  account  on  the  assets  side  has  been  written  down 
to  a  depreciated  basis,  which  might  occur  in  a  case  like  that  of  the  Alilwaukee 
company  after  the  original  valuation  of  its  property  by  the  Wisconsin  Railroad 
Commission  or  in  a  case  like  that  of  Cleveland,  after  Judge  Tayler's  valuation, 
with  accrued  depreciation  deducted  from  cost  new,  had  been  written  into  the 
service-at-cost  franchise.  Mr.  Mortimer's  depreciation  theories  are  fully  set  forth 
at  pages  810  and  81 1  of  the  Proceedings,  where  he  says : 

"The  purpose  of  accumulating  a  reserve  for  so-called  depreciation  is  fundamentally  to 
create  a  reserve  out  of  earnings  so  as  to  insure  the  future  replacement  of  the  element  of 
physical  property  at  the  end  of  its  probable  lifetime.  No  elements  of  physical  property  of 
the  same  class  have  all  equalized.  The  lives  of  cedar  trolley  poles  may  vary  from  8  to  20 
years.      There    is,   of   course,   as   the   statisticians   know,   one   certain   year    in   each    class    of 


50  Electric  Railway  Problem 

property  where  the  number  of  replacements  is  at  a  maximum.  Replacements  or  abandonment 
mvariably  begin  within  a  very  short  time  after  the  initial  construction  takes  place.  Th 
curve  of  mortality  of  the  elements  of  physical  property,  to  the  extent  that  such  mortalit 
curves  have  been  computed  or  arranged,  is  quite  similar  to  the  curves  of  mortality  of  huma 
lives. 

"The  problem  of  providing  for  so-called  depreciation  is  not  to  provide  for  the  wearini 
out,  so  much  as  it  is  to  provide  for  the  replacement.  1  am  speaking  now  from  the  utilit; 
standpoint.  Every  utility  is  presumed  to  operate  in  perpetuity.  Its  obligations  to  operat 
and  conserve  its  capital  account  do  not  necessarily  terminate  at  the  expiration  of  its  deter 
minate  franchise,  if  it  has  such  a  thing.  Xo  rates  of  fare  have  ever  been  allowed  which  wil 
amortize  the  value  of  physical  property  to  its  scrap  value  within  the  life  of  the  determinat 
franchise.  All  the  rates  of  fare  provided  for  in  any  plan  never  make  an  allowance  in  anioun 
greater  than  what  will  insure  the  replacement  of  the  elements  of  physical  property  at  th 
end  of  their  probable  lifetime. 

"Now,  we  have  a  piece  of  track,  which,  for  simplicity  in  calculations,  we  will  assum 
has  a  life  of  15  years.  It  is  the  duty  of  the  utility  to  appropriate  a  sufficient  amount  of  mone; 
out  of  its  earnings  which,  with  equal  increments,  if  you  please,  each  year,  together  with  th 
interest  upon  the  reserve  balances,  will  provide  a  sum  at  the  end  of  15  years  which  wil 
enable  the  utility  to  replace  that  element  of  property — a  piece  of  track — to  the  extent  of  th 
original  cost  thereof. 

"Now,  that  will  apparently  result  in  the  creation  on  the  balance  sheet  of  the  corporatioi 
of  a  liability  very  much  larger  than  the  amount  that  the  corporation  can  use  in  any  one  yeai 
but  the  recognition  of  that  liability  is  essential  if  the  balance  sheet  of  the  corporation  is  t( 
fairly  show  the  assets  and  liabilities,  because  the  balance  sheet  purports  to  represent  funda 
mentally  the  liability  of  the  corporation  as  a  group  of  shareholders  to  the  various  creditor 
and  the  public,  to  the  extent  that  the  public  is  interested  in  the  continued  operation  of  thi 
utility.  By  that,  I  mean  that  the  depreciaion  or  replacement  reserve  created  by  the  method 
that  I  have  generally  indicated  records  the  liability  of  the  corporation  to  the  utility  to  eflfec 
these  replacements  at  tlic  end  of  the  probable  lifetime  of  the  physical  property." 

When  Mr.  Mortimer  appeared  before  the  Cotnmission  the  second  time,  t( 
discuss  the  service-at-cost  plan,  he  undertook  to  show  that  Qeveland  has  beet 
operating  under  a  service-at-less-than-cost  plan.  Upon  this  point,  at  pages  197^ 
and  1972  of  the  Proceedings,  he  makes  the  following  statement : 

"One  of  the  fundamental  objections  to  the  Cleveland  franchise  lies  in  the  fact  that  th( 
franchise  does  not  require  that  any  reserve  for  future  replacements  be  accrued  out  of  curreii 
earnings,  thereby  requiring  that  the  replacements  of  the  physical  property  be  taken  care  o 
either  through  charges  through  current  operating  e-xi)eiises  or  by  suspending  them  for  on( 
year,  two  years,  four  years,  and  charging  them  up  through  the  earnings  of  subsequent  years 
In  other  words,  according  to  the  Johnson-GofF  appraisal,  the  Cleveland  Railway  started  ou 
with  estimated  accrued  depreciation,  the  liability  to  effect  future  replacements,  of  abou 
seven  and  a  half  million  dollars.  The  capital  was  stated  at  something  like  $19.tXX).000  net 
but  that  was  represented  by  properly  having  a  value  of  $26,(XX).000.  It  was  depreciated  ii 
other  words  30  per  cent. 

******** 

"Commissioner  W'chle :  Your  point  is  that  the  valuation  on  the  basis  on  which  the  rati 
was  begun,  as  it  was.  was  a  valuation  which  was  30  per  cent  under  the  valuation  based  or 
present  cost  of  reproduction? 

"Mr.  Mortimer:  .\nd  based  upon  the  amount  of  money  that  had  gone  into  the  property 
into  the  physical  property;  in  other  words,  taking  into  account  just  the  investment  of  cash  an< 
the  physical  property,  ihc  security  holders  suffered  a  shrinkage  of  3(1  per  cent — a  sacrifice  o; 
30  per  cent  of  the  cash  that  had  been  invested.  Since  that  time  capital  expenditures  havi 
been  added,  and  all  the  money  for  those  capital  expenditures  must  come  from  the  sales  o 
new  securities.  The  company  has  no  surplus  earnings  of  any  kind  whatsoever  with  whicl 
to  create  additions  to  its  plant  and  property  account." 

Mr.  Afortimer's  difliculty  here  seems  to  be  that  he  is  unable  to  forget  th< 
permanent  accrued  depreciation  that  was  written  otT  the  books  in  1910.  In  this 
respect  Cleveland  shines  in  a  little  different  way  from  Milwaukee.  In  Oevelanc 
the  amount  of  permanent  depreci;ition  was  actually  decapitalized  ;  in  Milwaukee 
according  to  Mr.  Mortimer,  the  amount  of  the  permanent  depreciation  was  accu- 
mulated in  a  reserve  fund  which  was  invested  in  betterments  and  extensions 
He  alleges  that  the  30  per  cent  written  off  the  cost  new  figure  in  Qeveland  ir 


Accrued  Depreciation  Neglected  51 

the  1910  appraisal  was  a  sacrifice  of  cash  investment.  Secretary  Baker  testified 
that  Tom  L.  Johnson  had  himself  been  active  in  the  formation  of  one  of  the 
principal  consolidations  preceding  the  formation  of  the  Cleveland  Railway  Com- 
pany, and  had  described  to  him  the  method  by  which  the  consolidation  had  been 
effected.  It  involved  the  issuance  of  5  shares  of  stock  in  the  consolidated  com- 
pany in  exchange  for  each  share  of  stock  in  the  several  constituent  companies. 
At  page  997  of  the  Proceedings,  he  describes  the  transaction  as  follows : 

"The  Chairman  :  At  the  time  when  that  plan  was  consummated  can  it  fairly  be  stated 
that  the  stock  of  the  consolidated  represented  as  five  to  one  of  the  stock  of  the  constituent 
companies  ? 

"Secretary  Baker:  Substantially  that.  That  was  Mr.  Johnson's  general  statement  about 
it.  There  are  no  secrets  in  that  business  now  because  this  has  all  been  talked  out  in  full  in 
Cleveland,  and  the  situation  is  so  changed  that  nobody  would  object,  I  am  sure,  to  my  quoting 
Mr.  Johnson's  statements  to  me  on  that  subject.  Nobody  has  any  sensibilities  about  it  any 
more.  But  what  they  did  was  to  turn  in  the  hose,  and  they  gave  five  shares  of  consolidated 
stock  for  each  share  of  constituent  stock,  although  the  market  value  of  the  constituent  stock 
at  the  time  of  the  consolidation  was  very  little,  if  any,  above  par  in  any  of  the  constituent 
companies.  Of  course,  what  they  were  doing  was  capitalizing  the  advantages  of  consolidation 
and  centralized  management  and  the  speculative  advantages  of  the  future  growth  of  the 
city  of  Cleveland." 

In  view  of  Mr.  Mortimer's  statement,  it  is  also  interesting  to  note  what 
Mr.  John  J.  Stanley,  President  of  the  Oeveland  Railway  Company,  says  about 
the  reduction  of  capitalization  in  1910.  At  pages  993  and  994  of  the  Proceedings, 
the  following  question  and  answer  appear : 

"The  Chairman:     Do  you  regard  the  value  of  that  plant  as   fair? 

"Mr.  Stanley:  No,  sir;  we  were  not  satisfied  with  the  valuation  at  the  time  the  settle- 
ment was  made.  They  cut  our  stock  down  from  par  to  55.  I  will  frankly  say  that  if  we 
were  allowed  at  that  time  about  80  we  would  have  been  satisfied." 

Evidently,  Mr.  Mortimer  as  an  outsider  has  a  more  intimate  knowledge  of 
the  amount  of  cash  invested  in  the  Cleveland  Railway  property  than  those  who 
were  in  the  midst  of  the  long  struggle  preceding  the  adoption  of  the  Tayler  plan. 

In  answer  to  questions  by  Commissioner  Meeker,  Mr.  Mortimer  elaborated 
his  criticism  of  the  Qeveland  arrangement  from  the  viewpoint  of  accruing  depre- 
ciation.   This  testimony  is  found  at  page  1975  of  the  Proceedings : 

"Commissioner  Meeker :  It  puzzles  me  a  little  as  to  how  the  company  can  get  away  with 
a  three-cent  fare  if  it  has  not  made  the  proper  reserves  for  depreciation,  replacement  and  so 
forth. 

"Mr.  Mortimer :  It  is  not  permitted  to  make  these  reserves  under  the  terms  of  the 
franchise. 

"To  give  you  an  illustration  of  that:  The  company  started  out  with  an  accrued  deprecia- 
tion on  its  property  of,  in  round  figures,  seven  and  a  half  million  dollars.  The  accrued 
depreciation  on  its  property  today   is,  in  round  figures,  $12,000,000. 

"Commissioner  Meeker ;     That   is,  the  plant  is  continually   wearing  out. 

"Mr.   Mortimer :     Yes. 

"Commissioner   Meeker:     And  it  is  not  replaced? 

"Mr.  Mortimer:  No,  I  do  not  mean  that.  Its  liability  to  effect  future  replacements  has 
increased  from  seven  and  a  half  million  dollars  at  the  end  of  the  year  1909  to  $12,000,000 
at  the  end  of  the  year  1918.  That  is,  the  liability  of  the  company  to  effect  future  replace- 
ments of  its  physical  property,  assuming  that  it  is  to  continue  in  operation.  That  is  the 
liability  over  and  above  the  amount  of  replacements. 

"Commissioner  Meeker:  The  period  of  reckoning  has  not  yet  come,  but  it  hangs  off 
in  the  future? 

"Mr.  Mortimer:  It  is  exactly  the  same  problem  as  confronts  assessment  life  insurance 
companies.  There  is  no  one  of  us  that  would  care  particularly  to  buy  any  large  quantity 
of  insurance,  life  insurance,  in  an  assessment  life  insurance  company. 

"If  any  of  us  wanted  to  buy  insurance,  we  would  go  to  a  legal  reserve  company,  a  com- 
pany that  created  a  reserve  against  the  accruing  liability  because  of  future  deaths.  We  have 
that  exact,  same  problem  in  providing  for  the  replacement  of  physical  property.     The  courts 


52  Electric  Railway  Problem 

have  all  held  that.  They  have  supported  it.  It  is  the  universal  theory  of  providing  for 
maintenance  and  depreciation  adopted  by  regulating  commissions  in  the  determination  of 
rates. 

"Commissioner  Meeker:  Is  my  understanding  correct,  that  the  day  of  reckonmg  has 
not  yet  come,  but  it  will  eventually  come,  and  the  company  will  either  have  to  get  more  liberal 
terms  or  be  forced  into  bankruptcy — either  the  company  or  the  city,  I  don't  know  which? 

"Mr.  Mortimer:  The  day  of  reckoning  for  the  company  would  come — if  the  property  was 
currently  maintained — the  day  of  reckoning  for  the  company  would  come  at  the  end  of  the 
franchise,  it  might  have  to  suflrer  on  negotiations  with  a  substantial  loss  in  its  invested 
capital." 

It  i.s  clear  that  Mr.  Mortiincr's  critici.sm  harks  back  to  the  failure  of  the 
Cleveland  franchise  to  establish  a  reserve  for  the  amortization  of  the  accrued 
depreciation  that  was  written  off  the  books  in  1910.  and  for  the  amortization 
of  the  permanent  depreciation  of  property  installed  since  that  date.  The  talk 
about  liability  to  effect  future  replacements  is  based  on  the  exploded  theory  that 
the  30  per  cent  representing  permanent  depreciation  ever  can  be  replaced.  Ac- 
cording to  Dean  Cooley's  analysis,  which  in  this  respect  appears  to  be  sound,  it 
will  never  be  necessary  or  even  possible  to  restore  this  accrued  depreciation  by 
renewals  or  replacements.  It  is  permanent ;  it  will  remain  for  "a  thousand  years," 
if  the  property  lasts  that  long.  .'Xs  to  the  current  depreciation  and  the  replace- 
ments required  from  time  to  time  to  keep  the  pruperty  continuously  in  standard 
operating  condition,  the  evidence  seems  to  be  conclusive  that  these  costs  have  been 
fairly  met  by  appropriations  from  earnings.  With  current  maintenance  and 
replacements  taken  care  of  in  this  way,  it  is  reasonably  clear  that  under  the 
Qeveland  franchise  there  is  no  substantial  accumulation  of  omitted  or  deferred 
maintenance  that  will  result  ultimately  in  the  need  for  a  general  rehabilitation 
of  the  jiroperty.  The  only  thing  not  jirovided  for  by  the  annual  maintenance  and 
depreciation  is  the  permanent  accrued  depreciation  on  the  new  property  installed 
since  the  T.nyler  settlement  went  into  effect.  Roughly,  that  would  ultimately 
amount  to  ^0  ])er  cent  of  the  new  capital  invested  since  that  time.  As  neutralizing 
the  effect  of  this  accruing  depreciation,  it  should  be  recognized  that  the  Cleveland 
franchise  prescribes  a  peculiar  rule  with  respect  to  replacements.  The  uniform 
systems  of  accounts  prescribed  by  the  Interstate  Coniniercc  Commission  and  bv 
the  slate  public  utilities  commissions  provide  that  where  a  repftlcement  is  made 
of  an  identical  article  at  a  higher  cost  than  the  original  cost,  the  difference 
between  the  original  cost  and  the  replacement  cost  shall  be  charged  to  capital 
account.  In  this  way  the  cai)ital  account  is  gradually  readjusted  through  the 
process  of  replacement  to  the  higher  scale  of  prices.  The  Cleveland  plan,  on 
the  other  haiul.  rer|uires  that  the  entire  cost  new  of  the  replacement,  if  it  is  iden- 
tical in  size  and  capacity  with  the  article  replaced,  shall  be  charged  to  current 
maintenance,  no  matter  how  great  the  increase  in  the  cost  of  the  article  mav  have 
been.  While  prices  are  going  uj)  and  until  the  street  railway  lines  have  gone 
through  a  complete  cycle  of  renewals  at  the  higher  i)rice  level,  this  system  tends 
strongly  to  conservatism  in  the  capital  account.  It  is  immensely  more  conservative 
than  the  reproduction-cost-new  method  of  valuation  advocated  by  the  American 
ICIectric  Kaihvay  Association  and  generally  by  the  valuation  experts  appearing 
for  the  electric  railway  companies  in  rate  cases.  It  is  even  more  conservative 
than  the  actual  co.st  method,  because  it  prevents  the  readjustment  of  book  cost 
to   the   higher   prices,    which    is   somvthing   entirely   consistent    with    ihe   actual 


Accrued  Depreciation  Neglected  53 

cost  method  as  advocated  by  those  who  believe  in  the  Massachusetts  theory  of 
vahiation. 

Dean  Cooky's  85  per  cent  standard  for  street  railways  is  based  upon  assump- 
tions that  appear  to  be  quite  untenable.  In  his  testimony,  above  quoted,  he  says 
that  "the  items  that  wear  out  are  only  about  one-third  or  perhaps  one-quarter 
of  the  total  cost  of  the  property."  How  he  arrived  at  such  a  conclusion  would 
be  a  mystery,  if  we  had  only  his  testimony  before  the  Commission  to  go  by.  It 
is  quite  evident  that  tracks,  paving,  cars,  electrical  equipment,  buildings,  machinery, 
etc.,  wear  out  in  time.  That  these  elements  should  represent  only  from  one- 
quarter  to  one-third  of  the  cost  of  the  property  seems  quite  absurd  on  its  face. 
But  light  is  thrown  on  Dean  Cooley's  methods  and  theories  by  his  valuation  of 
the  Public  Service  Railway  property  (of  New  Jersey)  to  which  extended  refer- 
ence was  made  in  the  testimony  before  the  Commission.  In  that  case,  he  classed 
as  undepreciable  the  following  elements  of  property :  land,  grading,  ballast,  track 
and  roadway  labor,  and  all  overheads  except  contingencies.  These  undepreciated 
overheads  alone  constituted  about  40  per  cent  of  the  estimated  base  cost  of  the 
physical  property.  It  seems  reasonably  obvious  that  at  least  75  per  cent  of  the 
physical  property  of  an  ordinary  street  railway  is  subject  to  depreciation.  Clearly, 
the  70  per  cent  standard  set  up  in  the  Cleveland  franchise  is  a  much  safer  one 
to  go  by  than  the  85  per  cent  standard  based  upon  Dean  Cooley's  reasoning  and 
estimates.  This  means  that  in  order  to  keep  the  legitimate  investment  in  an  electric 
railway  unimpaired,  the  original  capital  should  be  ultimately  reduced  about  30  per 
cent,  or  else  as  an  incident  of  growth  a  reserve  equivalent  to  30  per  cent  of  the 
original  capital  should  be  built  up  out  of  earnings  and  invested  in  betterments  and 
extensions  in  order  to  protect  the  integrity  of  the  capital  account  and  preserve  the 
credit  of  the  enterprise. 

I  am  referring  here  to  the  normal  and  necessary  permanent  depreciation  of 
a  street  railway  property,  and  to  the  inevitable  supersessions  that  have  taken  place. 
The  companies  now  generally  make  the  claim  that  a  well-maintained  old  property 
is  as  good  as  a  new  one,  and  worth  as  much,  certainly  for  rate  purposes.  The 
report  of  the  Committee  on  Valuation  of  the  American  Electric  Railway  Asso- 
ciation' is  most  emphatic  in  the  assertion  that  accrued  depreciation  should  not 
be  deducted  from  reproduction  cost  new  in  the  determination  of  value  for  rate 
purposes  or  for  sale  to  municipality,  state  or  government.  It  is  claimed  for  the 
companies  that  their  revenues  were  insufficient  to  enable  them  to  provide  for 
depreciation.  But  who  knows — when  they  never  tried?  They  lived  in  "a  fool's 
paradise,"  to  use  General  Tripp's  phrase,  and  did  not  think  it  necessary  to  try. 

In  this  connection  consideration  should  be  given  to  the  fact  that  the  City 
of  Glasgow,  Scotland,  has  been  able  to  amortize  its  entire  investment  in  its  electric 
tramway  system  out  of  the  earnings,  and  that  Liverpool  and  other  British  munici- 
palities have  gone  a  long  way  in  the  same  direction,  in  spite  of  the  fact  that  the 
average  fares  collected  on  these  British  lines  have  been  exceedingly  low.  More- 
over, the  city  of  San  Francisco,  which  has  been  operating  an  incomplete  but 
growing  system  of  municipal  railways  since  December  28,  1912,  on  a  5-cent  fare, 
was  able  to  accumulate  a  depreciation  fund  during  the  first  six  and  a  half  years, 
up  to  June  30,  1919,  amounting  to  $1,258,323,  or  more  than  $20,000  per  mile  of 


54  Electric  Railway  Problem 

track  owned  at  the  end  of  the  period.-  It  is  doubtless  true  that  some  of  the  electric 
railways  of  the  country  could  not  have  paid  all  their  operating  expenses  and  taxes, 
earned  a  fair  return  upon  the  original  investment,  and  also  amortized  the  accrued 
depreciation  under  a  5-cent  fare,  but  it  is  by  no  means  certain  that  the  majority 
of  them,  including  those  which  serve  the  great  urban  communities  of  the  country, 
could  not  have  done  so  if  they  had  started  out  with  a  conservative  capitalization, 
and  had  recognized  the  importance  of  maintaining  a  parity  between  their  capital 
accounts  and  the  depreciated  value  of  their  property. 

At  the  present  time,  their  policy  is  to  deny  the  impairment  of  their  capital 
through  accrued  depreciation,  and  to  overrule  the  repeated  decisions  of  the  United 
States  Supreme  Court  upon  advice  of  their  consulting  engineers.  With  respect 
to  the  financial  policies  of  electric  railways  so  far  as  they  have  a  bearing  upon 
credit,  it  may  well  be  said  that  "whom  the  gods  would  destroy,  they  first  make 
mad."  Who  can  doubt  for  a  moment  that  the  failure  to  amortize  the  portion  of 
the  original  investment  represented  by  the  difference  between  the  cost  new  of  a 
street  railway  property  and  its  "per  cent  condition"  when  it  has  come  down  to 
the  level  at  which  it  can  be  permanently  maintained  has  been  a  factor  tending 
to  undermine  its  credit?  Who  can  suppose  for  a  moment  that  the  policy  of  re- 
taining superseded  property  in  the  capital  account,  even  if  it  be  approved  by 
commissions  and  courts,  could  be  other  than  disastrous  to  the  permanent  credit 
of  the  electric  railways?  This  is  one  of  the  fruits  of  initial  overcapitalization. 
The  history  of  the  electric  railway  industry  has  demonstrated  the  necessity  of 
conservatism  in  capitalization  as  a  ])rercquisite  to  financial  soundness  and  adequate 
credit.  It  is  not  so  long  ago  since  the  indu.>;tr)-  was  started  that  the  men  then  in 
control  of  it  could  not  have  foreseen  at  least  in  some  measure  the  requirements  of 
the  situation,  if  they  had  been  actuated  primarily  by  desire  to  render  public  service 
rather  than  to  exploit  for  personal  profit  the  needs  of  the  urban  public  and  the 
possibilities  of  electricity.  It  is  now  generally  admitted  that  the  men  who  launched 
the  electric  railway  consolidations  and  other  deals  through  which  the  securities 
were  heavily  "watered"  made  their  fortunes  by  disposing  of  tbeir  holdings,  not 
by  keeping  them.  On  this  point.  General  Tripp's  testimony  at  page  155  of  the 
Proceedings  is  significant.  Questions  by  Commissioner  Sweet  brought  out  the 
following : 

"Commissioner  .'>wcct :  The  individuals  who  were  chiefly  responsible  for  that,  and  who 
made  money  out  of  it,  are  they  still  in  the  business,  or,  for  the  most  part  are  they  out  of 
it,  and  have  they  turned  over  the  capital  to  innocent  purchasers? 

"Gen.  Tripp:    Of  course,  that  question  is  a  general  question,  and  there  may  be  exceptions. 

"Commissioner  Sweet :     Oh.  undouhtedl\ . 

"Gen,  Tripp :  I  should  say  it  would  be  found  tliat  very  few  of  these  electric  railway 
securities  will  l>e  found  in  the  strong-bo.xes  of  tlie  estates  of  the  men  who  originally  pro- 
moted them  " 

All  this  goes  to  show  that  provision  for  accrued  depreciation  was  far  from 
the  thoughts  of  the  manipulators.  "Where  there's  a  will,  there's  a  way,"  but 
where  there  was  no  will,  there  was  no  wav. 


Chapter  XII 

PAYMENT  OF  UNEARNED  DIVIDENDS  AND  NEGLECT 
OF  ORDINARY  MAINTENANCE 

In  the  preceding  chapter  of  this  report  I  have  considered  the  failure  of  the 
electric  railways  to  amortize  normal  accrued  depreciation.  The  next  thing  to  be 
considered  in  the  analysis  of  the  financial  policies  that  have  contributed  to  the 
ruin  of  electric  railway  credit  is  the  fact  that  in  many  cases  they  have  neglected 
current  depreciation  to  the  extent  of  putting  dividends  ahead  of  maintenance. 
No  matter  what  difference  of  opinion  may  exist  among  engineers  and  economists 
with  respect  to  normal  accrued  depreciation  as  an  impairment  of  capital,  there  can 
be  no  difference  of  opinion  as  to  the  effect  of  "deferred"  or  "omitted"  mainten- 
ance upon  the  integrity  of  the  investment.  Yet  many  electric  railway  companies 
have  been  known  to  pay  dividends  while  they  were  neglecting  maintenance,  on  the 
theory  that  it  was  necessary  to  continue  to  pay  dividends  in  order  to  maintain 
their  credit. 

It  is  Dean  Cooley's  "second  depreciation"  that  we  are  concerned  with  here. 
Without  agreeing  to  his  percentages,  we  may  readily  admit  the  validity  of  the 
general  distinction  which  he  makes.  But  his  "second  depreciation"  is,  according 
to  his  own  analysis,  swallowed  up  in  maintenance.  I  do  not  mean  to  contend 
that  no  depreciation  reserve  whatever  is  needed  for  this  particular  purpose,  but 
merely  that  the  purpose  of  this  reserve  is  to  even  up  the  charges  for  maintenance 
and  renewals  so  as  to  avoid  violent  fluctuations  in  operating  expenses  from  year 
to  year. 

I  have  quoted  Mr.  James  D.  Mortimer  at  length  in  the  preceding  chapter, 
but  his  testimony  with  respect  to  depreciation  was  so  important,  even  if  some- 
what confusing,  that  I  shall  quote  him  again.  In  spite  of  the  severe  criticism 
which  he  leveled  at  the  Cleveland  plan,  he  does  not  seem  to  attribute  to  the 
Cleveland  property  any  neglect  of  maintenance  which,  according  to  the  testimony 
of  the  Massachusetts  witnesses,  leads  to  a  deterioration  that  ultimately  requires 
a  complete  rehabilitation.  In  other  words,  he  seems  to  admit  that  the  Cleveland 
Railway  is  in  what  Dean  Cooley  would  term  a  100  per  cent  operating  condition. 
What  he  is  troubled  about  is  not  the  ultimate  replacement  of  the  physical  property 
but  its  "financial  replacement"  when  the  franchise  expires.  This  point  is  brought 
out  in  his  answers  to  questions  by  Commissioner  Wehle  and  Mr.  Warren  at 
page  1983  of  the  Proceedings,  as  follows : 

"Commissioner  Wehle :     But  the  existing  property  as  I  understand  is  in  good  condition. 

"Mr.  Mortimer:  Oh,  it  is  in  good  condition  for  the  purpose  of  running  cars  over  it. 
but  that  does  not  in  any  way  reduce  the  liability  of  the  company  to  replace  that  property  at 
some  future  date.  The  question  of  good  condition  is  a  factor  entirely  separate  from  the 
factor  of  financial  replacement. 

"Commissioner  Wehle :    Your  idea  is.  then,  is  it  not,  that  the  companies  which  may  come 

55 


56  Electric  Railway  Problem 

to  own  these  properties  at  the  end  of  the  period  of  the  contract  are  running  the  risk  all  the 
time  lest  the  proiK-rties  will  not  be  kept  in  good  condition  and  that  although  the  properties  are 
in  good  condition  at  the  present  time,  yet  m  the  period  intervening  lx;t\veen  the  present  and 
the  expiration  oi  the  contract  between  the  companies  and  the  city  there  are  many  possibilities, 
and  that  there  has  not  been  such  a  resene  as  according  to  the  bookkeeping  standards  of 
public  service  companies  heretofore  would  sufficiently  protect  the  company. 

"Mr.  Murtinier:  Mr.  Commissioner,  it  is  not  so  much  a  question  of  operating  condition, 
or  as  you  say  good  condition :  it  is  a  question  of  protecting  themselves  against  second  hand 
value  at  the  end  of  their  franchise  period. 

"Mr.  Warren:  They  would  have  to  do  it,  if  there  was  no  end  to  the  franchise,  would 
they  not? 

"Mr.  Mortimer :     Yes. 

"Mr.  Warren:     Under  an  indeterminate  franchise? 

"Mr.  Mortimer:  Under  an  indeterminate  franchise  it  would  be  required  because  all  in- 
determinate franchises  carry  with  them  some  right  on  the  part  of  the  state  or  municipality  tO' 
purchase  or  condemn  the  property  and  tlicy  always  have  to  look  out  for  tlw  conditions  that 
may  obtain  at  the  time  of  condemnation.  .\nd  testimony  of  engineers  that  the  property  was 
in  100  per  cent  condition  would  not  absolve  the  company  from  having  to  meet  the  liability 
for  the  second  hand  value  of  the  proi)erty." 

Upon  being  pressed  to  explain  the  point  of  view  of  those  who  differed  with 
him  in  regard  to  the  merits  of  the  Cleveland  depreciation  policy,  Mr.  Mortimer 
continued  at  page  1984  of  the  Proceedings,  as  follows : 

"It  is  typical  of,  say,  the  Boston  Elevated  Railway.  The  Boston  Elevated  Railway,  as  I 
understand,  in  the  days  when  it  was  paying  dividends  and  its  stock  was  selling  in  e.xcess  of 
par,  reached  the  conclusion  that  a  depreciation  or  reserve  of  $1,0(XU)00  was  adequate,  and 
thereupon  declared  dividends  up  to  the  amount  available  after  providing  a  reserve  of  $1,000,000. 
This  was  not  an  annual  reserve.  They  said.  "We  will  take  care  of  maintenance  and  replace- 
ment through  operating  expenses.  We  will  always  try  to  maintain  our  reserve  at  $1,000,000.' 
.^nd  I  think  they  did  maintain  it  at  $l.fl(KUXX).  But  the  character  of  rolling  stock  and  the 
condition  of  inaiiiteiiance  of  the  physical  proi>erties  of  the  Boston  Elevated  is  indicative  of 
properties  that  take  that  viewpoint,  that  they  can  provide  for  modernization  of  their  equip- 
ment, write  olT  obsolete  property  and  plants  through  current  maintenance  expenses.  They  do 
not  do  it.  Now,  that  is  one  of  the  fundamental  things  that  is  wrong  with  the  electric  railway 
business.    It  is  one  of  the  things  that  is  wrong  with  the  .Massachusetts  Electric  Railway  situation. 

"Commissioner  Welile :  That  they  have  never  charged  off  to  depreciation  enough  and 
never  have  set  up  depreciation  funds  in  the  whole  history  of  the  industry? 

"Mr.  Mortimer:  (ienerally  the  electric  railways  of  Massachu.sctts  have  not  created 
depreciation  reserves,  neither  did  they  appropriate  or  spend  out  of  earnings  sufficient  money 
to  keep  their  properties  in  modeni  condition. 

"Commissioner  Mahnn :  Has  not  that  been  the  fault  of  the  whole  country,  not  only 
of  Massachusetts  but  of  the  entire  industry,  it  never  created  a  depreciation  fund  sufficient? 

"Mr.  Mortimer:  I  think,  Mr.  Commissioner,  that  that  is  a  fundamental  defect  in  the 
business.     There  are  some  exceptions  to  the  rule." 

Mr.  Mortimer's  reference  to  the  past  policy  of  the  Boston  Elevated  Railway 
Company  as  practically  the  same  as  the  policy  enforced  upon  the  Cleveland  Rail- 
way Company  does  not  appear  to  be  consistent  with  the  facts  brought  out  by 
various  witnesses  and  by  records  filed  with  the  Commission  with  respect  to  the 
actual  present  physical  condition  of  the  Cleveland  Railway  as  compared  with 
that  of  the  Boston  Elevated  when  the  Public  Trustees  took  possession,  July  1,  1918. 
In  the  one  there  is  very  little  deferred  maintenance;  in  the  other  there  was  a 
great  deal.  The  (-r(<lit  of  one  was  the  best  in  the  country;  that  of  the  other  had 
disappeared. 

In  this  comicction  Interstate  Commerce  Commissioner  Eastman's  testimony 
is  illuminating.  At  page  205S  of  the  Proceedings,  where  he  is  reciting  the  various 
causes  for  the  present  unhappy  condition  of  the  electric  railways  of  Massachu- 
setts, he  says : 

"Now,  in  the  fifth  place,  and  this  is  true  not  only  in  Massachusetts  but  in  all  other  parts 
of  the  country,  there  has  l)een  the  ordinary  failure  to  care  for  depreciation;  the  need  of 
caring   for  that  was  not  recognized  and  depreciation  was  not  cared  for." 


Dividends  Preferred  to  Maintexance  57 

A  little  further  on  in  his  testimony  he  refers  to  the  sources  of  strength  of  the 
street  railways  of  ]\Iassachusetts,  and  speaks  of  the  advantages  they  enjoyed 
because  they  had  a  plentiful  supply  of  local  capital  as  a  result  of  favorable  laws 
exempting  street  railway  securities  from  taxation  and  placing  them  under  strict 
regulation.  He  then  proceeds,  at  pages  2059  and  2060  of  the  Proceedings,  as 
follows : 

"That  in  a  sense  it  has  developed  into  a  sort  of  weakness  is  rather  a  paradox,  .■'it  the 
same  time,  I  think  it  is  true.  In  other  parts  of  the  country  the  e.xploitation  which  took  place 
resulted  in  early  smash.  That  came  about  in  Cleveland,  that  came  about  in  Chicago,  and  1 
think  in  other  large  cities  and  they  had  to  begin  all  over  again  about  the  year  1907,  and  they 
started  in  on  a  depreciated  basis  and  proceeded  to  rehabilitate  the  property  and  they  have  since 
had  the  advantage  of  that  rehabilitation. 

"Now,  in  Massachusetts,  the  fact  that  the  securities  were  regulated  and  the  capitalization 
was  relatively  low  resulted  in  prolonging  the  life  of  the  companies  until  they  began  to  receive 
the  full  effects  of  accrued  depreciation  and  they  are  suffering  from  that  now.  If  you  go 
back  10  or  12  years,  Massachusetts  was,  I  think,  receiving  as  good  railway  service  as  any  part 
of  the  country.  We  used  to  boast  of  the  street  railway  service  we  received  at  that  time  and 
we  were  proud  of  the  service  which  was  being  given  in  Boston  in  comparison  with  the  service 
which  was  being  given  in  many  other  large  cities.  But  at  the  present  time  the  failure  to 
take  care  of  depreciation,  added  to  the  other  elements  and  factors  which  have  entered  into  the 
situation  in  recent  years,  has  resulted  in  a  very  weak  and  undesirable  situation." 

Still  further  on,  at  pages  2061  and  2062  of  the  Proceedings,  Commissioner 
Eastman  says : 

"Speaking  again  of  the  situation  of  investors,  we  were  constantly  confronted  by  this 
situation.  We  asked  companies :  'Now,  why  did  you  continue  dividend  payments  when  you 
knew  that  dividends  were  not  really  earned,  taking  into  the  consideration  the  necessity  of 
maintaining  the  property  and  taking  care  of  depreciation?'  Those  dividends,  I  might  say, 
in  most  cases  were  small  and  not  large,  .^nd  the  answer  we  almost  always  received  was  this : 
it  was  necessary  to  continue  dividends  in  order  to  maintain  the  credit  of  the  properties.  That 
means,  in  other  words,  the  investors  looked  at  the  thing  in  the  most  superficial  way,  that  so 
long  as  the  company  is  paying  dividends  they  are  satisfied  that  it  is  all  right  without  making 
any  endeavor  to  find  out  the  real  facts  and  whether  or  not  it  is  earning  the  dividends  which 
it  is  paying.  I  consider  a  statement  of  that  sort  as  a  whole  a  reflection  on  the  intelligence 
of  investors.  .\nd  I  might  say  also  that  in  the  Bay  State  case  we  were  actually  confronted 
by  the  claim  that  depreciation  was  a  newly  discovered  science,  that  nobody  knew  anything 
about  depreciation  until  a  few  years  ago  when  that  theory  was  developed,  although  as  a 
matter  of  fact,  if  you  will  examine  the  laws  of  Massachusetts,  you  will  find  that  the  earliest 
law  applying  to  the  capitalization  of  street  railways  which  was  passed  away  back  in  1874  was 
based  directly  upon  the  theory  of  depreciation.  In  other  words,  it  was  provided  that  the 
Commission  should  not  allow  increases  in  stock  if  it  found  that  the  value  of  the  property 
was  impaired.  That  law  was  afterwards.  I  am  sorry  to  say,  emasculated.  But  depreciation  is 
not  a  new  science,  but  has  been  recognized  for  many  years,  as  you  know." 

Qiairman  McLeod  of  the  Massachusetts  Public  Service  Commission  dis- 
cussed at  considerable  length  the  policies  of  the  Board  of  Public  Trustees  operating 
the  Boston  Elevated  Railway  Company  with  respect  to  the  inclusion  of  deprecia- 
tion in  the  cost  of  service.  After  stating  that  the  trustees  had  spent  during  the 
past  year  about  $2,500,000  more  on  maintenance  than  was  spent  the  year  before 
and  that  in  addition  they  had  set  aside  over  $2,000,000  of  depreciation  reserves 
representing  an  increase  of  $1,650,000  over  the  preceding  year,  he  stated  that  all 
these  monies  were  charged  to  operation.  He  called  attention,  at  page  1444  of  the 
Proceedings,  to  the  fact  that  the  depreciation  fund  now  being  established  is  not 
intended  to  cover  depreciation  in  roadway  and  track  and  that  renewals  of  ties, 
paving  and  roadways  are  made  a  part  of  the  maintenance  charge.  It  was  brought 
out  by  Chairman  Elmquist's  questions  that  the  result  of  the  Boston  plan  will  be  a 
substantial  rebuilding  of  the  Boston  Elevated  property  out  of  earnings  and  the 
company's  failure  to  provide  for  depreciation  in  advance  of  paying  dividends  in 


58  Electric  Railway  Problem 

past  years  was  not  the  fault  of  the  public  regulatory  bodies.     The  testimony  on  this 
point  is  found  at  pages  1445  and  1446  of  the  Proceedings: 

"The  Chairman :  Then  in  a  nutshell  the  state  took  over  a  run-down  plant  and  is  going 
to  build  it  up  and  make  it  perfect,  turn  it  back  to  the  corporation  and  get  none  of  the  cost 
back. 

"Mr.  McLeod:  Of  course,  a  large  part  of  this  expenditure  represents  current  mainten- 
ance and  current  depreciation  requirements.  I  might  say  while  this  ten-year  period  is  in 
operation  there  is  a  certain  amount  of  depreciation  going  on  during  that  period  in  addition 
to  what  has  occurred  in  the  past,  but  I  have  no  doubt  in  my  own  mind,  and  I  think  I  am 
supported  in  that  by  investigation  made  of  the  matter  by  our  engineering  department,  that 
the  present  maintenance  and  depreciation  expenditures  on  the  Boston  Elevated  property, 
while  absolutely  desirable  and  projjcr  from  the  standpoint  of  putting  the  property  as  soon 
as  possible  into  good  physical  condition,  and  a  policy  which  I  believe  in  the  long  run  will  be 
of  advantage  to  the  public,  does  for  the  immediate  present  impose  upon  the  public  an  additional 
burden  owing  to  the  necessity  of  making  up  neglected  depreciation  in  the  past. 

"Commissioner  Gadsden:  If  I  understand  your  general  statement  it  was  to  the  effect 
that  rates  in  the  past  have  never  been  sufficient  to  yield  a  proper  and  fair  return  on  the 
property  and  set  up  the  proper  depreciation  and  that  these  properties  had  been  allowed  to 
run  down  so  far  as  their  physical  condition  was  concerned  in  order  to  pay  the  dividends. 
Now  if  that  is  so.  is  it  not  entirely  proper  that  when  the  public  takes  over  the  property  in 
the  hands  of  the  public  trustees  the  public  should  pay  a  fare  to  put  the  property  in  good 
operating  condition,  which  it  has  not  done  in  the  past?  Is  there  really  any  injustice  in  that? 
Is  not  the  public  only  now  paying  what  it  should  have  paid  all  these  years? 

"Mr.  McLeod:  I  think  that  is  an  element  that  undoubtedly  must  be  recognized  in  the 
situation;  that  is  to  say,  if  it  can  be  shown  that  the  properties  failed  to  earn  their  way  in 
the  past,  by  reason  of  being  prevented  from  charging  a  proper  fare,  and  the  public  has  had 
the  iKMietit  of  those  lower  fares,  and  saved  a  certain  amount  of  money,  that  it  would  other- 
wise have  paid,  rt  might  be  said  that  it  was  only  just  that  the  public,  who  had  been  the 
beneficiaries  of  the  old  scheme,  should  pa\  the  cost  of  making  that  up,  and  put  on  to  one 
generation  the  burden  that  ought  to  have  been  borne,  perhaps,  by  the  former  generation. 

"\t  the  same  time,  I  believe  that  that  is  a  problem  to  be  worked  out  by  the  companies 
themselves,  under  the  general  economic  scheme  of  regulation  and  supcr\'ision.  and  when  there 
is  a  new  phase  of  the  problem,  by  reason  of  the  public  stepping  in  and  temporarily  taking 
charge  of  the  properties,  all  that  could  rcisonably  be  expected  of  them  would  be  to  turn  the 
properties  back  in  the  same  condition,  and  then,  at  the  end  of  that  period,  if  the  companies 
believe  that  they  can  put  lack  the  values  into  the  property  by  charging  increased  fares,  there 
is  no  reason  why  they  should  not  do  so. 

"Of  course,  this  whole  matter  is  afTectcd  by  the  underlyine  problem  as  to  how  far  th'ise 
past  values  can  be  put  back  into  the  properties  by  any  system  of  fares  which  may  be  charged. 

"The  Chairman :  Have  you  not  permitted  the  companies  at  any  time  to  come  before 
your  commission  to  get  adequate  revcniics? 

"Mr.  Mcleod:  That  is  true,  and  bro.idly  speaking,  no  claim  can  be  made,  at  least  I  have 
never  heard  of  any  claim  at  any  time  from  any  responsible  source  up  to  the  present  time, 
that  the  unfortunate  financial  condition  of  the  companies  in  Massachusetts  was  due  to  the 
fact  that  they  asked  for  an  increased  fare  which  was  denied ;  because  there  was  absolutely 
no  jti'.tiliration   for  any  such  claim. 

"In  Massachusetts  the  rate-making  power  began  only  in  191,3.  The  old  railroad  com- 
mission simply  had  a  power  to  deal  with  rates  upon  complaint,  and  never  really  took  any 
active  part  in  matters  of  rates  at  all;  and  the  most  that  was  done  in  the  whole  period  of 
the  existence  of  the  old  railroad  commission  was  to  put  in  a  few  little  minor  rate  adjustments 
at  certain  points,  not.  however,  Kised  upon  any  valuation  of  the  company  or  any  determina- 
tion as  to  how  much  money  the  company  was  entitled  to  earn,  but  upon  the  basis  of  making 
the  fares  between  points  .'X  and  R  consistent  with  the  general  fare  scheme  which  the  company 
itself  voluntarily  had  put  into  effect  for  its  entire  system;  in  other  words,  merely  to  correct 
discriminations. 

"The  Chairman :  Then,  in  so  far  as  they  are  charging  higher  fares  now  to  permit  the 
cnmp.iny  to  build  up  its  property,  it  is  penalizing  the  present  passengers  for  the  delinquencies 
of  the  company  in  the  past? 

"Mr.  Mcl^ixl:     I  think  that  is  proliably  true. 

"It  must  he  Ixirne  in  mind  that  the  companies  were  placed  in  an  exceedingly  difficult 
position  Ijccause  it  was  absolutely  ncccssan,-,  as  it  is  necessan,-  now.  and  necessary  always, 
that  the  company  should  l)e  kepi  in  good  financial  credit,  because  a  new  inflow  of  capital  is 
constantly  necessary ;  and  in  nnler  to  get  that  capital  they  had  to  keep  on  paying  dividends, 
and  they  h.id  to  put  a  gtxxl  fuiancial  face  on  their  properties.  The  moment  that  they  would 
come  in  to  a  commission  to  ask  for  an  increase  of  rates,  they  would  have  to  disclose  their 
nrrtls.  and  the  disclosing  of  the  actual  condition  of  the  company  would  undoubtedly  have 
affected  their  irclit  " 


Dividends  Preferred  to  Maintenance  59 

Surely,  there  is  nothing  mysterious  about  the  destruction  of  the  Boston 
Elevated  Railway  Company's  credit,  in  the  light  of  testimony  like  this. 

The  policy  of  paying  dividends  while  neglecting  current  depreciation  and 
maintenance  has  not  been  confined  to  Massachusetts,  as  will  be  evidenced  by  the 
report  and  order  of  the  Board  of  Public  Utility  Commissioners  of  New  Jersey, 
dated  July  10,  1918,^  in  the  matter  of  the  application  of  the  Public  Service  Rail- 
way Company  for  approval  of  an  increase  in  rates.  In  this  report  the  New  Jersey 
commission  says : 

"The  continuous  maintenance  of  safe,  adequate  and  proper  service  is  the  paramount  duty 
of  a  public  utility. 

"Such  continuous  service  can  only  be  assured  by  the  maintenance  of  a  proper  depreciation 
reserve. 

"This  fact  is  recognized  in  the  system  of  accounts  adopted  by  this  Board  and  by  the 
company  in  the  setting  up  of  a  depreciation  reserve.  This  depreciation  reserve  is  built  up  out 
of  the  rates.  In  the  year  1917  the  appropriation  for  depreciation  reserve,  which  should  have 
been  credited  thereto,  was  depleted  to  the  extent  of  over  5500,000  and  used  to  pay  dividends. 

"To  divert  to  the  payment  of  dh'idends  monies  credited  to  or  zvhich  should  go  to  the  credit 
of  this  reserve,  and  so  destroy  the  assurance  of  the  continuance  of  safe,  adequate  and  proper 
service,  is  luholly  unjustified  and  a  violation  of  the  paramount  duty  of  the  utility. 

"If  the  earnings  of  a  utility  will  not  admit  of  the  maintenance  of  a  proper  depreciation 
reserve  and  a  fair  return  upon  the  property  used  and  useful,  the  remedy  is  not  to  be  found 
in  the  reduction  of  the  amount  carried  to  or  the  depletion  of  the  depreciation  reserve,  but  in 
a  prompt  application  to  this  Board  for  relief,  before  which  the  inter-related  question  of  the 
continuous  maintenance  of  safe,  adequate  and  proper  service  and  of  just  and  reasonable  rates 
may  be  considered,  and  all  parties  affected — the  utility  and  the  public — heard." 

A  similar  situation  was  developed  in  the  case  of  the  Scranton  Railway  Com- 
pany, where  the  City  of  Scranton  instituted  a  proceeding  before  the  Pennsylvania 
Public  Service  Commission  for  the  disapproval  of  the  increased  fares  which  the 
company  had  put  into  effect  under  the  Pennsylvania  law.  The  Scranton  Rail- 
way Company  is  controlled  by  the  American  Railways  Company  of  Philadelphia, 
a  holding  company,  of  which  Mr.  C.  L.  S.  Tingley,  one  of  the  witnesses  before 
the  Federal  Electric  Railways  Commission,  is  Vice-President.  It  developed  in 
the  Scranton  Railway  fare  case  that  dividends  were  paid  by  the  company  after  it 
had  begun  to  neglect  its  maintenance.  Mr.  Tingley's  testimony  before  the  Penn- 
sylvania Commission  upon  this  point  is  illuminating.  The  extract  is  found  at 
pages  159  and  160  of  the  Brief  of  Complainant  filed  by  the  City  of  Scranton.  It 
appears  that  Mr.  Tingley  sought  to  excuse  the  action  of  the  Scranton  Railway 
Company  in  paying  dividends  to  the  stockholders,  while  omitting  ordinary  main- 
tenance on  the  ground  that  the  payment  of  dividends  was  necessary  to  maintain 
the  company's  credit  and  enable  it  to  sell  its  bonds.  Upon  this  point,  under  cross 
examination  by  Mr.  R.  S.  Houck,  City  Solicitor  of  Scranton,  Mr.  Tingley  gave 
the  following  testimony : 

"Q.  The  dividends  of  1917  and  1918  were  partially  paid  out  of  the  surplus  of  the 
company,  were  they  not? 

"A.     Yes,  sir. 

"Q  Now,  according  to  your  testimony,  during  this  same  period  the  maintenance  of  the 
road  was  considerably  curtailed  and  neglected? 

"A.     Yes,  sir. 

"Q.     Did  the  necessities  of  the  road  require  the  payment  of  dividends  on  stock? 

"A.  I  think  so,  yes,  sir.  With  a  bond  issue  about  to  mature  and  a  necessity  for  selling 
new  securities  to  replace  that  issue,  there  was  necessity  of  maintaining  our  credit. 

"Q.     When  a  road  neglects  its  maintenance  does  its  credit  likewise  fall? 

"A.  No,  because  that  is  not  a  matter  of  financial  knowledge,  and  it  can  be  overcome 
in  a  year  or  so. 


60  Electric  Railway  Problem 

••Q.  It  was  the  judgment  of  the  management  of  the  road,  then,  that  it  was  more  essential 
to  pay  the  dividends  than  it  was  to  repair  the  road? 

"A.     To  that  extent;  yes,  sir." 

On  the  same  general  subject,  Mr.  Oiarles  A.  Fagan,  one  of  the  receivers  of 
the  Pittsburg  Railways  Company,  ga%e  significant  testimony  before  the  Federal 
Electric  Railways  Commission,  at  page  620  of  the  Proceedings.  After  describing 
the  circumstances  of  the  receivership  he  was  asked  by  Oiairman  Elmquist  whether 
the  company  had  been  operating  successfully  prior  to  the  recent  increase  in 
prices.     The  testimony  upon  this  point  is  as  follows : 

"The  Chairman:  The  condition  that  confronts  you  is  due  entirely  to  the  increased  cost 
of  labor,  supplies  and  materials,  is  it  not? 

"Mr.  1-agan:     1  would  say  vcs  tu  that  question.  ; 

"The  Chairman :     because  up  to  the  ri.sing  tide  of  prices  you  were  operatmg  successtuUy, 

were  you  not .''  ... 

"Mr  l"agan:  Well,  if  you  mean  that  from  a  financial  standpoint,  by  paying  the  interest 
on  the  capital  charges,  yes.  If  you  mean  satisfactorily  so  far  as  the  ser\'ice  of  the  system 
was  concerned,  I  would  say  no.  In  other  words.  1  think  this  system  is  about  at  least  six  years 
behind  in  the  rehabilitation  and  upkeep  of  the  physical  system. 

"The  ChairnKiii :  How  many  years  ago  did  this  let-down  in  the  maintenance  and  con- 
dition of  the  property  Income  apparent? 

"Mr.    l-agan  :     .\l)out  six  years  ago. 

"The  Chairman:     What  was  the  cause  of  it  six  years  ago? 

"Mr.  l-agan:  Well,  mv  opinion  is  that  the  company  in  the  beginning  or  at  ditterent 
times  was  over-ca!>italized ;  that  the  capital  stock  was  too  high ;  that  the  l)onds  were  not  sold 
at  par:  that  favorite  contractors  were  given  the  contracts  for  the  building  and  rehabihtation 
of  the  road,  and  that  all  of  those  things  tended  to  the  situation  which  finally  developed." 

Ur.  Milo  R.  Maltbie.  one  of  the  last  witnesses  before  the  Commission,  added 

the  weight  of  his  experience  and  authority  to  the  destructive  etlfect  of  neglected 

maintenance  upon  street  railway  credit.     At  page  2092  of  the  Proceedings,  he  says : 

"It  has  been  the  law  in  many  states  for  years  that  dividends  could  not  be  declared  unless 
earned.  Some  of  the  states  have  recognized  in  the  law  depreciation,  and  other  states  have 
not  referred  to  it  specifically.  Of  course,  it  is  a  matter  of  common  knowledge  that  in  the 
pa-st,  say  20  years  ago,  many  of  the  companies  paid  no  attention  to  depreciation,  expecting 
that  the  growth  oi  the  business  and  the  increases  in  earnings  resulting  therefrom  would  be 
sufficient  to  take  care  of  replacements  and  renewals  when  it  became  neces.sary  to  make  them; 
and,  of  course,  for  a  considerable  time,  their  ex|)ectations  were  justified.  That  is  exactly 
what  hai)pened :  and  they  did  not  find  themselves  in  a  critical  situation. 

"Sooner  or  l:iler.  however,  that  condition  is  iKUind  to  catch  up  with  a  company,  and 
put  it  in  a  position  like  the  street  railways  were  in  in  New  York  City  alxnit  ten  years  ago, 
when  they  went  through  reorganization,  in  1907,  and  the  years  following,  where  the  lack  of 
provision  for  depreciation  meant  that  the  proficrty  had  a  ser>'ice  value  far  below  the  cost 
of  the  property  and  where,  when  it  became  neccssarj-  to  make  provision  for  renewals  and 
replacements,  there  were  not  sufficient  sums  available,  and  the  public  authorities  would  not 
let  them  issue  securities  for  the  replacement  of  property.  Many  companies  today  are  in  that 
silu.nlion;  not  all.  but  many  of  them  arc  in  the  situation  where  they  have  not  adequate 
<!iprrriati<in  reserves,  and  where  in  order  to  meet  that  (lilin<|iK'ncy  it  is  necessary  to  resort 
In  other  metho<ls  which,  of  course,  makes  it  particularly  difficult  to  secure  money  from  any 
financial  house  which  has  an  examination  made  of  the  property  before  approving  any  con- 
siderable amount  of  securities." 

As  has  been  demonstrated  under  the  Chicago  settlement  ordinances  of  1907, 
rehabilitation  is  a  very  costly  jiroccss.  Even  where  the  old  capital  account  is 
cut  to  tile  bone,  as  seemed  to  be  the  case  in  Cliicago,  general  rehabilitation  makes 
a  tremendous  call  upon  the  investors.  It  demands  that  they  shall  send  a  lot  of 
good  money  after  bad.  I'niess  the  old  investors  are  squeezed  out  entirely,  re- 
habilitation almost  inevitably  leads  to  overcapitalization,  strained  credit  and 
costly  financial  arrangements.  Alas  the  day  that  gave  birth  to  the  fatal  thought 
that  credit  can  be  kejit  alive  by  dividends  made  possible  through  neglect  of 
maintenance. 


Chapter  XIII. 

OVERBUILDING 

During  the  period  wlien  horses  and  mules  were  the  motive  power  in  street 
railway  operation,  short  Hnes  and  many  of  them  were  the  rule.  Many  separate 
companies,  partially  competitive,  sprang  up  in  all  the  principal  urban  centers. 
Access  to  the  traffic  center  was  generally  indispensable  to  each  separate  line. 
The  result  was  that  in  many  cities  tracks  were  constructed  in  the  downtown  dis- 
tricts far  beyond  what  would  have  been  required  under  unified  operation.  Later 
on,  after  the  period  of  electrification  and  consolidation  set  in,  many  of  the  cities 
still  clung  to  the  fetish  of  competition  and  gave  franchises  for  circuitous  and 
partially  paralleling  routes  to  new  companies.  The  new  lines,  after  their  con- 
struction, were  almost  everywhere  swallowed  up  in  the  general  consolidations 
forced  by  the  monopolistic  character  of  the  street  railway  business.  A  few  of 
the  competing  lines  still  survive  under  diverse  ownership  and  management.  For 
example,  Dayton,  Ohio,  still  boasts  of  four  street  railway  companies,  and  even 
the  District  of  Columbia  has  two.  In  Detroit  the  3-cent  lines,  built  under  a  com- 
peting franchise  granted  as  a  part  of  the  late  Mayor  Pingree's  campaign  to  bring 
the  old  traction  company  to  its  knees  and  secure  a  reduction  in  street  railway 
fares,  were  soon  swallowed  up  in  the  Detroit  United  Railway,  but  until  very 
recently  these  lines  were  operated  as  a  separate  system  with  different  rates  of  fare 
and  transfer  regulations.  The  City  of  Richmond,  Virginia,  furnishes  another 
illustration  of  the  effects  of  competitive  street  railway  building.  During  recent 
years  it  has  been  one  of  the  great  problems  of  the  Virginia  Railway  and  Power 
Company  to  secure  from  the  city  authorities  of  Richmond  the  right  to  abandon 
lines  that,  in  its  opinion,  have  proven  unnecessary  and  ought  never  to  have  been 
built.  For  j'ears  the  Attorney  General  of  the  State  of  New  York,  at  the  instance 
of  the  Public  Service  Commission  for  the  First  District,  was  engaged  in  litigation 
to  enforce  the  legal  abandonment  of  street  railway  mileage  in  downtown  New 
York  which  had  originally  been  constructed  under  perpetual  franchises  by  separate 
and  competing  companies,  and  which  was  being  held  in  nominal  use  by  the  opera- 
tion of  a  "franchise-carrying"  car  with  an  irregular  24-hour  schedule. 

No  evidence  was  presented  to  the  Commission  to  indicate  the  precise  extent 
to  which  the  overbuilding  of  street  railway  lines  in  the  days  when  competition  was 
recognized  as  a  desideratum  of  public  policy  still  survives  to  plague  the  industry, 
but  it  cannot  be  doubted  that  if  the  problem  of  laying  out  transportation  lines 
could  be  tackled  anew,  without  any  embarrassment  from  the  existence  of  the 
present  structures,  great  economies  could  be  effected  and  great  improvements  in 
service  made  by  the  adoption  of  lay-outs  better  adapted  to  the  requirements  of 
electric  railway  traction  of  the  present  day.     When  Secretary  Baker  was  on  the 

61 


62  Electric  Railway  Problem 

stand,  he  was  asked  by  Qiairman  Elmquist  what  there  is  about  the  Cleveland 
situation  that  permits  the  company  to  operate  at  a  5-cent  schedule  today  and 
meet  all  of  its  fixed  charges  and  operating  costs. ^  In  reply  he  cited  "a  sound 
capitalization,"  representing  approximately  the  physical  valuation  of  the  property, 
as  the  first  reason  for  the  fortunate  condition  in  which  the  Oeveland  Railway 
Company  finds  itself.  His  second  reason  was  the  absence  of  overbuilding.  Upon 
this  point,  at  page  1008  of  the  Proceedings,  he  says: 

"Another  thing,  of  course,  is  the  fact  that  Oeveland  has  been  a  very  rapidly  growing 
city,  and  its  lines  of  street  railroad  have  been  extended  to  meet  that  growth  solely  in  the 
interest  of  service. 

"What  I  mean  by  that  is  this:  There  has  been  no  competition  between  competing  lines, 
and  there  has  been  no  building;  lor  speculative  purposes.  When  you  have  a  privately  owned 
street  railroad,  it  sometimes  happens— I  do  not  mean  that  this  is  the  usual  thing,  but  it  some- 
times happens — that  the  persons  who  manage  the  railroad  go  out  and  buy  large  farms  in  the 
suburbs,  and  then  they  extend  their  railroad  out  to  their  farms  and  sell  the  farms  cut  up  into 
building  lots,  and  they  operate  the  street  railroad  as  a  feeder  to  a  real  estate  venture.  That 
has  not  happened  in  Oeveland.  because  the  street  railroad  is  operated  in  the  interest  of  the 
people,  and  it  has  had  no  heavy  losses  in  long  hauls  to  sparsely  settled  communities,  for  the 
purpose  of  aiding  real  estate  speculation.  That  is  a  thing  which  has  happened  in  a  great 
many  street  railroad  enterprises,  and  it  has  not  happened  in  Oeveland  in  a  great  many  years, 
because  this  settlement  has  been  going  on  for  a  long  time." 

What  Secretary  Baker  says  is  undoubtedly  true  of  the  development  of  the 
Oeveland  Railway  sy>tem  under  the  Tayler  franchise,  but  there  is  little  doubt 
that  in  the  early  years,  before  the  original  competing  lines  were  consolidated, 
there  was  excess  trackage  in  Cleveland,  as  in  other  cities.  \\"hat  happened  in 
Milwaukee  is  shown  by  Mr.  Mortimer  at  pages  7i>5  and  7i>6  of  the  Proceedings, 
where  the  following  testimony  is  found : 

"Mr.  Warren:  Was  there  any  substantial  increase  of  line  going  back  to  the  electrification 
of  this  system,  in  mileage? 

"Mr.  Mortimer:  No;  in  this  system,  there  has  been  no  substantial  increase  in  mileage 
within  the  city  limits,  Ixicause  the  company  was  built  up  of  seven  separate  sy.stems,  many  of 
which  closely  paralleled  one  another,  and  in  a  process  of  gradual  rehabilitation,  the  lines  that 
have  been  too  close  together  have  fieen  removed ;  so  that  while,  say,  at  the  end  of  the  year 
1910,  there  was  less  actual  track  mileage  in  the  city  of  Milwaukee  than  there  was  in  1896.  it 
reached  farther  o>it  into  the  residential  and  manufacturing  districts  and  was  much  better 
distributed  to  serve  the  population. 

"Mr.  Warren:     .So  thai   there  were  e.xtensions? 

".Mr.   Mortimer:     Oh,   there  were  extensions. 

"Mr.  \\  arren  :     But  you  have  eliminated  some  unneccssan,'  mileage. 

"Mr.  Mortimer:     Yes;  we  have  eliminated  some  unnecessary  mileage. 

"Mr.  Warren;  Were  those  different  lines  merged  into  one  company,  or  were  they  all 
in   one   company   before   that  ? 

"Mr.  Mortimer:  The  Milwaukee  Electric  Railway  &  Light  Company  is  a  reorganization 
of  the  Milwaukee  S'rret  Railway  Company,  and  all  lines  were  merged  in  the  Milwaukee 
Street    Railway  Company. 

"Ktr.  Warren:     .After  or  before  electrification? 

"Mr.  Mortimer:  The  process  extended  over  a  period  of  about  three  years,  electrification 
and  merger  simultaneously." 

It  will  be  seen  from  the  above  that,  according  to  Mr.  Mortimer,  the  excess 
mileage  resulting  from  horse  car  competition  has  been  gradually  eliminated  in 
Milwaukee  and  a  more  scientific  and  economical  system  of  lines  evolved  during 
the  period  of  electric  traction.  I'ndoubtedly  the  cost  of  lines  abandoned  in  this 
way  generally  figures  in  the  capital  account  of  an  electric  railway  company  where 
such  abandonment  has  occurred,  and  goes  to  swell  its  claim  on  account  of  super- 
seded property  in  the  determination  of  fair  present  value  for  rate  purposes.     It 


Overbuilding  63 

is  thus  a  source  of  overcapitalization  which,  in  turn,  has  a  weakening  effect 
on  street  railway  credit. 

One  of  the  unfortunate  incidents  in  the  early  history  of  street  railway 
development  was  the  use  of  different  gauges  in  the  construction  of  competing 
lines.  In  the  process  of  consolidation,  where  lines  having  different  gauges  were 
brought  together,  it  was  necessary  either  to  spend  large  sums  of  money  for  a 
change  of  gauge  on  one  set  of  lines,  or  to  continue  the  physical  operation  of  the 
two  sets  of  lines  separately.  The  Public  Service  Railway  Company  of  New 
Jersey,  for  example,  carries  in  its  capital  account  items  of  expense  aggregating 
about  $4,000,000  charged  to  "rehabilitation,"  which  it  appears  from  testimony 
recently  offered  by  the  con^pany  in  the  railway  fare  case  were  incurred  in  changing 
gauges  to  permit  unified  operation  in  the  northern  part  of  the  state.  It  is  note- 
worthy, moreover,  that  this  company  still  has  the  broad  gauge  in  its  southern 
division  in  and  about  Camden,  although  all  of  its  lines  in  northern  New  Jersey 
are  of  standard  gauge.  For  many  years,  unnecessary  trackage  and  uneconomi- 
cal operation  were  maintained  in  the  City  of  Norfolk,  Virginia,  by  the  Virginia 
Railway  and  Power  Company,  by  reason  of  the  existence  of  two  gauges  on  dif- 
ferent parts  of  its  system.  The  lines  of  the  Los  Angeles  Railway,  which  supply 
most  of  the  local  service  in  the  City  of  Los  Angeles,  are  of  narrow  gauge,  while 
the  Pacific  Electric  lines,  spreading  out  from  Los  Angeles  as  a  center,  are  of 
standard  gauge,  with  the  result  that  on  routes  where  both  local  and  interurban 
cars  are  operated  it  has  been  necessary  to  encumber  the  streets  with  three  rails 
instead  of  two.  No  doubt  there  are  many  other  illustrations  not  brought  out 
in  the  evidence  before  the  Commission  where  competitive  building  in  the  early 
days  of  street  railroading  and  the  use  of  different  gauges  have  resulted  in  exces- 
sive charges  to  capital  account  originally,  and  in  further  excessive  charges  for  re- 
habilitation and  change  of  gauge  following  consolidation ;  or  else  in  continued 
wastefulness  in  operating  methods. 

Not  only  did  the  electric  railway  inherit  a  large  amount  of  overbuilding  from 
the  horse  car  days  of  competition  and  diverse  gauges,  and  not  only  did  additional 
overbuilding  result  after  the  introduction  of  electricity  as  a  motive  power  from 
the  continued  effort  of  the  municipalities  to  preserve  the  imagined  benefits  of 
competition,  but  the  electric  railway  may  be  charged  with  overconstruction  on 
other  accounts.  The  introduction  of  electricity  gave  rise  to  a  period  of  high  hopes 
and  intense  speculation.  Promoters  of  transit  schemes  thrived,  and  when  they 
were  not  engaged  in  the  pastime  of  overcapitalization  in  connection  with  the  con- 
solidation of  competing  properties,  they  branched  out  into  the  highways  and  by- 
ways and  procured  the  extension  of  electric  railway  facilities  into  the  suburban 
and  rural  districts  where  nothing  but  the  over-sanguine  expectations  of  a  "green" 
art  gave  promise  of  financial  success.  Witnesses  for  the  American  Electric  Rail- 
way Association  laid  great  emphasis  in  their  testimony  before  the  Commission 
upon  the  statistics  of  abandonment  as  indicative  of  the  poor  financial  condition 
of  the  electric  railway  industry  at  the  present  time  and  of  the  danger  that  the 
industry  may  collapse  entirely,  and  an  essential  public  service  disappear.  The 
abandonments  effected  and  proposed  on  the  Bay  -State  lines  of  Massachusetts 
have  been  called  prominently  to  the  attention  of  the  Commission,  and  have  fre- 


64  Electric  Railway  Problem 

quently  been  referred  to  in  the  propaganda  carried  on  by  the  electric  railways 
during  the  past  two  years  throughout  the  United  States.  Mr.  James  \V.  Welsh, 
statistician  for  the  Association,  presented  a  list  of  certain  electric  railways,  as 
of  June  7,  1919,  showing  sixty-two  companies  with  5.912  miles  of  single  track 
in  the  hands  of  receivers ;  si.xty-one  companies  with  791  miles  of  single  track 
dismantled  and  junked,  and  thirty-eight  companies  with  257  miles  of  single  track 
abandoned,  making  a  total  of  6,960  miles  of  track,  or  about  16  per  cent  of  the 
total  track  mileage  of  the  electric  railways  in  the  United  States.  The  statistics  of 
dismantlement  and  abandonment  start  with  the  year  1915.  They  include  30.4 
miles  of  track  abandoned  by  the  Bay  State  Street  Railway  Company.  There  is 
little  or  nothing  in  the  evidence  presented  to  the  Commission  to  show  that  the 
abandonment  of  lines,  as  far  as  it  has  gone  up  to  the  present  tirrie.  is  anything 
other  than  a  tardy  but  necessarj'  recognition  of  the  financial  mistakes  made  in 
the  early  days  of  street  railway  development.  It  would  appear  from  the  testi- 
mony that  the  abandonment  of  30  miles  of  Bay  State  track  is  an  extremely  modest 
beginning  in  the  direction  dictated  by  sound  financial  policy.  From  the  point  of 
view  of  the  electric  railway  industry  it  is  only  the  fact  that  lines  once  built  create 
a  species  of  vested  rights  in  real  estate  values  and  social  conveniences  dependent 
upon  the  e.xistence  of  transportation  facilities  that  makes  questionable  a  policy  of 
wholesale  abandonment  of  unprofitable  lines. 

Mr.  R.  S.  Bauer,  of  Lynn,  described  what  he  learned  when,  as  President 
of  the  Lynn  Board  of  Trade  as  far  back  as  1908,  he  took  up  the  study  of  the 
develo])ment  of  the  Bay  State  system.  He  gave  this  significant  testimony  at 
pages  1622  and  1623  of  the  Proceedings: 

"1  fomul  further  that  the  ground  hogs  in  the  different  communities,  the  land  speculators, 
had  brought  certain  influences  to  l)ear  on  the  Icxral  govennnents  which  compelled  the  street 
railways  tu  Inn'UI  extensions  into  property  lor  the  sake  of  adding  rental  and  sale  values  to 
pasture  land,  and  the  ixiliticians  in  charge  of  the  localities  in  those  times  brought  sufficient 
influence  to  benr  on  the  roilri>ads  to  compel  them  to  build  that  kind  of  extensions,  which 
were  never  profit  producing  lines. 

"So  when  the  unit  system  was  eventually  fi>rmed.  it  took  in  all  of  these  miles  of  non- 
productive track,  together  with,  of  course,  a  certain  number  of  miles  of  very  productive  track. 

"Tlie  Hay  .Stale  system  has  arourd  one  tliousand  miles  oi'  trackage.  Out  of  that  thousand 
miles  there  arc  alxiut  .520  miles  that  were  built  purely  for  speculative  or  competitive  purposes, 
that  have  never  Ik-cii  profit  producing  from  the  time  they  were  first  laid.  They  would  not  be 
profit  producing  today  at  any  rate  of  fare  that  the  people  would  pay  to  ride  on  the  trolleys." 

In  the  "Statement"  of  Chairman  McLeod  for  the  Massachusetts  Public 
Service  Commission-  before  the  Street  Railway  Investigation  Commission  of  the 
Massachusetts  legislature,  November  2S,  1917,  the  history  of  electric  railway  de- 
velopment in  Mas.^achusctts  is  set  forth  at  some  length.  At  pages  3  to  5  of  this 
document  we  find  the  following: 

"Mr.  Warren  has  told  you  that  Massachusetts  'has  more  .street  railway  mileage  in  pro- 
portion to  its  )N>pulalion  .md  to  its  area  than  any  other  state  in  the  Union,'  and  he  is  sul>- 
stantiallv  correct  •  •  •  •  J\,^.  t"a,-:  i,  iniportant  and  significant.  Voii  have  be  n  told  inat 
people  then  l)elieved  that  electric  railways  were  a  Iwnanza,  or.  as  Mr.  Sullivan  puts  it.  'that 
you  could  carry  iieople  any  distance,  anywhere,  any  time,  for  a  nickel."  But  this  is  only 
partially  true.  lU-giiuiing  in  18").?.  the  Hoard  of  Railroad  Commissioners,  under  the  able 
leadership  of  John  !•".  San  ford,  time  and  again  warned  investors  against  this  belief  and 
demc  iislratcd  its  falhcv  in  great  detail      •     •     •     » 

"The  fart  is  that  Massachusetts  was  beset,  in  the  nineties  and  even  later,  by  a  throng 
of  promoters  who  laid  out  lines  anywhere  and  everywhere,  bid  against  each  other,  and  in 
their  eagerness  for  lix-ations  accepted  franchise  grants  subject  to  burdensome  restrictions. 
The  subsequent  disregard  of  these  grants,  which  the  local  authorities  supposed  were  binding 


Overbuilding  65 

contracts,  has,  as  you  know,  been  a  fruitful  source  of  public  irritation.  In  a  number  of  cases 
they  have  been  carried  to  the  courts.  You  may  wonder  why  this  craze  for  building  should 
have  fastened  upon  a  state  where  the  law  permitted  no  bonus  stock  and  where  no  promoters' 
profits  were  directly  recognized.  Such  profits  were,  of  course,  in  some  way  secured.  The 
fact  seems  to  be,  as  nearly  as  we  can  determine  it,  that  the  promoters  awarded  to  themselves 
the  contracts  for  construction,  that  the  Board  of  Railroad  Commissioners,  until  1902,  had  no 
power  to  prescribe  standards  of  construction;  that  it  was  dependent  in  the  supervision  of 
security  issues,  until  1902,  upon  experts  paid  by  the  companies  themselves;  and  that  there 
has  never  been  any  regulation  of  the  creation  of  floating  indebtedness.  The  result  was  that 
many  of  the  roads  were  poorly  and  cheaply  built,  and  it  is  a  fair  deduction  that  costs  were 
at  times  less  than  the  estimates  upon  which  security  issues  were  based,  and  that  the  promoters 
added  the  difference  to  their  profit  and  further  enriched  themselves,  in  some  cases,  through 
the  medium  of  floating  debt. 

"An  even  worse  result  was  that  this  thirst  for  construction  profits  led  to  the  building 
of  many  badly-located  roads,  with  no  reasonable  financial  excuse  for  existence.  *  *  *  Xhe 
building  of  these  ill-advised,  poorly-designed  and  cheaply-constructed  roads  has  been  an 
important   factor  in  producing  the  situation  which  you  are  now  considering." 

In  his  testimony  before  the  Commission,  at  pages  1435  and  1436  of  the 
Proceedings,  Mr.  McLeod  emphasized  the  effects  of  overbuilding  upon  the  present 
condition  of  the  companies.     His  testimony  is : 

"In  Massachusetts  the  financial  stability  of  the  street  railway  industry  has  been  impaired 
by  overproduction.  Massachusetts  has  more  street  railway  mileage  in  proportion  to  its 
population  and  area  than  any  other  state  in  the  Union,  and  this  mileage  is  not  only  large  in 
amount,  but  in  many  cases  badly  located.  This  condition  is  the  result  of  the  era  of  speculation 
in  street  railway  building  which  set  in  with  the  advent  of  electrification.  Competitive  lines 
were  built  where  there  were  traffic  possibilities  for  a  single  line  only,  and  the  lines  were 
extended  anywhere  and  everywhere  into  the  sparsely  settled  rural  districts  where  there  was 
no  reasonable  financial  excuse  for  building  at  all.  It  might  have  been  better  in  the  long  run 
if  this  boom  period  had  been  allowed  to  run  its  natural  course,  if  unnecessary  lines  had  then 
been  abandoned  and  if  a  number  of  small  companies  which  had  sprung  up  during  this  period 
of  mushroom  growth  had  reorganized  by  scaling  down  their  securities  to  correspond  with  the 
traffic  possibilities  of  the  territories  they  served.  Instead,  these  speculative  companies  were 
saved  from  prospective  bankruptcy  or  the  scrap  heap  by  the  policy  of  consolidation,  under 
which  they  were  taken  over,  with  all  their  questionable  debts  and  obligations,  on  a  share-for- 
share  basis  by  the  more  prosperous  urban  companies.  From  this  union  of  prosperous  and 
potentially  bankrupt  companies  there  emerged  a  number  of  street  railway  systems  with  just 
sufficient  vitality  to  keep  their  heads  above  water  during  fair  weather,  but  incapable  of  meeting 
the  stress  of  hard  times  and  war  conditions." 

Mr.  Richard  T.  Higgins,  Chairman  of  the  Public  Utilities  Commission  of 
Connecticut,  indicates  by  his  testimony  that  overbuilding  was  not  unknown  in  that 
state.     At  page  1108  of  the  Proceedings,  he  says: 

"During  the  era  of  street  railway  development  many  lines  were  extended  into  rural 
sections.  These  sections  developed  because  of  the  e-xtensions  and  became  dependent  upon 
the  trolley  for  transportation,  but  the  volume  of  traffic  now  received  on  many  of  these  lines 
is  not  sufficient  to  pay  operating  expenses." 

Again,  at  page  1111,  he  says  that  "in  the  pioneer  days  of  street  railway 
operation,  when  the  street  railway  business  was  more  or  less  profitable  and  the 
nickel  was  worth  a  good  deal  more  than  it  is  today,  the  spirit  of  greed  or  avarice, 
high  financing,  possibly  of  extension  of  unprofitable  lines,  crept  into  many 
companies." 

Thus  far  I  have  discussed  overbuilding  in  the  form  of  unnecessary  trackage 
constructed  originally  as  a  result  of  competition  or  as  the  result  of  the  pressure 
of  real  estate  interests  or  as  a  result  of  optimistic  promotion.  Attention  should 
further  be  called  to  the  overbuilding  that  has  progressively  characterized  the 
development  of  the  electric  railway  right  down  to  the  war  period.  I  refer  to 
the  tendency  almost  everywhere  manifested  during  the  fifteen  or  twenty  years  pre- 
ceding the  invention  of  the  one-man  safety  car  to  install  heavier  and  heavier  track 


66  Electric  Railway  Problem 

construction  and  heavier  and  heavier  equipment  in  connection  with  the  replace- 
ment and  extension  of  street  railway  property.  A  large  amount  of  the  additional 
capital  that  has  gone  into  the  electric  railway  business  during  its  period  of  phe- 
nomenal expansion  has  been  required  by  this  increase  in  the  size  and  weight  of 
cars  and  the  weight  of  rail,  and  by  the  larger  power  plants  required  on  account 
of  the  heavier  equipment.  While  the  testimony  before  the  Commission  is  in- 
complete on  this  point,  it  is  noteworthy  that  the  Committee  on  One-Man  Car 
Operation  of  the  American  Electric  Railway  Transportation  and  Traffic  Asso- 
ciation, in  its  report,  presented  at  tiie  .-\llantic  City  convention  in  October,  1919,* 
called  attention  to  the  fact  that  two  large  street  railway  systems  reported  their 
purpose  to  reduce  the  weight  of  rail  to  the  extent  of  20  per  cent  to  30  per  cent 
if  safety  cars  become  the  standard  type  of  equipment  in  the  future.  The  safety 
car  itself,  weighing  less  than  half  as  much  as  the  average  double-truck  modern 
car  in  use  on  city  systems,  and  only  a  fraction  as  much  as  the  big  interurban 
cars,  represents  a  much  smaller  investment  per  passenger  seat  than  is  represented 
by  the  old  type  of  cars.  While  there  is  still  considerable  mystery  and  doubt 
about  the  revolution  fn  street  railway  equipment  and  operation  predicted  bj'  Henry 
Ford,  it  is  significant,  nevertheless,  in  connection  with  this  matter  of  overbuild- 
ing, that  Mr.  Ford's  engineer,  in  an  interview  recently  published,  is  reported  to 
have  said  that  with  the  new  type  of  cars  a  40-pound  rail  would  be  ample  in  place 
of  the  91 -pound  rail  now  used  by  the  Detroit  United  Railway.*  No  doubt  the 
municipalities  have  been  in  part  responsible  for  the  introduction  of  extremely 
heavy  types  of  rail  in  many  places.  Upon  the  assumption  that  heavy,  grooved 
rails  were  essential  for  the  protection  of  the  pavement  and  the  preservation  of  a 
smooth  street  surface,  this  type  has  been  required  by  franchise,  contract  or  by 
ordinance  in  a  great  many  cities. 

It  seems  clear  that  overbuilding  in  its  various  forms  has  been  one  of  the 
most  important  factors  in  swelling  the  capitalization  and  the  construction  accounts 
of  the  electric  railways.  Its  effect  upon  credit  could  not  have  been  otherwise 
than  adverse  and  cumulative,  particularly  when  the  idea  dawned  upon  the  hori- 
zon of  the  street  railway  investor  that  many  street  railway  lines  and  an  enormous 
amount  of  street  railway  equipment  were  becoming  obsolete  as  a  result  of  auto- 
mobile competition  and  a  sharp  reversal  of  the  tendency  of  development  in  the 
street  railway  art. 


I 


Chapter  XIV 
HOLDING  COMPANIES  AND  BANKER  CONTROL 

It  has  been  said  that  the  electric  railway  companies  of  Massachusetts  have 
always  been  nearly  free  of  initial  overcapitalization,  and  the  conservative  figures 
of  capital  stock  and  bonds  outstanding  per  mile  of  track  seem  to  bear  out  this 
statement.  Those  who  wish  to  gloss  over  the  evil  eftects  of  overcapitalization  on 
credit  and  to  treat  it  as  a  "dead  issue"  at  the  present  time  point  to  Massachusetts 
for  their  proof.  We  have  seen  that  there  was  some  "water"  in  street  railway 
capital  even  in  Alassachusetts,  that  the  roads  were  recklessly  overbuilt  and  that 
they  grossly  neglected  to  provide  for  depreciation.  But  the  evidence  goes  farther 
and  show's  that  the  holding  company  nuisance  developed  in  Massachusetts  as  a 
means  of  evading  state  regulation  and  creating  overcapitalization  in  the  street 
railway  industry  in  spite  of  laws  and  commissions.  There  are  those  who  would 
excuse  the  optimism  of  early  promoters  and  speculators  on  the  theory  that  ordi- 
nary good  business  judgment  was  used  in  the  development  of  the  electric  railway 
industry  and  that  the  men  who  built  and  managed  the  roads  twenty  or  twenty- 
five  years  ago  did  not  foresee  and  could  not  have  foreseen  the  disappointments 
that  were  in  store  for  the  industry  even  before  the  Great  War  brought  on  the 
present  crisis.  This  view  is  clearly  controverted,  at  least  so  far  as  Massachu- 
setts is  concerned,  by  the  annual  reports  of  the  Massachusetts  Board  of  Railroad 
Commissioners,  extracts  from  which  appear  as  an  appendix  in  the  documentary 
"Statement"  filed  by  the  Massachusetts  Public  Service  Commission  with  the 
special  legislative  investigating  committee  of  1917.  For  instance,  the  Twenty- 
Fourth  Annual  Report  of  the  Railroad  Commission,  for  the  year  1893,  right  in 
the  heyday  of  electrification,  contains  the  following  statement  at  pages  105  and 
106: 

"There  is  an  active  'boom'  in  electric  railway  building  and  speculation  now  in  progress. 
It  is  stimulated  by  the  apparent  cheapness  of  electricity  as  compared  with  horse  power,  by  the 
expectation  of  large  profits,  and  in  some  cases  probably  by  the  hope  of  successful  deals  in 
the  securities  of  the  company.  Little  attention  is  paid  to  the  fact  that  the  plants  and  equip- 
ments of  the  companies  using  electric  power  are  new.  that  their  cost  is  charged  to  construction 
and  not  to  expense,  and  that  the  point  has  not  yet  been  reached  where  extensive  repairs  and 
renewals  are  required.  When  this  point  has  been  reached,  and  the  cost  of  repairs  and  renewals 
is  charged  to  the  current  expense  of  operation,  the  margin  of  apparent  profit  which  is  now 
shown  by  some  of  the  companies  will  probably  be  materially  reduced. 

"The  horse  railway  has  been  usually  a  local  enterprise,  built  by  home  capital,  and  con- 
trolled by  residents  of  the  city  or  town  in  which  it  was  located,  whose  interests  were  identified 
with  those  of  the  community  which  the  railway  served.  It  is  notorious  that  to  a  large  and 
increasing  extent  our  street  railways  are  passing  into  the  control  of  syndicates  and  traction 
companies,  so  called,  organized  in  other  states  whose  easy-going  laws  allow  to  corporations 
there  formed  a  license  which  is  forbidden  in  this  State.  The  stock  of  the  railway  company  is 
bought  up.  in  some  cases  at  prices  much  beyond  its  market  or  intrinsic  value,  is  conveyed  to  the 
syndicate  or  traction  company,  or  to  trustees  for  its  benefit,  and  the  purchasing  syndicate  or 
trust,  as  it  is  said,  thereupon  proceeds  to  make,  without  regard  to  the  amount  of  cash  paid  in 
or  paid  out,  largely  watered  and  inflated  paper  issues  of  its  own  stock  and  securities,  upon 
which  the  public  using  the  railway  is  expected  somehow  to  pay  a  return.     Such  speculative 

67 


68  Electric  Railway  Problem 

deals  and  stock  operations  are  against  public  policy  if  not  against  public  morality,  and  tend  to 
the  introduction  of  a  system  and  method  of  financial  and  business  management  which  in  the 
end  must  prove  pernicious  to  the  interests  of  the  public." 

Again,  in  the  report  for  1894,  the  Railroad  Commissioners  discussed  the 
financial  prospects  of  electric  traction  as  compared  with  horse  railway  operation, 
and,  after  pointing  out  that  the  cost  of  renewals  and  replacements  was  not  yet 
being  felt,  reached  the  following  conclusion  at  pages  109  and  110  of  the 
report : 

"We  must  conclude,  then,  taking  everything  into  the  account,  that  there  has  t>een  thus 
far  no  demonstration  of  the  superior  net  earning  capacity  of  the  electric  as  compared  with 
the  horse  system,  but  rather  the  reverse.  It  is  not,  however,  intended  to  raise  the  inference 
that  the  electric  system  is,  or  is  likely  to  prove,  under  conservative  and  proper  management, 
a  serious  financial  failure.  The  conditions  attending  its  further  and  fuller  development  will 
probably  l)c  found  to  differ  in  no  essential  respect  from  those  attaching  to  the  old  horse  rail- 
way system,  or  to  the  steam  railroad  system.  .\  well  located  and  well  inanaged  electric  rail- 
way, it  may  be  fairly  said,  stands  a  similar  chance  of  financial  success  with  a  well  located 
and  well  managed  railroad  or  horse  railway.  Upon  the  present  showing  and  outlook,  it  cer- 
tainly stands  no  better  chance.  If  ladly  located  or  badly  managed,  there  clearly  has  not 
been  manifestecl  as  yet  any  miraculous  power  in  its  peculiar  system  of  locomotion  to  save  it 
from  the  familiar  fate  of  the  railroad  or  horse  railway  when  struggling  under  the  same 
difficulties. 

"It  can  and  should  be  said,  however,  without  hesitation  or  qualification,  that  the  electric 
system  has  not  shown  or  indicated  any  such  margin  of  profit  as  to  justify  the  expectation  of 
more  than  moderate  and  ordinary  returns  on  money  legitimately  invested  in  it.  The  idea, 
which  seems  to  have  obtained  some  currency,  that  the  electric  railway  system  is  a  bonanza 
of  rare  and  inexhaustible  wealth,  is  clearly  a  delusion,  and  has  doubtless  proved  to  some  a 
snare.  The  absolute  cost  and  expensivencss  of  the  system,  under  the  most  conser\'ative, 
able  and  honest  management,  are  sufficient  to  task  its  earning  capacity  to  the  full  limit. 
There  is  no  margin  for  fictitious  or  inflated  capitalization.  It  presents  no  safe  or  inviting 
field  for  speculative  enterprise  or  manipulation,  unless  it  be  to  the  un.'icrupulous  operators 
of  an  inside  ring  who  are  willing  to  practice  on  the  credulity  of  a  misinformed  public.  Wher- 
evcr  there  is  reason  to  Ix-lieve  that  water  has  been,  or  is  about  to  be,  injected  into  the  stock 
or  bonds  of  an  electric  railway  company,  the  only  safe  course  is  to  let  its  securities  severely 
alone. 

"Instcid  of  inflating  the  li.nbilities  and  straining  the  earnings  and  surplus  for  the  di- 
vision of  ostensible  profits,  the  manifestly  safe  and  imperative  policy  for  the  electric  com- 
panies— and  that  without  special  regard  to  the  present  unusual  stringency  of  the  times — is 
to  keep  the  capitalization  and  charges  upon  income  within  the  narrowest  practicable  limits. 
and  to  set  apart  year  by  year  some  substantial  portion  of  the  earnings  as  a  fund  for  future 
contingencies,  and  for  the  increasing  burdens  of  expense  which  are  sure  to  come  and  whose 
weight  is  now  only  partially   felt  or  known." 

The  extent  to  which  Massachusetts  street  railways  are  now  controlled  by 
holding  companies,  and  the  way  in  which  these  companies  have  brought  about 
overcapitalization  outside  of  the  law  is  shown  by  the  following  extract  taken 
from  pages  (•>  and  7  of  the  Massachusetts  Commission's  "Statement"  of  Novem- 
ber 28.  1917: 

"To  facilitate  the  process  of  consolidation,  and  for  other  reasons,  stock  control  of  many 
of  the  companies  was  acquired  by  holding  companies,  organized  without  express  statutor>' 
authority  in  the  fonn  of  voluntary  associations  or  express  trusts.  Last  year,  excluding  the 
Boston  KIcvated.  out  of  a  total  $52.4J4.IO(f  common  stock  of  all  operating  companies, 
stock  anmunting  to  $,?9.476.88<).  or  75  per  cent,  was  in  the  hands  of  these  voluntarj-  associations. 
Ah  our  .^uprrtnc  Court  has  said,  'they  are  not  corporations,  although  they  are  organized  with  a 
view  to  exercise  many  of  the  privileges  of  corporations  without  assuming  their  statutor>'  liabili- 
ties.' Their  securities  liaN-c  been  issued  entirely  without  public  regulation.  As  a  rule,  they  have 
both  common  and  prcfcrrctl  shares.  The  common  shares  arc  practically  all  "water"  and  the  in- 
flation in  some  cases  extends  to  the  preferred  issues.  By  this  means  large  profits  were  in  some 
case  rraix-d  by  the  organizing  syndicates.  Not  a  few  investors  have  purchased  shares  of 
these  holding  companies  in  the  belief  that  they  were  buying  the  securities  of  Massachusetts 
public  .service  roriioralion-.  i>>ue<l  under  public  supervision.  M.iiiy  more  have  been  inisletl 
by  the  wnni  "preferretl."  failing  to  realize  that  the  frfffrred  shares  of  these  associations 
were  no  letter  than  and  frequently  not  so  good  as  the  common  shares  of  the  underlying 
street  railway  companies.     The  effort  to  inaintain  dividend  payments  upon  these   inflated  se- 


Holding  Companies  and  Banker  Control  69 

curities  has  at  times  proved  injurious  to  the  underlying  properties.  The  failure  of  these 
associations  to  satisfy  expectations,  and  the  consequent  disillusionment  of  investors,  has 
impaired  street  railway  credit  generally.  You  will  find  that  many  of  the  investors  who  have 
appeared  before  you  are  holders  of  these   'watered'   shares." 

These  facts  were  further  emphasized  by  Chairman  McLeod  and  Interstate 
Commerce  Commissioner  Eastman  in  their  testimony  before  the  Commission.  At 
page  1447  of  the  Proceedings,  Mr.  McLeod  says : 

"A  great  part  of  the  street  railway  management  of  the  state,  and  a  large  number  of 
the  companies  in  the  state,  very  much  more  than  the  majority,  outside  of  the  Boston  Elevated 
Company,  is  represented  by  holding  company  control ;  and  the  securities  underlying  the 
street  railway  company  are  taken  over  by  the  liolding  company,  either  as  a  single  asset  or 
in  conjunction  with  the  assets  of  other  companies;  and  the  holding  company  floats  a  set 
of  new  quasi-securities  of  its  own  and  markets  those ;  and  of  course  those  are  handled 
through  the   investment   bankers   in   the   same   way  as  ordinary   industrial   issues. 

"The  Chairman :  So  that  the  investment  bankers  were  putting  out  a  security,  then, 
without   examining   the   physical   condition   of   the   property  ? 

"Mr.  McLeod :  I  do  not  know  to  what  extent  they  examined  it ;  but  an  examination 
ought  to  have  disclosed,  if  it  were  an  intelligent  examination,  the  fact  that  the  property 
during  this  entire  period  was  not  on  a  self-supporting  basis." 

Mr.  Eastman's  prepared  testimony  on  this  subject  is  found  at  page  2058 
of  the  Proceedings,  where,  in  enumerating  the  causes  for  the  bad  present  con- 
dition of  the  Massachusetts  street  railways,  he  says : 

"In  the  third  place  a  factor  of  weakness.  I  think,  was  the  control  of  the  companies  in 
many  instances  by  holding  companies  organized  in  the  form  of  voluntary  associations,  or  to 
use  a  more  technical  term,  express  trusts.  Although  the  stock  and  bonds  of  the  street  railway 
companies  themselves  were  issued  under  public  supervision,  these  voluntary  associations  which 
corralled  all  their  stock  were  subject  to  no  regulation  whatever  and  issued  shares  upon  an 
inflated  basis,  and  that  had  the  result  of  accentuating  the  desire  to  draw  every  possible 
drop  of  income  out  of  the  underlying  companies  that  could  be  secured  in  order  to  support 
earnings    upon    the    inflated    shares    of    these    voluntary    associations." 

Later  on,  Chairman  Elmquist  brought  Mr.  Eastman  back  to  the  subject  of 
holding  companies,  and  the  latter  reiterated  and  amplified  his  previous  statement. 
This  additional  testimony  appears  at  page  2075  of  the  Proceedings: 

"The  Chairman :  You  were  discussing  the  holding  companies  and  mentioned  that  as  one 
of  the  weaknesses  of  the  Massachusetts  system.  To  what  extent  is  a  holding  company  a 
weakness   in   the   system  of   operation? 

"Commissioner  Eastman :  ^\'ell,  I  think  it  is  a  weakness  in  this  way,  where  the  securi- 
ties of  the  holding  company  are  issued  on  an  inflated  basis  as  they  were  in  Massachusetts, 
that  two  things  result : 

"In  the  first  place,  there  is  a  tendency  to  draw  from  the  underlying  companies  every 
r-ossible  cent  which  you  can  in  order  to  make  a  showing  on  these  inflated  securities ;  and 
outside  of  that,  there  was  in  Massachusetts  a  very  deep  seated  tendency  to  mislead  investors. 
For  instance.  I  have  known  of  investors  who  bought  preferred  shares  of  the  Massachusetts 
Electric  Companies,  which  was  the  holding  company,  which  controlled  the  Bay  State,  and 
they  were  under  the  impression  that  they  were  buying  preferred  stock  of  the  street  railway 
company,  whereas  the  preferred  shares  of  that  holding  company  were  no  better  than  the  common 
stock  in  the  underlying  company.  Now,  when  they  are  disillusioned  by  their  experience,  that 
all  tends  to  injure  the  credit  of  street  railway  companies." 

The  extent  to  which  holding  companies  have  come  into  control  of  public 
utilities  throughout  the  United  States  is  shown  by  a  note  that  appears  in  printed 
"Memoranda  and  Data  Submitted  to  the  Officials  of  the  Treasury  Department 
and  referred  to  in  the  correspondence  between  the  President  and  the  Secretary 
of  the  Treasury,  January  8,  1918,"  prepared  by  the  special  committee  of  three 
representing  the  joint  electric,  street  railway  and  gas  interests  of  the  country,^ 
which  states : 

"Approximately  75%  of  the  public  utilities  of  the  country  are  owned  in  whole  or  in  part 
by  so-called  holding  companies  which  are  responsible  for  financing  the  operating  companies. 


70  Electric  Railway  Problem 

This  financing  is  done  tliroufih  the  securities  of  the  parent  company,  which  securities  are 
supported  by  the  securities  of  the  various  operating  companies.  This  gives  a  strength  to 
the  securities  of  the  parent  company  which  a  single  localized  operating  company  could  not 
present.  It  it  were  not  for  the  supporting  strength  of  these  parent  companies  many  of  the 
individual  o|)crating  companies  would  have  gone  under  hcfore  Januan'  1.  1918.  It  is  essential 
that  any  arrangement  for  assisting  the  general  public  utility  financing  should  be  broad  enough 
to  include  within  its  provisions  these  parent  companies.  If  the  Government  financial  aid  is 
extended  through  the  parent  companies  wherever  possible,  the  process  will  be  very  much 
simplified  and  the  demands  upon  the  guaranty  fund  on  the  part  of  the  Government  reduced 
to  a   relatively   nominal  amount." 

Mr.  Richard  Schaddelee.  a  manager  of  several  street  railways  in  the  Middle 
West,  who  testified  before  the  Commission  on  behalf  of  the  Electric  Railway 
Association,  expresses  the  opinion  that  the  holding  companies  have  been  instru- 
mental in  postponing  the  bankruptcy  of  some  of  the  operating  companies.  At 
page  871  of  the  Proceedings,  he  says : 

".\nother  reason  a  good  many  street  railway  companies  are  not  yet  in  bankruptcy  is 
due  to  the  fact  that  there  are  .some  strong  holding  companies  standing  back  of  them  and 
they  are  putting  the  credit  tx;hind  those  companies,  that  is.  they  are  holding  a  lot  of  them 
up.  and  if  they  were  standing  on  their  feet  there  would  be  a  whole  lot  more  bankrupts  than 
there  arc   now.     That   is  another  thing   you   have   to   consider." 

The  evidence  submitted  to  the  Commission  on  the  theoretical  functions  and 
practical  workings  of  holding  companies  in  the  country  as  a  whole  was  much 
more  meagre  than  the  evidence  with  respect  to  their  activities  in  Massachusetts. 
Mr.  Marion  M.  Jackson,  representing  Mayor  James  L.  Key,  of  Atlanta,  placed 
upon  the  record  considerable  testimony  on  the  ramifications  of  holding  company 
control,  particularly  in  the  South  and  West,  and  the  matter  of  concentrated  finan- 
cial control  was  referred  to  by  Mr.  W.  Jett  Lauck  in  his  Brief  for  the  Amalga- 
mated Association  of  Street  and  Electric  Railway  Employes.  Also,  Mr.  James 
L.  Quackcnbush,  general  counsel  for  the  Interborough  Rapid  Transit  Com- 
pany of  N'ew  York,  described  from  his  point  of  view  the  relation  of  the  Inter- 
borough-Metropolitan  Company  and  its  successor,  the  Interborough  Consoli- 
dated Corporation,  to  the  Rapid  Transit  lines  and  the  surface  lines  of  \ew  York. 
Mr.  Morris  L.  Cooke,  fomier  Director  of  Public  Works  of  the  City  of  Phila- 
delphia, organizer  of  the  two  national  conferences  on  public  Utilities  that  were 
held  in  Phil.idelphia  during  the  Hlankenburg  administration,  and  acting  director 
of  the  Utilities  Bureau,  referre<l  in  his  testimony  to  his  pamphlet  "Snapping 
Cords"'  published  in  1913,  in  which  he  commented  upon  "the  changing  attitude 
of  American  cities  toward  the  utility  problem."  At  pages  5  and  6  of  this  pam- 
phlet, a  copy  of  which  he  filed  with  his  testimony,  at  page  1690  of  the  Proceedings, 
Mr.  Cooke  has  this  to  say  about  the  methods  by  which  public  service  corporations 
have  been  overcapitalized  and  about  the  banker's  role  in  the  financial  drama : 

"We  .should  understand  the  way  in  which  the  so-called  'water"  has  been  introduced 
into  the  securities  of  these  comp,inies. 

".•\t  the  l>CKinninK  ol  the  process  stands  a  hanker  who.  having  purchased  all  or  prac- 
tically all  of  the  stock  of  a  lix-ally  owned  property,  proceeds  to  introduce  better  methods 
of  ninnagcment  and  to  improve  and  extend  the  equipment,  accepting  for  the  money  advanced 
for    such    pnr|>oses    whatever    security    the    company    is    able    to    issue. 

".•\s  s<H>n  as  the  earnings  ..f  the  com|Mny  reflect  these  improved  conditions,  or  results 
are  sufficiently  assured  to  warrant  an  adequate  engineering  repon,  a  plan  of  reorganization 
is  dcvi.sed. 

".\  company  is  formed  to  take  over  one  or  more  smaller  companies.  This  company 
usually  authorizes  ciiouRh  b<inds  to  provide  for  the  refunding  of  all  the  mortgage  indebted- 
ness of  the  comiMiiics  consolidated  and   to  pay  back   to  the   lianker  the   monev   expended   by 


Holding  Companies  and  Banker  Control  71 

him  in  the  purchase  of  the  stock  of  these  companies  and  also  the  improvements  made  and 
sometimes  a  cash  profit  besides,  but  this  is  not  usual.  Very  often  they  do  not  get  back  all 
of  the  money  put  out.  But  you  will  recognize  when  they  do  get  back  all  of  the  money  put 
out,  the  stix:k  of  the  company  becomes  theirs  for  services  without  any  actual  cost. 

"Preferred  and  common  stock  are  issued  in  amounts  according  to  the  particular  plan. 
The  preferred  stock  is  generally  sold  as  soon  as  the  earnings  make  this  possible  for  cash, 
which  is  either  profit  or  to  a  considerable  extent  profit  and  the  common  stock  representing 
the  control  of  the  company  and  its  prospects  has  a  material  immediate  \'alue  on  account  of 
this.  Very  often,  a  considerable  part  of  the  preferred  has  to  be  used  for  greasing  the 
wheels.  Up  to  this  point,  with  slight  variations,  the  process  is  as  old  as  the  modern  cor- 
poration." 

Mr.  Cooke  then  describes  the  holding  company  as  the  banker's  next  device 
and  shows  the  part  it  has  played  in  overcapitalization.  At  pages  6  and  7  of  his 
pamphlet,  Mr.  Cooke  says: 

"It  is  the  ne.\t  step — the  formation  of  the  holding  company — which  has  caused  so  much 
criticism.  As  a  device  for  the  injection  of  water  the  efficiency  of  the  holding  company  com- 
pares with  the  high  finance  which  preceded  it  as  a  high  pressure  fire  main  does  to  a  garden 
hose.  Thus,  a  banker  having  the  stock  of  several  companies,  the  aggregate  of  which  pro- 
duces a  considerable  sum  in  dividends,  forms  what  is  known  as  a  holding  company  and  he 
turns  the  stock  which  he  holds  into  this  company  for  what  is  known  as  collateral  trust  bonds, 
and  preferred  and  common  stock.  He  sells  the  bonds,  thereby  getting  cash  for  his  stock 
which  he  turned  into  the  company,  without  losing  control  of  the  individual  company.  There 
are  a  number  of  instances  where  several  small  holding  companies  have  been  turned  into  one 
large  holding  company.     The  end   is   not  yet. 

"The  only  serious  defence  I  have  ever  heard  made  of  this  method  of  fiancing  is  based 
upon  a  belief  in  the  absolutism  of  prii-ate  property,  for  certain  it  is  that  the  capitalization 
of  a  company  under  this  method  of  financing  has  no  relation  whatever  to  values. 

"Of  the  $8,000,000,000  or  more  of  capital,  employed  in  electric,  gas,  street  and  inter- 
urban  railway  companies,  nearly  five  and  a  half  billion  dollars  are  controlled  by  holding  com- 
panies and  their  subsidiary  companies.  Holding  companies  control  76  per  cent,  of  the  two 
billion  dollars  of  capital  invested  in  electric  light  and  power  companies ;  two-thirds  of  the 
one  and  one-third  billion  dollars  in  artificial  gas  companies,  and  two-thirds  of  the  five  billion 
dollars  of  capital  in  street  and  interurban  railway  companies." 

The  early  syndicates  and  private  banking  houses  were  undoubtedly  respon- 
sible for  the  inflation  of  securities  and  the  frauds  perpetrated  on  the  investing 
public.  How  these  niatters  worked  in  the  early  days  of  electricity  is  vividly 
described  by  Mr.  Lauck  at  pages  17  and  18  of  his  brief,  where  he  says: 

"Adventuring  in  the  financial  exploitation  of  street  railways  on  a  large  scale  dates  from 

the  early  eighties,  and  more  particularly  from  the  beginnings  of  cable-line  construction  and 
electrification  of  horse  car  lines,  and  extended  over  a  period  of  more  than  a  quarter  of  a 
century.  During  the  eighties  and  nineties  few,  if  any,  restrictions  through  state  or  municipal 
laws  and  regulations  were  thrown  around  operations  of  this  character,  the  'game'  was  new, 
opportunities  were  innumerable,  and  the  practice  was  almost  universal.  Every  city  had  its 
traction  speculators,  the  public  was  uninformed  or  indifferent,  and,  therefore,  gullible,  and 
enormous  fortunes  were  made  in  a  few  months  or  a  few-  years  of  frenzied  financiering. 
Shrewd  men  were  quick  to  see  the  possibilities  in  this  field,  and,  as  might  have  been  expected, 
a  few  of  the  more  shrewd  and  more  energetic  speedily  associated  themselves  in  groups  or 
syndicates  to  conduct  their  operations  on  a  large  scale  and  to  monopolize  the  opportunities. 
One  such  group  in  its  personnel,  its  methods,  and  its  performances  is  typical  of  all,  and  for 
the  purposes  of  illustration  we  may  cite  what  was  popularly  known  as  the  Widener-Elkins- 
Dolan-Whitney-Ryan  syndicate.  This  group  of  capitalists  and  political  manipulators  was 
not  a  compact  corporation,  it  had  no  legal  existence,  and  did  not  always  act  as  a  unit,  and 
has  been  described  as   'rather  a   federation  of  capital   than  a   well-defined   union.' 

"In  the  course  of  twenty  to  twenty-five  years  these  men,  w-orking  separately  or  together, 
entered  city  after  city  and  State  after  State  until  they  controlled  or  dominated  the  street  railway 
systems  in  New  York,  Chicago,  Philadelphia  and  Pittsburgh,  and  in  at  least  one  hundred 
smaller  cities  and  towns  in  seventeen  states.  The  total  capitalization  of  the  street  rail- 
ways they  thus  controlled  in  1907  exceeded  one  billion  of  dollars,  which  was  considerably 
more  than  one-fourth  of  the  capitalization  of  all  the  street  railways  in  the  United  States  at 
that  time.  Their  power  in  politics  was  as  potent  as  their  exercise  of  it  was  pernicious.  .Their 
profits  in  the  aggregate  are  not  ascertainable  from  authentic  records,  but  may  be  estimated 
at  hundreds  of  millions,   for  these  profits  represented  not  merely  the  water  which  they  in- 


72  Electric  Railway,  Problem 

jected  into  the  securities  of  the  companies  they  controlled,  but  the  market  price — often  two 
or  three  times  the  par  value — at  which  they  were  able  to  unload  these  watered  securities  on 
the  investing  public." 

Things  quieted  down  sontcwhat  after  state  regulation  became  general,  but  the 
early  syndicates  were  succeeded  by  the  modern  holding  companies,  engineering 
and  management  cotporations,  and  investment  banking  houses,  all  of  which  were 
free  from  publicity  of  accounting  and  regulation  by  the  state  public  utility 
commissions.  The  control  and  financing  of  street  railway  companies  became 
more  centralized  than  ever.  The  advantages  of  local  ownership  were  lost,  and  the 
appeal  was  made  from  the  local  investors,  who  might  know  what  was  going  on, 
to  the  great  investing  public  of  the  nation  as  a  whole,  who  probably  would  be 
"innocent"  of  such  knowledge. 

Mr.  Francis  H.  Sisson,  of  the  Guaranty  Trust  Company,  in  discussing  the 
issuance  of  bonds  in  street  railway  financing  transactions,  at  page  345  of  the 
Proceedings,  says: 

"Misht  I  add  that  I  think  one  of  the  fallacies  of  our  public  utility  financinR,  which 
has  been  particularly  true  of  the  railroads  and  in  a  measure  true  of  street  railway  lines,  has 
l)een  the  building  up  of  this  burden  of  debt  (tionds)  all  the  time,  instead  of  making  the  stock 
attractive  so  people  will  buy  it.  We  have  been  piling  up  fixed  charges  instead  of  giving 
these  roads  a  credit  based  upon  earnings  which  would  permit  a  sale  of  stock  to  the  public 
at  a  fair  price.  The  railroad  burden  of  debt  has  been  increasing  ratably  year  after  year, 
because  you  cannot  sell  railroad  stock,  the  public  will  not  buy  it,  because  it  is  not  assured 
of  a   fixed   return. 

"Mr.  Warren:  We  have  a  law  in  Massachusetts  designed  to  provide  for  that,  by  which 
funded  debt  can  be  issued  only  to  the  par  \-alue  of  the  stock,  and  as  the  stock  can  only  be 
issued  at  par.  the  result  has  been  the  piling  up  of  a  floating  debt  which  is  far  more  inimical, 
because  it  invites  a   receivership  over  night. 

"Mr.  Sisson :  A  proper  financial  construction  ought  to  provide  for  a  bonded  obliga- 
tion of  not  more  than  60  per  cent  of  the  real  value  and  the  balance  in  stock." 

Strange  as  it  may  seem,  these  unsound  policies  are  probably  due  in  large 
measure  to  the  fact  that  the  electric  railways  have  come  to  be,  to  a  great  extent, 
a  banker-controlled  industry.  Those  who  have  the  ultimate  say  in  matters  of 
street  railway  policy  from  the  point  of  view  of  the  investors  have  been  dependent 
for  their  profits  and  their  power  upon  the  volume  of  securities  outstanding  and 
the  frequency  with  which  these  securities  were  exchanged  or  refunded.  The 
big  margins  are  made  on  the  bankrupt  or  semi-bankrupt  concerns.  But  in  the 
case  of  the  electric  railways  the  controlling  financial  interests  that  profited  by 
keeping  them  in  a  speculative  and  precarious  condition  carried  their  policy  too 
far,  even  from  their  own  point  of  view.  The  war  came  on  and  the  enfeebled  sick 
man  suddenly  had  fainting  spells,  so  that  the  doctors  who  had  been  keeping 
him  in  condition  to  require  their  services  found  themselves  in  serious  danger  of 
losing  a  lucrative  patient  and  in  danger  even  of  being  called  upon  to  contribute 
to  the  expenses  of  his  obsequies.  Under  these  circumstances,  the  problem  of 
rehabilitating  street  railway  credit  generally  comes  pretty  nearly  to  being  a  prob- 
lem of  restoring  the  dead. 

The  facts  of  street  railway  history  substantially  bear  out  the  testimony  of 
E.y-Governor  Eugene  N.  Foss,  of  Massachu.sctts,  who  at  page  792  of  the  Pro- 
ceedings referred  to  the  evils  of  banker  control,  h.iving  in  mind  particularly  the 
steam  railroads.     He  said : 

"Ranker  management  has  got  to  cease  from  all  of  these  railroads  and  public  service 
corporations.     It  is  a  failure.     Why?     Because  the  temptation  to  wreck  these  roads  and  re- 


Holding  Companies  and  Banker  Control  73 

organize  them  is  too  great.  They  do  it  every  ten  years  or  thereabouts,  and  that  is  what 
happens.  Do  these  railroad  presidents  and  these  railroad  managers  who  own  very  little  of 
the  stock  of  the  companies,  you  will  find — do  they  ever  consult  their  directors  or  stockholders 
in  reference  to  any  measures?  No.  they  go  right  down  to  Wall  Street  and  talk  with  the 
banker  who  is  running  the  proposition.  That  is  the  man  who  appointed  them,  the  banker, 
not  the  directors." 

Another  Massachusetts  witness,  Mr.  Ralph  S.  Bauer,  of  Lynn,  described  his 
study  of  the  development  of  the  Bay  State  lines,  and  paid  his  respects  to  banker 
management  in  no  uncertain  terms.     At  page  1622  of  the  Proceedings,  he  said : 

"In  the  early  days  of  the  street  car  service  there  were  four  competing  companies  in 
Lynn,  each  one  of  them  to  a  very  large  extent  paralleling  or  feeding  into  the  other's  terri- 
tory, a  waste  of  investment,  a  waste  of  service,  a  condition  that  really  forbade,  if  extended 
to  any  great  extent,   a  return  on  the  capital   invested. 

"Then  I  found  that  a  little  later  on  in  the  nineties,  banking  interests  in  New  England 
became  interested  in  the  street  railway  problem,  and  believed  that  by  consolidating  these 
competing  companies  there  could  be  evolved  from  such  consolidation  a  unit  system  which 
would  pay  tremendous  profits.  Securities  were  advertised  and  sold  with  that  statement  con- 
nected with  them,  through  the  most  responsible  banking  houses  in  New  England. 

"It  created  a  state  of  mind  in  everj'one  that  the  street  railway  service  was  a  tremendous 
profit-producing  arrangement,  and  that  all  anyone  had  to  do  was  to  invest  in  securities  and 
in  a  year  or  two  lie  back  and  reap  the  reward." 

Further  on,  at  page  1625  of  the  Proceedings,  Mr.  Bauer  adds: 

"The  banker  control  of  our  street  railways  has  been  the  real  reason  of  their  existing 
during  all  these  years  without  anyone  finding  what  the  real  question  was,  without  anyone 
understanding  the  philosophy  relating  to  the  community  on  the  one  side,  the  car  riders  on 
the  other  and  the  street  railway  system  as  a  factor  in  both.  They  have  regarded  it  purely 
as  a  speculative  dollar-producing  arrangement,  nothing  else.  Their  whole  drive  has  been 
along  that  line.  And  the  time  has  come  now  that  any  rate  of  fare  which  will  pay  a  return 
on  the  capital  invested  is  a  larger  rate  than  that  at  which  the  people  will  ride.  Therefore, 
the  thing  that  presents  itself  to  you  men  as  I  see  it  is  to  recommend  some  readjustment  of 
the  railway  service  that  will  restore  to  the  communities  the  service-producing  possibilities 
that  the   communities  are  entitled  to  have   from  that   factor.'' 

Mr.  John  J-  Stanley,  president  of  the  Cleveland  Railway  Company,  in  his 
testimony  before  the  Commission,  rather  naively  gave  support  to  this  idea  that 
the  investment  bankers  are  primarily  interested  in  concerns  whose  credit  is  poor 
rather  than  in  those  whose  credit  is  good.  Chairman  Elmquist  was  questioning 
him  about  the  benefits  of  the  Cleveland  service-at-cost  plan.  At  page  598  of  the 
Proceedings  the  following  questions  and  answers  appear: 

"The  Chairman :    Do  you  think  this  is  as  good  a  plan  as  can  be  devised  to  take  care  of 
the  companies,  as  well  as  the  public,  during  good  as  well  as  during  bad  times? 
"Mr.    Stanley :    Yes. 

"The  Chairman:    Do  you  feel  that  this  plan  establishes  a  good  credit  for  the  company? 
"Mr.  Stanley:    Without  a  doubt.     I  do  not  know  what  a  banker  is  in  my  business. 
"The  Chairman:    And  creates  an  absolutely  safe  return   for  capital? 
"Mr.   Stanley :    Yes." 

There  can  be  no  doubt  that  the  exceptionally  good  credit  of  the  Cleveland 
Railway  Company  during  these  troubled  times  has  been  due  in  large  part  to  its 
simple  corporate  organization  and  its  direct  relation  to  the  local  investing  public. 
The  Cleveland  Railway  has  been  operated  as  a  public  utility,  not  as  a  stock- 
jobbing enterprise.  That  holding  companies  and  banker  control  have  "made  a 
mess  of  it"  in  trying  to  finance  the  electric  railway  industry  is  reasonably  clear. 
The  record  does  not  show  the  extent  to  which  the  holding  companies  outside  of 
Massachusetts  have  been  overcapitalized,  but  there  is  reason  to  believe  that  they 
have  taken  advantage  of  their  freedom  from  publicity  of  accounts  and  from  regu- 


74  Electric  Railway  Problem 

lation  by  public  service  commissions  to  pursue  the  same  policies  which  the  electric 
railways  themselves  pursued  until  they  were  stopped  by  law. 

The  first  fundamental  cause  of  the  electric  railways'  loss  of  credit  is  un- 
doubtedly their  false  basis  of  capitalization  and  the  improper  use  made  by  them- 
selves or  on  their  behalf  of  the  credit  which  they  had.  Ever  since  the  introduc- 
tion of  electric  traction,  if  not  before  that  time,  they  have  been  "riding  for  a  fall." 

Overcapitalization  served  two  purposes:  it  was  a  means  by  which  pro- 
moters and  speculators  in  the  early  days  were  enabled  in  many  cases  to  build  up 
big  fortunes  through  the  sale  of  securities  that  represented  little  or  no  investment. 
It  was  also  a  means,  under  certain  circumstances,  of  artificially  stimulating  credit 
and  enabling  companies  that  needed  new  capital  for  construction  purposes  to  get 
it,  albeit  upon  difficult  and  disadvantageous  terms.  It  is  reasonably  clear  that 
direct  overcapitalization  of  the  electric  railways  and  the  holding-company  device 
for  securing  additional  capital  that  could  no  longer  be  secured  directly  by  the 
electric  railways,  resulted  in  an  inflation  of  credit  which  in  the  nature  of  things 
led  inevitably  toward  a  day  of  reckoning,  regardless  of  the  occurrence  of  an  un- 
expected emergency  such  as  the  World  War.  Electric  railway  credit  must  needs 
have  been  like  a  cat  with  its  proverbial  "nine  lives,"  to  withstand  the  multiplied 
follies  of  financial  mismanagement  that  have  characterized  the  development 
of  the  industry. 


Chapter  XV 
THE  UNIFORM  FIVE-CENT  FARE 

It  is  apparent  that  the  reasons  already  adduced,  inherent  in  the  spirit  and 
policies  of  the  electric  railway  industry  as  it  has  been  built  up  in  this  country, 
leave  little  to  be  desired  in  accounting  for  the  wrecking  of  credit  that  has  taken 
place.  Still,  to  make  the  picture  complete,  it  is  necessary  to  point  out  a  number 
of  influences,  which  were  in  a  measure  external  to  the  industry,  that  contributed 
to  the  ultimate  result.  I  refer  to  certain  types  of  restrictions  imposed  by  public 
authority  and  to  certain  reactions  of  public  sentiment  which  have  characterized 
the  public  relations  of  the  industry.  Undoubtedly  the  uniform  inflexible  5-cent 
fare  in  its  inception  represented  a  more  or  less  unconscious  conspiracy  between 
the  public  and  the  promoters  of  the  street  railway  business  to  relieve  the  com- 
munities in  their  organized  capacity  from  the  necessity  of  treating  local  trans- 
portation as  a  public  function,  and  to  put  the  business  of  local  transportation  on 
a  basis  that  would  encourage  private  speculation  and  the  exploitation  of  trans- 
portation service  for  private  profit.  The  fixed  5-cent  fare  was  in  the  early  days 
the  very  corner-stone  of  the  towering  structure  of  capital  inflation  built  up  by 
the  promoters  and  manipulators  of  the  industry.  The  fact  that  labor  costs  were 
low,  and  the  hope  that  economies  resulting  from  the  use  of  electricity  as  a  motive 
power  would  make  the  5-cent  fare  an  inexhaustible  gold  mine  in  urban  commun- 
ities, were  largely  responsible  for  the  speculative  spirit  and  the  unsound  policies 
that  characterized  the  industry.  It  was  not  foreseen  in  1896  that  the  time  would 
come  when  the  purchasing  power  of  the  gold  dollar  would  undergo  a  shrinkage 
of  50  per  cent.  The  margin  of  profit  in  a  5-cent  fare  under  the  old  conditions 
was  sufficient  to  encourage  speculation  and  to  promote  overcapitalization  and 
neglect  of  depreciation.  .\t  that  time  the  fixed  5-cent  fare  was  looked  upon  as  a 
guaranty  of  continuously  increasing  earning  power  for  the  street  railway  busi- 
ness, and  in  this  way  the  inflexible  fare,  which  the  street  railway  men  now  regard 
as  a  fatal  limitation  upon  earning  power,  was  an  indirect  means  of  stimulating 
the  abuse  of  street  railway  credit  in  the  ways  which  I  have  already  pointed  out. 

I  have  already  cited  Mr.  Newman's  testimony  where  he  pointed  out  that  in 
the  old  days  bankers  and  promoters  insisted  upon  having  the  5-cent  fare  provi- 
sion in  their  franchises.  It  is  a  strange  irony  of  fate  that  the  5-cent  fare,  which 
was  then  eagerly  sought  for  and  became  the  basis  for  almost  unlimited  specula- 
tion and  inflation  of  securities,  should  later  on,  by  its  inflexibility,  have  been  a 
cause  of  the  destruction  of  credit.  General  Tripp,  after  describing  the  bank- 
ruptcy and  partial  disintegration  of  the  New  York  Railways  Company,  incor- 
porated as  a  reorganization  of  the  old  Metropolitan  Street  Railway  Company, 
expressed  very  emphatically  the  view  that  the  inflexible  fare  was  a  condition  that 

75 


76  Electric  Railway  Problem 

made  the  destruction  of  credit  inevitable,  in  the  war  emergency,  and  that,  if 
retained,  will  make  the  restoration  of  credit  impossible.  Upon  this  point  he 
testified  at  page  151  of  the  Proceedings,  as  follows: 

"Mr.  Warren:  Would  vou  sav  that  that  situation  had  resulted  entirely  from  the  reduced 
purchasing  value  of  the  nickel,  or,  to  state  it  in  another  way,  from  the  increased  cost  of 
labor  and   materials  and  operating  expenses  generally? 

"Gen.  Tripp :    Yes,   sir. 

"Mr.  Warren:  .^nd  which  was  something  which  was  entirely  unforeseen  when  the  re- 
organized property  was   launched?  v 

"Gen.  Tripp:  Yes.  sir.  Of  course,  we  acted,  and  we  were  all  livmg  m  a  fools  paradise 
in  the  street  railway  business  and  \vc  suddenly  woke  up  when  the  war  woke  us  up.  to  find 
that  no  business  which  cannot  increase  its  revenue  under  any  conditions  can  live  or  is  sound. 
The  street  railway  credit,  in  my  opinion,  can  never  l)e  restored  under  the  present  system  of 
relationship  between  the  municipalities  and  the  companies.  It  is  necessary  to  have  a  credit 
on  a  basis  that  is  good  not  for  two  years  or  three  years,  but  for  long  periods.  Capital  stock 
never  falls  due.  Bonds  usually  run  for  from  20  to  30  years,  and  in  order  to  attract  private 
capital  into  that  class  of  securities  hereafter,  there  must  be  a  basis  of  relationship  which 
will  reasonablv  assure  the  investor  that  for  the  period  for  which  they  are  to  use  his  money, 
there  is  a  reasonable  assurance  that  he  will  receive  a  return,  and  that  he  will  be  protected 
against  unforeseen  and  unusual  things,  such  as  this  war  has  brought  alxsut." 

T.ater  on,  at  page  152  of  the  Proceedings,  General  Tripp  expressed  the 
opinion  that  "the  unfortunate  situation  of  the  street  .railway  is  a  *  *  * 
condition  for  which  no  one  is  to  blame,  e.xcept,  perhaps,  the  investors  or  early 
promoters  of  these  companies,  who  could  not  look  far  enough  into  the  future  to 
see  that  it  was  a  fallacy  and  a  fundamental  error  to  invest  money  in  a  project 
where  it  was  impossible  to  increase  your  income."  "However,"  he  continues, 
"that  was  universally  done,  and  we  can  only  regret  it  now."  Mr.  Warren  brought 
the  witness  back  to  this  subject  of  credit  at  page  153,  where  he  expresses  the 
conviction  that  credit  cannot  be  restored  on  the  basis  of  a  fixed  fare.  The  Pro- 
ceedings show : 

"Mr.  Warren:  Reverting  to  the  question  of  credit.  Gen.  Tripp,  do  you  think  that  the 
investing  public  is  now  aware  of  the  effect  of  this  limitation  upon  income  to  such  an  extent 
that  it  will  be  impossible  in  the  future,  with  a  fixed  limit  substantially  higher,  perhaps,  than 
5  cents,  to  rehabilitate  the  credit  of  the  companies? 

"Gen.  Tripp:  It  is  not.  to  my  mind,  so  much  a  question  of  what  th^  individual  investor 
feels  about  it.  The  individual  investor  usually  invests  upon  the  advice  of  his  bankers,  but 
there  is  no  doubt  but  what  the  bankers  of  the  country  arc  thoroughly  familiar  with  and 
thoroughly  alarmed  over  the  situation. 

"Mr.  Warren:    .\n(l  any  remedy  ought  to  involve  the  elimination  of  the  fixed  maximum? 

"Gen.  Tripp:  No  other  solution,  in  my  opinion,  would  be  adequate,  even  if  cities  should 
remit  all  taxes,  and  relieve  the  sta'ct  railway  companies  of  the  burdens  of  paving,  and  all 
charges  of  that  character.  It  would  not  affect  the  real  situation.  In  the  first  place,  the 
amount  involved  is  not  sufficient  to  make  up  the  difference,  and,  in  the  next  place,  it  is  attack- 
ing the  symptoms.  Kven  pennission  to  increase  the  fare  on  the  basis  of  the  present  rela- 
tionship is  entirely  in.ulequate.  That  does  not  solve  the  problem.  The  problem  is  one  which 
requires  a  sound  basis  upon  which  to  rest,  but  which  permits  of  different  solutions  in  different 
localities.  Some  communities  may  require  a  street  railway  scr^-ice  that  the  population  in 
itself  would  rot  warrant,  and  |ierhaps  it  would  be  impossible  to  assess  a  fare  liigh  enough 
to  pro<hirr  sufficient  net.  In  thu-c  particular  localities,  if  they  desire  such  service,  the  remedy 
is  through  taxation  to  support  it.  or  some  other  methods.  Zone  svstems  may  be  desirable 
in  some  cases ;  and  so,  I  think,  the  liasis  must  be  fixed  upon  which  these  \'arious  solutions 
may  rest. 

"Mr.  Warren:  So  it  is  not  only  a  matter  of  possibly  higher  fares,  but  a  matter  of  rela- 
tione l)etween  the  company  and  the  car-riding  public  that  it  serx-es? 

"Gen.  Tripp :    I   think  a  new  scheme  of  relationship  must   first  be  devised." 

Whether  the  5-cent  fare  was  sufficient,  during  the  pre-war  period,  to  pay  the 
full  cost  of  electric  railway  service  appears  to  be  a  question  of  local  conditions 
and  point  of  view      In  vii w  of  what  is  now  being  accomplished  by  the  Cleveland 


The  Five-Cent  Fare  77 

Railway  Company,  the  Interborough  Rapid  Transit  Company,  the  Philadelphia 
Rapid  Transit  Company,  the  Chicago  Surface  Lines,  the  Capital  Traction  Com- 
pany, the  Union  Street  Railroad  Company  of  New  Bedford,  the  Detroit  United 
Railway,  the  Indianapolis  Traction  and  Terminal  Company,  the  San  Francisco 
and  Seattle  Municipal  Railways,  and  certain  other  electric  railway  systems,  it 
cannot  be  doubted  that  prior  to  the  era  of  war  prices  the  5-cent  fare  furnished 
ample  revenue  in  many  localities  to  pay  the  full  cost  of  service  including  full  pro- 
vision for  depreciation  and  a  fair  return  upon  a  conservative  investment.'  Some 
of  the  witnesses  for  the  Electric  Railway  Association  gave  sweeping  testimony 
to  the  effect  that  under  the  5-cent  fare  the  companies  could  not  have  done  these 
things,  but  their  testimony  is  not  convincing  except  with  respect  to  electric  rail- 
way properties  that  were  constructed  and  operated  under  relatively  unfavorable, 
physical  conditions,  or  in  sparsely  populated  districts,  or  under  exceptionally 
severe  franchise  or  tax  conditions.  It  is  surely  demonstrated  by  the  testimony 
and  by  the  supplementary  data  submitted  to  the  Commission  that  the  nickel  is 
a  convenient  coin  and  the  5-cent  fare  a  habit,  but  that  otherwise  there  is  no  logic 
in  a  uniform  rate  of  fare  for  all  communities  alike,  regardless  of  location,  topog- 
raphy, density  of  traffic  and  other  major  elements  entering  into  the  cost  of 
service.  The  fact  that  the  flat  5-cent  fare  had  no  fixed  relation  to  the  cost  of 
the  service  rendered  to  individual  car  riders  or  to  the  average  cost  of  the  service 
rendered  in  particular  communities  was  undoubtedly  an  encouragement  to  specu- 
lation where  the  fixed  fare  was  supposed  to  be  more  than  enough,  and  deterrent 
to  necessary  credit  where  the  fare  was  proven  to  be  too  little.  There  is  great 
force  in  General  Tripp's  contention  that  there  is  little  likelihood  of  electric  railway 
credit  ever  being  fully  restored  on  the  basis  of  an  arbitrary,  fixed  fare,  whether 
it  be  five  cents  or  some  higher  figure.  So  long  as  credit  rests  upon  earning 
power,  and  earning  power  rests  almost  exclusively  upon  passenger  revenue,  the 
fixed,  uniform  fare  is  theoretically  a  broken  reed  for  credit  to  lean  upon.  Prac- 
tically, it  may  serve  as  a  reasonably  adequate  support  in  certain  communities 
where  operating  conditions  are  favorable  and  the  five-cent  psychology  strong. 


Chapter  XVI 
SPECIAL  TAXATION   AND   FRANCHISE   OBLIGATIONS 

Out  of  the  riot  of  speculation  and  overcapitalization  in  the  early  days, 
coupled  with  the  general  belief,  fostered  by  the  policies  of  the  companies  them- 
selves, that  they  were  earning  enormous  profits,  grew  a  spirit  of  jealousy  and 
hostility  on  the  part  of  the  people  who  deemed  themselves  to  be  the  owners  of  the 
public  streets  and  looked  upon  themselves  as  silent  partners  in  the  street  railway 
business,  entitled  to  a  share  in  the  profits  because  of  their  contribution  of  the  rights 
of  way  over  which  the  street  cars  run.  This  jealousy  and  hostility  was  greatly  in- 
tensified by  the  overcrowding  of  cars  and  other  faults  of  service  which  seemed  to 
be  the  result  of  an  arrogant  and  selfish  spirit  on  the  part  of  the  street  railway 
managers,  fostered  by  their  possession  of  a  monopoly  and  by  the  increasing 
public  need  for  the  service  they  rendered.  It  is  now  recognized  by  spokesmen 
of  the  street  railway  companies,  and  by  every  student  of  street  railway  policy, 
that  private  ownership  and  operation  of  this  utility  cannot  be  successful  at  the 
present  or  in  the  future  without  the  existence  of  a  spirit  of  cooperation  between 
the  communities  and  the  companies  that  serve  them.  The  financial  policies  and 
conditions  discussed  in  previous  chapters  of  this  report  developed  not  merely  an 
estrangement  but  a  feeling  of  bitter  antagonism  on  the  part  of  the  public  against 
the  companies.  The  lure  of  prospective  profits  under  the  5-cent  fare  had  un- 
questionably led  street  railway  promoters  into  devious  paths  and  corrupt  prac- 
tices in  their  efforts  to  secure  favorable  franchises  and  beneficial  legislation. 
Reprisals  were  now  in  order.  The  people  found  that  a  franchise,  even  if  cor- 
ruptly granted,  was  irrepealable.  Bribed  aldermen  had  authority  to  give  away 
public  rights  that  the  coninninity  cii  masse  had  no  power  to  recover.  The  public 
realized  that  in  the  power  of  taxation  it  had  a  weapon  by  which  it  could  force 
the  street  railway  companies  to  give  up  some  share  of  their  profits,  even  where 
the  franchises  were  perpetual  and  the  fares  fixed.  In  those  parts  of  the  country 
where  franchises  had  been  granted  for  a  limited  term,  the  public  made  their  re- 
newal the  occasion  for  imposing  upon  the  street  railway  companies  heavy  finan- 
cial burdens  on  the  theory  that  the  cities  should  be  compensated  for  what  were 
considered  to  be  immensely  valuable  grants.  Out  of  these  conditions  and  out  of 
this  feeling  of  resentment,  public  policies  were  developed  that  undoubfedly  im- 
posed upon  the  electric  railway  business  unusual  financial  burdens,  burdens  which 
fell  upon  the  companies  while  they  were  operating  under  the  fixed  fare  and  had 
sufficient  earnings  so  that  they  could  be  compelled  to  render  adequate  service. 
Taxation  becomes  a  habit  with  ]>ublic  bodies  wherever  subjects  of  taxation  are 
discovered  from  which  large  revenues  can  be  derived  without  danger  of  reaction 
at  the  ballot  box.     The  policy  of  laying  burdens  upon  the  electric  railway  industry 

78 


Special  Taxation  79 

gained  a  momentum  that  was  very  little  checked  by  the  change  in  the  financial 
condition  of  the  companies  resulting  from  stricter  public  regulation  and  altered 
economic  conditions.  Even  where  the  arbitrary  limitations  of  the  fixed  maximum 
fare  has  been  removed  in  the  process  of  the  establishment  of  the  policy  of  con- 
tinuous state  regulation,  so  that  taxes  and  franchise  burdens  are  included  in  the 
operating  expenses  and  recognized  as  an  element  of  the  cost  of  service  to  be 
reckoned  with  in  fixing  the  fares  paid  by  the  car  riders,  comparatively  little  has 
been  done  to  relieve  the  electric  railway  industry  from  the  special  taxes  and 
burdens  formerly  imposed.  The  extent  of  these  burdens,  and  perhaps  more  par- 
ticularly the  spread  of  public  antagonism  indicated  by  their  imposition,  were  un- 
doubtedly a  factor  in  the  shrinkage  of  the  companies'  net  earnings  and  the  im- 
pairment of  their  credit.  In  the  era  when  the  street  railways  were  capitalizing 
hopes  the  effect  of  public  antagonism  and  the  public  use  of  the  taxing  power  had 
not  been  properly  discounted. 

Nevertheless  it  does  not  appear  upon  analysis  that  the  efifective  burdens  laid 
upon  the  electric  railway  industry  through  special  forms  of  taxation  and  through 
special  franchise  requirements  are  as  great  as  they  are  sometimes  assumed  to  be. 
The  figures  accompanying  Chart  C-122,  introduced  by  Mr.  James  W.  Welsh,  statis- 
tician of  the  American  Electric  Railway  Association,  show  the  total  amount  of 
taxes  paid  by  the  electric  railways  during  the  census  years  1902,  1907,  1912  and 
1917,  and  the  estimated  amount  of  taxes  paid  during  1918.  The  figures  also 
show,  except  for  the  year  1918,  a  distribution  of  the  taxes  into  two  classes : 
(1)  taxes  on  real  and  personal  property,  and  (2)  taxes  on  earnings,  capital,  etc. 
The  1918  figures  are  estimated  from  the  returns  of  a  large  number  of  companies 
made  to  the  Association.  Mr.  Welsh's  figures,  introduced  at  page  117  of  the 
Proceedings,  to  accompany  Chart  C-122, ^  are  as  follows: 

"Item                                                  1902  1907               1912  1917               1918 

Taxes    (Total)    $13,078,899  $19,775,602  $35,027,965  $45,756,695  $49,496,334 

On  Real  and   Personal   Property    5,835,542  9,464.616      15,658,239  21,804,619  

On  Earnings,   Capital  and   Other 

Taxes    7,243,357  10,310,986      19,369,726  23,952,076  

Per  Cent  of  Operating  Expenses           9.19  7.87               10.55  10.11               9.93" 

It  is  noteworthy  that  the  ratio  of  taxes  to  total  operating  expenses  has  not  in- 
creased very  greatly  since  1902.  It  is  shown  that  during  that  year  taxes  amounted 
to  9.19  per  cent  of  operating  expenses,  while  during  1917  they  were  10.11  per  cent. 
Mr.  Welsh's  estimate  for  1918  indicates  that  although  the  amount  of  taxes  paid 
was  about  $3,760,000  more  than  in  1917,  this  increase  was  proportionately  less 
than  the  corresponding  increase  in  operating  expenses. 

Mr.  Welsh  also  introduced  Chart  C-132  to  show  the  extent  of  the  combined 
burden  of  "paving  and  other  imposts  and  taxes."  Expenditures  other  than  taxes 
are  not  based  upon  the  census  returns,  but  upon  answers  to  a  questionnaire  sent 
out  by  the  Association  "to  determine  the  amount  expended  annually  by  the  electric 
railway  companies  on  paving,  cleaning  and  sprinkling  the  streets,  transportation 
of  municipal  employes,  and  tolls  and  maintenance  of  otherwise  public  bridges, 
etc."  The  figures  accompanying  the  chart  indicate  the  amount  of  taxes  paid,  the 
amount  of  paving  and  other  imposts,  the  gross  earnings,  the  per  cent  of  gross 
earnings  used  in  payment  of  taxes,  and  the  per  cent  of  gross  earnings  required 


80  Electric  Railway  Problem 

for  paving  charges  and  other  imposts  for  each  year  from  1912  to  1918  inclusive. 
The  estimated  figures  are  shown  in  parentheses;  other  figures  being  taken  from 
the  census  reports.  The  figures  introduced  by  Mr.  Welsh  at  page  122  of  the 
Proceedings  are  shown  in  the  table  on  the  opposite  page. 

It  will  be  observed  that,  expressed  as  a  percentage  of  gross  earnings,  taxes 
have  remained  relatively  steadfast  during  the  seven  years  covered  by  these  fig- 
ures. They  represented  5.98  per  cent  of  gross  earnings  in  1912,  and  6.47  per  cent 
of  gross  earnings  in  1918.  The  paving  charges  and  other  imposts  as  estimated 
by  the  American  Electric  Railway  Association  in  terms  of  a  percentage  of  gross 
earnings  showed  a  somewhat  greater  fluctuation,  but  in  this  case  the  percentage 
was  lower  in  1917  than  in  1912,  and  still  lower  in  1918,  based  on  the  Association's 
estimates  for  that  year.  The  total  of  taxes,  paving  charges  and  other  imposts 
combined,  shows  8.55  per  cent  in  1912;  9.38  per  cent  in  1913;  9.68  per  cent  in 
1914;  9.61  per  cent  in  1915;  9.01  per  cent  in  1916;  8.67  per  cent  in  1917,  and 
8.57  per  cent  in  1918.  However,  we  must  not  lose  sight  of  the  fact  that  included 
in  the  paving  charges  and  other  imposts  are  items  which  may  represent,  at  least 
in  part,  items  of  expense  to  the  municipalities  caused  by  the  presence  and  opera- 
tion of  the  electric  railways  and  which,  therefore,  may  be  regarded  as  legitimate 
elements  of  operating  expense,  not  as  special  burdens  imposed  upon  the  street 
railway. 

Prof.  Charles  J.  Bullock,  of  the  Economics  Department  of  Harvard  Univer- 
sity, was  produced  as  a  witness  on  taxation  by  the  American  Electric  Railway  As- 
sociation. His  testimony  was  based  in  part  upon  the  statistics  collected  by  Mr. 
Welsh.     At  page  649  of  the  Proceedings  he  makes  the  following  statement : 

"In  the  year  1917,  according  to  the  U.  S.  Census,  the  electric  railways  of  the  United 
States  paid  taxes  and  other  contrihutions  amounting  to  $63,279,000,  which  may  be  classified 
as   follows : 

Taxes  on  real  and  personal  property   $21,804,000 

Taxes  on  earnings  and  capital  and  other  bases  23,952.000 

Total  taxes         $45,756,000 

Other    public    contributions    17,522.000 

ToUl  ta.xes  and  other  contributions    $63,279,000 

'The  total  payments  for  taxes  and  other  contributions  amounted  in  this  vear  to  8.67 
per  cent  of  the  gross  earnings  of  the  electric  railways.  This  percentage  would  be  moderate 
in  the  case  of  a  business  where  the  gross  receipts,  or  annual  turnover,  amounted  to  two  or 
three  times  the  capital  investment;  but  it  is  exceedingly  heavv  in  an  industn-  where  there 
IS  a  capital  investment  amounting  to  sevet^il  dollars  for  every  dollar  of  annual  gross  receipts." 

Professor  Bullock  advocated  the  theory  of  "equal  taxation"  and  took  the 
position  that  the  electric  railways  ought  to  be  taxed  as  nearly  as  possible  on  the 
same  basis  as  other  industries.  His  analysis  of  the  taxation  policies  of  the 
country  shows  that  in  certain  respects  the  electric  railways  have  been  discrim- 
inated against  and,  as  shown  by  the  statement  quoted  above,  he  indicates  that 
on  account  of  the  low  ratio  of  gross  earnings  to  investment  in  this  industr>' 
taxes  levied  on  the  basis  of  a  percentage  of  gross  receipts  bear  more  heavily 
upon  the  electric  railways  than  upon  most  other  industries.  He  recognizes  that 
some  of  the  public  contributions  which  the  street  railways  have  been  compelled 
to  make  came  from  the  days  when  they  "were  not  regulated  and  frequently 
derived  large  profits  from  the  use  of  the  franchise  which  they  enjoyed."  His 
characterization,  from  the  point  of  view  of  the  theory  of  equal  taxation,  of  the 


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81 


82  Electric  Railway  Problem 

various  taxes  and  special  imposts  levied  upon  the  electric  railways  is  found  at 
pages  643  and  644  of  the  Proceedings,  where  he  says : 

"Now  looking  over  the  taxes  that  street  railways  pay  you  find  that  Federal  income  and 
excess  profit  taxes  so  far  as  they  fall  upon  street  railways  are  perfectly  conformable  to  the 
theory  of  equality  and  ought  not  to  be  removed  unless  there  is  an  emergency  that  justifies  it. 
You  find  that  local  property  taxes  are  in  principle  perfectly  conformable  to  the  theory  of 
equality  and  that  they  ought  not  to  be  removed  unless  there  is  a  very  serious  emergency  that 
justifies  it.  You  find  that  these  miscellaneous  taxes  on  gross  receipts,  capital  stock  and  license 
charges  levied  in  addition  to  property  taxes  are  frequently  more  in  the  aggregate  than  other 
properties  bear.  Sometimes  they  are  not.  Y'ou  will  find  in  various  states — I  have  alluded  to 
the  southern  states,  and  some  of  the  western  states — you  will  find  there  property  subject  to 
special  taxes  and  also  to  pnvilcge  and  license  taxes,  and  under  tiio.sc  conditions  there  is  no 
inequality  in  imposing  similar  charges  on  street  railways.  But  where,  as  in  New  York  or 
Pennsylvania,  you  have  taxation  on  property  and  have  in  addition  a  gross  receipts  tax  or  some 
other  kuid  of  a  tax  that  other  property  docs  not  pay,  you  have  a  departure  from  the  principle 
of  equal  taxation  and  you  have  a  special  taxing  on  transportation  which  is  not  consistent 
with   the  theory   of  equal   taxation. 

"Now  I  come  to  the  miscellaneous  public  contributions  that  I  have  already  alluded  to, 
which  in  the  aggregate  are  so  large,  and  invite  your  attention  to  them.  They  are  an 
inheritance  from  the  past.  They  came  from  the  days  when  street  railways  were  not  regu- 
lated and  frequently  derived  large  profits  from  the  use  of  the  franchise  which  they  enjoyed. 
Under  a  system  of  regulation  of  public  utilities  the  charges  must  be  assumed  to  fall  upon 
the  street  car  rider  and  they  amount  to  a  special  tax  on  the  transportation  industry  in  all 
cases  where  they  exceed  a  figure  which  fairly  represents  the  special  charge  that  the  presence 
of  the  street  railway  tracks  in  the  streets  occasions  the  city. 

"About  that  point,  about  the  amount  of  the  special  expense  to  a  city  occasioned  by  street 
railway  tracks,  there  has  always  Ixjen  difference  of  opinion.  The  companies  have  been  in- 
clined to  think  that  the  presence  of  the  tracks,  at  least  under  modem  conditions,  did  not  occa- 
sion great  expense,  and  the  wearing  out  of  the  pavement  and  the  surface  was  due  to  the  use 
of  the  tracks  by  other  vehicles  than  the  cars.  The  cities,  on  the  other  hand,  have  undoubtedly 
made  this  theory  of  charging  for  upkeep  of  the  streets  an  excuse  for  levying  special  taxes 
on  the  transportation  industry  far  in  excess  of  the  legitimate  charges  that  the  users  of  street 
cars  should  pay.  The  correct  jirinciple  seems  to  be,  however  hard  it  may  be  to  apply  it,  that 
any  special  damage,  any  siHjcial  extra  expense  for  upkeep  of  streets  under  normal  conditions 
may  very  properly  be  put  upon  the  street  car  riders.  It  should  be  considered  just  like  an 
equal  amount  of  tax  similar  to  that  which  other  similar  enterprises  pay,  and  the  car  riders 
should  pay  it.  Anything  Ix-yond  that  point  under  normal  times  violates  the  principle  of 
equality  in  taxation  and  in  a  crisis  like  the  present  is  in  every  way  objectionable.  A  thorough 
revision  of  those  charges  in  all  cases  where  they  exceed  a  fair  charge  for  extra  cost  of  upkeep 
of  streets  would  seem  to  be  one  of  the  things  needed." 

Professor  Bullock's  suggestions  as  to  the  best  way  to  bring  about  a  modi- 
fication of  the  public  burdens  of  the  electric  railways  are  full  of  interest.  At 
pages  644  and  645  of  the  Proceedings,  he  says : 

"1  suggest  first  the  revision  of  these  special  charges.  They  used  to  be  a  means  of  securing 
to  the  public  treasury  a  part  of  the  frequently  excessive  profits  of  unregulated  monopolies. 
They  are  tixlay  a  special  charge  on  the  industry  of  railway  transportation  and  they  are  not 
consistent   with  the  principle  of  equal  taxation. 

"I  suggest  in  the  next  place  that  the  other  special  taxes  levied  by  the  states,  the  addi- 
tional t.ixcs,  gross  receipts  and  capital  stock  and  licenses  ought  also  to  be  reconsidered  and  in 
so  far  as  they  lead  to  a  burden  of  taxation  on  street  railways  exceeding  that  borne  by  other 
business  enterprises,  thev  should  Ix-  reduced  or  abolished. 

"I  suggest  in  the  Ihinl  place  that  relief  from  the  ordinary  taxes  imposed  upon  property 
ought  to  he  the  last  remedy.  It  can  t)c  justified  only  upon  the  ground  of  extreme  emergency 
and  the  failure  of  other  relief  measures.  Ilcfore  you  reduce  the  ordinary  taxes  levied  on 
proKrty  you  should  raise  your  fares  to  the  maximum  point  that  is  practicable,  looking  at  the 
mailer  from  the  revenue  result.  The  industry  should  not  Ix;  relieved  of  the  ordinary  property 
taxes  which  other  property  pays  except  as  a  last  resort.  In  some  cases,  apparently,  we  are 
aUiiit  at  that  point.  The  increase  of  fares  in  my  own  slate  has  certainly  reached  the'  revenue 
point  and  the  revenue  result  is  somewh.Tl  disappointing.  We  verv  likelv  liave  got  to  give  relief 
in  taxation  if  we  want  to  keep  a  good  many  of  our  street  railroad  tracks  down. 
•         •*****• 

"I  suggest  in  the  next  place  that  if  relief  is  to  be  given  from  the  property  tax  it  would 
be  better  not  to  repeal  the  lax  but  to  suspend  its  operation  for  a  term  ot  years  and  to  provide 
for  an  income  tax  on  the  companies  during  that  interval,  •  *  •  ♦  a  tax  on  net  income,  if  there 
are  any  companies  that  are  prosperous.    We  have  one  company  in  Massachusetts,  if  I  remem- 


Special  Taxation  83 

ber,  that  was  prosperous,  or  was  prosperous  six  months  ago;  at  least  it  was  not  unprosperous. 
If  any  companies  are  earning  a  substantial  amount  of  net  income  they  might  pay  a  moderate 
income  tax.  This  substitution  for  a  term  of  years  of  a  tax  on  net  income  for  a  tax  on 
property  would  maintain  the  principle  that  street  railways  ought  to  be  taxed,  and  it  would, 
as  the  industry  revives  and  begins  to  see  better  days,  bring  in  a  normal  contribution  to  the 
public  treasury. 

"I  finally  suggest  that  if  the  Federal  Government  is  to  lead  the  way,  reduction  might 
very  well  be  made  or  total  exemption  might  very  well  be  granted  from  the  Federal  income 
and  excess  profits  taxes.  The  revenue  sacrifice  by  the  repeal  of  those  taxes  would  be  a  small 
thing  for  the  Federal  Government.  The  Federal  Goveniment  by  a  very  small  sacrifice 
can  afford  substantial  relief.  For  the  state  and  local  governments  to  set  aside  their  property 
taxes  means  a  comparatively  large  sacrifice   for  a  particular  locality." 

It  is  undoubtedly  true  that  the  taxing  and  other  public  burdens  levied  upon 
the  electric  railway  companies  are  far  from  uniform  in  the  different  jurisdictions, 
and  that  in  some  jurisdictions  these  burdens  are  extremely  heavy.  It  appears 
from  the  testimony  that  Rhode  Island  furnishes  a  good  illustration  of  this  fact. 
Mr.  Zenas  W.  Bliss,  Chairman  of  the  Rhode  Island  State  Tax  Commission,  one 
of  the  receivers  of  the  Rhode  Island  Company  appointed  at  the  suggestion  of  the 
Attorney  General  of  the  State,  and  the  Chairman  of  the  Special  Commission 
which  submitted  a  report  on  the  affairs  of  the  Rhode  Island  Company  to  the 
General  Assembly  in  March,  1918,  appeared  before  the  Commission  and  de- 
scribed the  complicated  system  of  taxation  in  Rhode  Island.  His  description  of 
the  taxes  to  which  the  Rhode  Island  Company  is  siibject  is  found  at  page  1196 
of  the  Proceedings,  where  he  says : 

"The  Rhode  Island  Company  pays  a  property  tax,  that  is.  upon  its  real  estate  and  tangible 
personal  property,  in  all  of  the  municipal  jurisdictions  in  which  it  operates.  It  is  also  liable 
to  pay  a  franchise  tax  in  each  municipal  jurisdiction.  These  franchise  taxes  are  somewhat 
controlled  by  the  general  law,  in  that  it  limits  them  both  up  and  down.  In  some  municipali- 
ties they  are  not  allowed,  under  the  general  law,  to  charge  less  than  a  certain  per  cent.  In 
others  they  are  allowed  to  charge  up  to  a  certain  per  cent. 

"There  is  a  rather  peculiar  condition  in  some  of  our  towns,  where  the  town  is  divided 
into  fire  districts.  They  have  delegated  to  them,  these  districts,  the  taxing  power,  and  so 
they  put  on  a  tax  in  addition  to  the  regular  municipal  tax,  based  upon  the  local  municipal 
valuation.       So  that,  in  many  towns,  the  railroad  company  has  to  pay  two  property  taxes. 

"The  state  imposes  a  2  per  cent  gross  receipt  franchise  tax  and  also  a  1  per  cent  gross 
receipt  tax  which  is,  or  at  least  has  been,  up  to  the  present  time,  considered  a  property  tax 
in  lieu  of  any  tax  upon  the  stocks  and  bonds,  securities  and  other  intangible  property  in  the 
corporation  in  the  hands  of  the  holder  or  owned  by  the  corporation  itself. 

"The  City  of  Providence  imposes  a  franchise  tax  of  5  per  cent  upon  the  gross  receipts 
of  this  corporation  within  the  city  limits,  that,  in  addition  to  the  taxes  imposed  by  the  state, 
making  8  per  cent  tax  upon  the  gross  receipts  of  the  Rhode  Island  Company  within  that  juris- 
diction. Of  course,  that  is  the  largest  jurisdiction,  so  far  as  receipts  are  concerned,  and 
about  65  per  cent  of  the  total  gross  receipts  of  the  company  are  collected  within  the  municipal 
boundaries   of   the   City  of   Providence. 

"I  have  not  the  figures  brought  down  exactly  to  date,  but  the  last  available  information 
is  to  the  effect  that  the  total  taxes  imposed  upon  this  company  are  approximately  12^  per 
cent  of  the  gross  receipts.  It  is  one  of  the  heaviest  taxed  public  utilities  that  I  know  of  in 
the  country ;    and  of  course  the  taxation  is  very  excessive." 

Mr.  W.  E.  Creed,  counsel  for  the  San  Francisco-Oakland  Terminal  Railways 
Company,  which  operates  the  traction  lines  in  nine  cities  on  the  east  side  of 
San  Francisco  Bay,  and  also  the  trans-bay  service  from  Oakland,  Berkeley  and 
Alameda  to  San  Francisco,  testified  that  the  condition  of  the  trans-bay  lines  was 
extremely  precarious,  and  in  this  connection  he  called  particular  attention  to  the 
effect  of  special  taxes  and  paving  burdens.  At  pages  884  and  885  of  the  Pro- 
ceedings, he  said : 

"I  regard  the  situation  there  on  the  east  side  of  the  bay  as  extremely  hazardous  for  the 
continuance  of  the  service.     I   feel  the  death  rattle  is  in  the  throat  of  those  companies  and 


84  Electric  Railway  Problem 

that  the  only  relief  which  will  be  of  any  ser\-ice  is  immediate  relief.  The  company  cannot 
wait  for  a  complete  linal  and  i)erfected  solution.  It  must  have  more  money  to  continue  that 
service. 

"The  difficulties  on  the  east  side  of  the  bay  under  which  the  company  has  struggled  are 
common  to  all  of  California.  These  difficulties  as  I  see  them  are,  first,  the  5'4  per  cent  state 
franchise  tax  on  gross  revenues,  and  that  5J-4  per  cent,  of  course,  acts  as  a  reducer  of  every 
increase  in  revenue.  Secondly,  the  old  franchise  ta.xes  which  we  collect  under  the  Broughton 
act,  which  I  should  say  approximately  average  around  2  per  cent;  they  amount  to  1  per  cent 
under  extensions,  but  I  think  on  an  average  they  would  amount  to  2  per  cent,  taking  in  all 
cases.  Then  the  paving  tax.  This  situation  has  occurred  in  several  places  in  California. 
The  pavement  which  is  perfectly  good  for  ten  years  has  been  changed  by  the  municipal 
authorities  to  very  high  class,  the  pavement  lx;ing  ordered  is  the  ver)-  best  class  of  pavement. 
Now  that  has  resulted  in  abandonment  of  pavement  which  had  Ikvu  paid  for  by  the  traction 
companies,  the  investment  of  a.  tar  larger  sum  of  money  in  the  most  modern  approved  pave- 
ment. That  has  l)een  a  very  .'-erious  burden  to  the  Traction  Division  on  the  east  side  of  the 
bay,  and  also  to  the  Key  Division,  because  there  never  was  any  reserve  to  take  care,  call  it 
depreciation  reserve  or  whatever  you  want  to,  of  that  abandonment  of  pavement  which  had 
an  assumed  life,  we  will  say,  of  ten  years  to  run,  and  yet  it  has  been  replaced  by  more  ex- 
pensive pavement  and  an  absolute  loss  of  the  ten  years  of  service  of  the  old  pavement  borne 
by  the  comiany,  and  if  was  an  absolute  capital  loss." 

It  should  not  be  inferred  from  Mr.  Creed's  testimony  that  heavy  taxes  and 
pavinjj  obligations  are  the  only  cau.-;es  of  the  present  financial  difficulties  of  the 
San  Francisco-Oakland  Terminal  Railways.  For  several  years  prior  to  the  in- 
crease in  fares  the  traffic  and  revenues  on  this  system  remained  practically  sta- 
tionary, and  the  company  has  been  before  the  California  Railroad  Commission 
more  than  once  during  this  period.  The  commission  in  its  decision  of  May  24, 
1915,  found  that  this  company  had  a  net  capitalization  of  $45,457,000,  consisting 
of  $28,175,000  of  stock.  aii<r$17.2S2.000  of  bonds:  that  the  total  cash  realized 
from  the  issuance  of  these  securities  was  only  $13,1%,705.12;  that  stock  of  the 
par  value  of  $18,794,738.41  was  issued  against  "intangible  property,"  and  that 
the  reproduction  cost  less  depreciation  as  of  June  30,  1914,  including  multiples, 
cost  of  acquisition,  and  interest  during  construction  as  applied  to  operative 
lands  was  $23,641,893.30.  These  matters  are  set  forth  in  Decision  No.  2412  of 
the  "Report  of  Decisions  of  the  Railroad  Commission  of  California"  at  pages 
4  to  6  and  39  and  40.  On  August  11.  1919.  the  California  Railroad  Commission, 
in  an  order  permitting  certain  increases  of  fares  in  addition  to  increases  previously 
authorized,  said : 

"It  has  iK-on  re|>caledly  pointed  out  by  this  Commission  that  the  only  permanent  remedy 
for  the  finaiu-ial  ditliculties  of  this  company  is  a  thorough-going  reorganization  of  its  finances. 
As  long  as  the  Key  .System  rests  on  the  present  unsound  financial  structure,  it  is  bound  to 
continue  in  financial  difficulties  in  the  future  as  it  has  in  the  past.  Tlic  rate  increases  will 
not  cfTect  a  complete  or  permanent  remedy  of  this  situation.  If  it  were  practicable  to  do 
so,  we  would  make  reorganization  one  of  the  conditions  of  this  order." 

.■\s  a  matter  of  fact,  the  taxes  paid  by  the  San  Francisco-Oakland  Terminal 
Railways  Company,  at  least  during  recent  years,  have  not  been  out  of  propor- 
tion to  the  average  taxes  paid  by  the  electric  railways  of  the  country,  as  will  be 
seen   by   the   following: 

,.  Per  Cent  of 

'  *■'"■  Gross  Taxes  to  Gross 

hntird  June  so                                   Operating  Rerenue  Taxes  Operatmii  Revenue 

•'"•' S-4..'^47..W)S  JJl.lMn.Ol  4  7 

!'"•» 4..';f).MI.V.M  .'.W.SR4..y  5  24 

•915 4..1.vV,'<')l  .")  J.M  SS2.0I  5  76 

\9\6 4.417.847.89  264.992.27  6.0 

'""•■•.- 4.4I6.J9829  268,.W.36  0.08 


Special  Taxation  85 

It  will  be  observed  that  during  the  period  from  1913  to  1917  the  taxes  increased 
considerably  faster  than  the  company's  gross  revenue,  although  in  1917  the  taxes 
were  only  6.08  per  cent  of  the  gross  operating  revenues,  which  is  slightly  less  than 
the  average  for  the  entire  country  as  shown  by  the  census  report.  The  California 
Railroad  Commission's  order  of  August  11,  1919,  shows  that  during  the  ten- 
months  period  from  September  1,  1918  to  June  30,  1919,  while  increased  fares 
were  in  elTect  on  this  company's  lines,  the  gross  operating  revenue  was  $4,654,465 
and  the  taxes  were  only  $220,281,  or  4.73  per  cent  of  the  gross  operating  revenue. 
Figures  are  not  available  to  show  the  amount  of  paving  charges  and  other 
special  imposts  borne  by  this  company,  but  the  tax  figures  seem  to  indicate  that 
Mr.  Creed  in  his  testimony  overestimated  the  importance  of  this  particular  factor 
in  the  financial  troubles  of  the  company  for  which  he  spoke. 

Mr.  Harlow  C.  Clark,  a  witness  for  the  American  Electric  Railway  Asso- 
ciation, called  attention  to  another  point  that  is  of  considerable  importance  in 
connection  with  a  discussion  of  the  effect  of  special  franchise  obligations  upon 
the  credit  of  the  electric  railways.  In  the  valuation  of  street  railway  properties 
for  the  determination  of  the  fixed  capital  to  be  recognized  in  resettlement  fran- 
chises, acrimonious  controversies  have  frequently  arisen  with  respect  to  the  dis- 
position of  the  item  of  paving.  The  cities  often  object  to  this  item  on  the  ground 
that  the  pavements  are  public  property,  notwithstanding  the  fact  that  the  com- 
panies may  have  been  called  upon,  under  the  provisions  of  their  franchises,  to 
install  the  pavements  in  and  about  their  tracks  at  their  own  expense.  At  page 
909  of  the  Proceedings,  Mr.  Clark  says : 

"If  you  will  look  into  the  capitaliEation  account  of  those  companies  you  will  find  a  very 
large  amount  of  capital  which  is  there  because  the  investments  in  paving  and  other  municipal 
requirements,  and  which  are  fixed  charges,  are  now  paid  by  these  companies.  I  have  in  mind 
that  when  the  Rhode  Island  Company  was  valued  by  a  commission  appointed  by  the  legislature, 
it  was  discovered  that  almost  one-tenth  of  its  capitalization  was  due  to  payments  made  on 
account  of  paving  and  other  requirements  of  that  kind." 

New  York  City  is  peculiar  in  that  it  still  has  a  large  number  of  operating 
companies.  With  the  partial  disintegration  of  the  New  York  Railways  system 
and  the  Brooklyn  Rapid  Transit  surface  lines  the  number  of  these  operating 
companies  has  recently  been  increased.  At  the  present  time  there  are  approxi- 
mately thirty-five  separate  companies.-  The  aggregate  operating  revenue  of  all 
these  companies  for  the  year  ended  June  30,  1919,  was  $110,191,682.33,  and  the 
total  amount  of  street  railway  taxes  accrued  during  that  year  was  $7,909,678.82 
or  7.18  per  cent.  One  of  the  heaviest  taxes  in  New  York  is  the  special  franchise 
tax  which  applies  to  the  structures  of  the  electric  railway  companies  found  in 
the  public  streets  and  the  intangible  rights  under  which  these  structures  are 
maintained  and  operated.  The  burden  of  taxation  in  terms  of  a  percentage  of 
gross  revenues  shows  wide  variations  among  the  different  companies  operating 
in  New  York  City,  as  will  be  seen  from  the  table  on  the  following  page,  com- 
piled from  the  Public  Service  Commission's  Summary  for  the  year  ended  June 
30,  1919: 


86 


Electric  Railway  Problem 


Street  Railway  Revenues  and  Taxes  in  New  York  City 


Total 
Street  Railway 
Company  Operatimj  Revenue 

Hudson  &  Manhattan  R.  R.  Co $  5,633„^S7.25 

Inlcrborough  Rapid  Transit  Company 

Subway  division    24,632,207.96 

Elevated   division    18.575.001.87 

New  York  Consolidated  R.  R.  Co 15.667.098.37 

Brooklyn  Heights  R.  R.  Co 8.621.560.27 

Bridge   Operating   Company    222.326.90 

Brooklyn,  Queens  Co.  &  Suburban  R.  R.  Co..  1.356.871.11 

Coney  Island  &   Brooklyn  R.   R.  Co 1.871.734.97 

Coney  Island  &  Gravescnd  Rv.  Co 91.802.60 

Nassau    Electric   R.    R.  Co 4.965.758  83 

South    Brooklyn    Ry.    Co 845.497.96 

New    York    Railways   Co 11.8()3.601.14 

Second   .•X venue    R.    R.    Co.,    Receiver 842.749.71 

Brooklyn  &  North  River  R.   R.  Co 193.331.48 

Third  .-Vve.   Ry.  Co.    (incl.    Kingsbridge   Ry.)  3.887.170.28 

Dry  Dock.  E.  B'way  &  Battcrv-  R.  R.  Co....  530.060.80 
42nd  St.,  Manhattanville  &  St.  Nicholas  Ave. 

Ry.  Co.    (incl.  3rd  .Avenue  Bridge  Co.)..  1,705.121.07 

Belt    Line    Corporation    562.869.79 

,Mid-Crosstown    Ry.    Co 36.781.10 

New  York  City   Inlcrborough  Ry.  Co 709.246.84 

Pelham   Park  &   City    Island    R.   R.  Co 19.012.f>5 

Southern  Boulevard  R.   R.  Co 224.847.48 

Union   Rv.  Co.   (incl.  Bronx   Traction  Co.)..  2.767.735.84 

Westchester    Electric    R.    R.   Co 623.005.15 

New   York   &   Queens   Co.    Ry.   Co 1.044..).?4.43 

Long   Island   Electric   Ry.  Co 237.287.44 

New  York  &  Long  Island  Traction  Co 566.163.28 

Ocean   Electric  Railway  Co 174.684.')4 

New  York  &   North   .Shore  Traction  Co 157.705.40 

Manhattan  &•  Queens  Traction  Corp.,  Rec'vers  270.1.=i().12 

Richmond  Light  &   R.   R.  Co 491.577.64 

.Statcn   Island   Midland   Rv.   Co 307.534.04 

Southficid    Bcich    Rv.    Co 16.370.60 

Manhattan    Bridge    Three-Cent    Line    153.110.78 

lUush    Terminal    R.    R.    Co 252.943.17 

Van  Bnmt  Street  &  Erie  Basin  R.  R.  Co. . . .  71.169.37 

.Ml  Companies  in   New  York  City    $110,191,682.33 


Per 

centage  of 

Stre, 

:t  Railway 

Taxes   to 

Street 

Operating 

Railivay  Taxes 

Revenue 

$  330.698.80 

5.98 

882.175.29 

3.58 

2.251,981.61 

12.12 

864.451.10 

5.52 

756.905.46 

8.78 

11.868.86 

5.34 

74.112.70 

5.46 

115.088.12 

6.15 

4.767.49 

5.19 

187.735.87 

3.78 

80.580.76 

9.53 

1,248.196.88 

10.S2 

85.920.97 

10.20 

11.509.61 

5.95 

286.295.33 

7.37 

48.849.91 

922 

112.784.51 

6.61 

42.961.50 

7.63 

2.749.14 

7.47 

50.755.59 

7.16 

2.718.63 

14.30 

13.559.37 

6.03 

183.663.86 

6.64 

30.238.21 

4.85 

58.481.97 

5.60 

12.591.68 

5.31 

29.544.96 

5.22 

6.027.70 

3.45 

12.698.82 

8.05 

12.456  88 

4.61 

27.112.89 

5.52 

18.833.68 

6.12 

2,551.30 

15.58 

23.686.86 

15.47 

14.161.85 

5.60 

4.960.66 

6.97 

$7,909,678.82 

7.18 

For  the  year  ended  June  30.  1918.  the  aggregate  taxes  of  the  electric  railways 
of  New  York  City  amounted  to  $8,232,321  as  against  total  railway  operating 
revenues  of  $103,500,189.  Tlie  taxes  were  7.95  per  cent  of  the  revenues.  The 
Intcrhorough  Rapid  Transit  Company's  1918  taxes  on  account  of  the  subways 
were  $1,649,411,  almost  double  the  amount  for  1919.  It  appears  that  the  Inter- 
borough  Rapid  Transit  Company's  federal  taxes  for  the  year  1918.  just  before 
its  profits  disappeared,  were  so  great  as  to  cause  a  taxation  "peak"  in  that  year 
for  ail  tiic  electric  railways  of  New  York  City  taken  together. 

The  census  figures  show  that  the  aggregate  revenues  of  the  electric  railways 
of  the  country  from  railway  operations  were  $650,000,000  in  1917.  The  final 
figure,  $73O.(XX).0OO,  used  in  the  testimony,  was  reached  only  by  the  inclusion  of 
nearly  $60,000,000  of  revenues  from  auxilian,-  operations  and  over  $20,000,000 


Special  Taxation  87 

of  non-operating  income.  As  we  have  seen,  several  witnesses  called  attention 
to  the  fact  that  several  dollars  of  capital  are  required  in  the  electric  railway 
business  to  produce  one  dollar  of  annual  revenues.  If  we  were  to  take  the  net 
capitalization  including  real  estate  mortgages  and  floating  debt  as  the  measure 
of  the  investment  in  1917,  we  should  have  $5,056,554,324  of  capital  producing 
$650,149,806  of  revenue,  or  7.85  to  1.  Taxes  amounting  to  6.27  per  cent  of 
gross  earnings  would,  on  this  basis,  amount  to  only  %o  of  one  per  cent  on  the 
investment;  and  the  8.47  per  cent  of  gross  earnings  representing  taxes  and 
paving  and  other  imposts  taken  together  would  be  only  l.OS  per  cent  on  the 
capital.  This  suggests  the  conclusion  that,  after  all,  the  electric  railways  are 
not  very  heavily  taxed  on  the  value  of  their  property,  or  else  that  their  net 
capitalization  is  subjected  to  an  enormous  shrinkage  to  get  it  down  to  the  basis 
of  taxable  value.  What  a  conservative  investment  means  to  street  railways 
and  to  their  credit  is  clearly  indicated  by  the  contrast  between  the  situation  in 
Cleveland  in  this  respect  and  that  in  the  rest  of  the  country.  The  earnings 
of  the  Cleveland  Railway  in  1919  were  approximately  44  per  cent  of  capital 
value,  while  the  earnings  of  the  electric  railways  of  the  country  at  large  were 
only  12.86  per  cent  of  the  net  capitalization  as  found  by  the  Census  Bureau. 
This  is  31.4  to  1  in  favor  of  Cleveland.  It  indicates  either  gross  overcapitalization 
in  the  country  at  large  or  tremendous  street  railway  earning  power  in  Cleveland 
as  compared  with  other  cities. 

In  any  case,  taxes  are  the  enemy  of  credit,  for  they  fight  with  capital  charges 
for  what  is  left  of  the  revenues  after  operating  expenses  are  paid,  and  the  larger 
the  capital  in  proportion  to  annual  earnings  the  more  sensitive  will  credit  neces- 
sarily be  to  every  increase  in  taxes  and  special  imposts. 


I 


Chapter  XVII 

USE  OF  POLICE  POWER  TO  COMPEL  MORE  AND 
BETTER  SERVICE 

About  fifteen  years  after  the  introduction  of  electric  traction  the  public 
gradually  awoke  to  the  fact  that  it  could  use  the  police  power  as  well  as  the 
taxing  power  to  bring  the  electric  railways  to  time.  It  came  to  appreciate  that 
with  all  the  privileges  and  guaranties  which  they  had  obtained  through  their 
charters  and  their  franchises,  they  were  still  under  legal  obligation  to  render 
adequate  service  and  that  they  could  be  forced  to  give  such  service  as  a  condition 
of  the  monopoly  privileges  they  enjoyed.  The  result  was  the  passage  of  public 
utility  laws  and  ordinances  and  the  creation  of  public  service  commissions  with 
power  to  fix  and  enforce  standards  of  service.  It  had  long  been  an  axiom  in  the 
street  railway  business  that  the  profits  were  in  the  straps,  but  the  public  began 
insistently  to  demand  seats  instead  of  straps  and  refused  to  recognize  the  right 
of  the  companies  to  exploit  the  straps  for  profit.  While  it  was  not  found  prac- 
ticable to  compel  the  companies  to  supply  a  seat  for  every  passenger  during  the 
rush-hour,  nevertheless  standards  of  ser\'ice  were  established  which,  under  the 
conditions  of  the  most  congested  traffic,  required  the  companies  to  move  as 
many  cars  during  the  rush  hours  as  the  track  facilities  would  permit.  The  public 
also  insisted  on  the  equipment  of  cars  with  vestibules  for  the  protection  of  the 
motormen  and  upon  better  heating,  lighting  and  ventilation  for  the  comfort  and 
convenience  of  the  passengers. 

The  extent  to  which  street  railway  service  has  been  brought,  at  least  theoreti- 
cally, under  public  service  commission  control  is  well  illustrated  by  the  testimony 
of  Mr.  W.  D.  George,  one  of  the  receivers  of  the  Pittsburgh  Railways  Company, 
at  page  306  of  the  Proceedings,  where  he  says: 

"I  think  the  piibHc  scrA'ice  laws  of  the  different  states  have  very  well  covered  that.  In 
the  State  of  I'eniisylvania,  it  is  very  effective.  We  cannot  move  in  the  manaBemeiit  of  the 
company  in  I'ittsburgh  without  complaint  being  resistered  by  the  City  of  Pittsburgh  before 
the  public  .service  body  of  the  State.  They  tell  us  to  put  on  more  cars.  If  some  citizen 
in  some  community  complains  of  the  ser\'icc  that  is  afforded  that  particular  community,  he 
has  a  right  to  be  heard  iKfore  the  Public  Service  Commission,  and  they  say  whether  we 
shall  put  that  service  on,  or  whether  we  shall  not  put  that  service  on." 

A  particularly  bitter  complaint  against  the  policies  that  have  been  pursued 
by  public  service  commissioners  in  their  relation  to  the  electric  railways  was 
voiced  by  Mr.  James  L.  Qiiackciibush,  General  Counsel  of  the  Intcrborough  Rapid 
Transit  Company,  who  followed  Ex-Govemor  Foss  of  Massachusetts  on  the 
stand.  After  stating  that  a  public  service  commission  has  existed  in  New  York 
for  twelve  years  and  that  the  troubles  arising  from  state  commission  control 
arc  not  "with  the  law,  but  with  its  administration,"  Mr.  Quackenbush  says  at 
pages  817  and  818  of  the  Proceedings: 


Police  Power  and  Improved  Service  89 

"The  first  time  that  anything  has  been  done  by  the  PubHc  Service  Commission  in  the 
First  District,  which  is  the  New  York  City  District,  of  the  slightest  benefit  to  tlie  railroads, 
was  done  last  week  by  Commissioner  Nixon.  Since  the  first  day  of  July,  1907,  down  to  the 
first  day  of  July,  1919,  I  have  been  in  daily  contact  with  the  administration  of  the  Public 
Service  Commission  in  the  First  District,  and  I  cannot  now  recollect  a  single  transaction  that 
has  been  of  the  slightest  benefit  to  the  railroads  under  their  jurisdiction. 

"Now,  the  trouble  has  been  that,  instead  of  the  members  of  the  commissions  carrying 
out  the  theory  of  Gov.  Hughes  in  the  Session  of  1907,  when  the  Public  Service  Commission 
Law  was  first  enacted,  namely,  that  the  commission  would  be  a  tribunal,  impartial  and 
fair,  between  the  industrj-  and  the  public,  that  it  would  be  a  means  of  the  prevention  of  any 
further  prejudice  against  the  industry  on  the  part  of  the  public,  that  it  would  ascertain  the 
truth  and  tell  the  people  the  truth,  that  the  people,  learning  the  truth,  would  be  educated  up 
to  carrying  out  what  is  always  the  desire  of  the  people — to  do  justice — that  function  com- 
pletely  and  absolutely   failed." 

A  little  farther  on  Mr.  Ouackenbush  expresses  sharp  disagreement  with  the 
testimony  of  Mr.  Foss.  He  alleges  that  the  public  service  commissions  in  New 
York  have  failed  to  give  the  companies  proper  protection,  and  at  page  819  of 
the  Proceedings,  he  says : 

"In  other  words,  it  has  been  a  failure  on  the  part  of  individuals  to  recognize  that  they 
were  there  as  protectors  of  the  people  who  had  their  investments  there.  I  go  further  than 
that.  I  say  that  the  Public  Service  Commission  regulation  in  New  York  City  failed  because 
it  did  not  courageously  put  a  stop  to  the  prejudice  that  was  shown  by  the  former  Governor 
of  Massachusetts  here  this  morning. 

"Now.  I  challenge,  so  far  as  it  relates  to  the  City  of  New  York,  the  accuracy  of  every 
statement  made  by  that  gentleman.  There  is  no  warrant  for  it,  and  yet  it  exists,  and  it 
exists  solely  and  only  because  those  men  who  were  in  a  position  all  those  years  to  know 
the  truth  and  did  know  the  truth,  kept  the  truth  to  themselves  and  did  not  convey  it  to  the 
public   whom  they   represented. 

"From  the  time  that  the  commission  took  office,  on  July  1,  1907,  down  to  this  act  of 
Commissioner  Nixon,  the  whole  problem  was  to  control  the  outgo  of  the  utilities,  and  no  heed 
or  regard  was  paid  to  their  income  whatever.  Notwithstanding  that  the  surface  lines,  of  the 
New  York  Railways  Company,  were  going  down-hill,  were  going  fast  towards  a  receiver- 
ship last  year;  notwithstanding  that  we  warned  them  of  it,  advised  them  of  it,  that  our 
monthly  reports,  quarterly  reports,  annual  reports,  frequent  hearings  under  oath,  showed  the 
fact,  they  continued  to  make  orders  to  increase  service.  They  took  the  view,  and  both  com- 
missions took  the  view,  that  they  were  not  concerned  with  the  question  of  how  we  were  going 
to  get  the  money  to  provide  the  service — and  when  I  said  a  while  ago  that  I  was  slightly 
familiar  with  the  operation  of  the  so-called  up-state  commission.  I  meant  [not]  by  actual 
appearance  before  them,  although  I  represent  two  roads  that  are  within  their  jurisdiction,  but 
I  do  know  about  their  operations,  because  it  is  my  business  to  watch  the  operations  of  both 
commissions." 

Mr.  Quackenbush  emphasized  the  fact  that  the  New  York  Commission  kept 
on  issuing  service  orders  regardless  of  the  financial  condition  of  the  companies. 
In  Connecticut  the  police  power,  or  perhaps  it  would  be  more  correct  to  say  the 
"police  influence,"  was  used  to  force  additional  service  through  unprofitable  ex- 
tensions. Mr.  Lucius  S.  Storrs.  President  of  the  Connecticut  Company,  described 
the  situation  at  pages  434  and  435  of  the  Proceedings,  as  follows : 

"One  little  line  of  New  England  of  interest  in  a  small  village  was  a  stage  running  from 
the  railroad  station  up  into  the  village,  as  so  many  of  these  villages  were  founded  away  back 
from  what  was  ultimately  the  line  of  transportation,  or  on  the  line  of  transportation  of  those 
days,  the  stage;  and  when  the  steam  railroads  came  through,  the  lines  of  transportation 
changed.  The  stage  was  operating  from  this  small  station  to  the  little  rural  community,  an 
attractive  little  New  England  village.  Some  mill  owner  who  had  made  a  lot  of  money  up 
there  perhaps  thought  it  would  be  a  good  idea  to  put  a  horse  car  line,  and  he  put  in  a  horse 
car  line  two  and  a  half  miles  long. 

"It  was  very  profitable  and  ran  along.  The  car  ran  on  rails  instead  of  the  stage  on 
the  road.  It  was  a  typical  old  corduroy  road.  If  a  man  had  a  house  a  little  bit  beyond  the 
center  of  the  town,  distant  from  the  railroad  station,  he  thought  it  would  be  a  good  idea  to 
extend  it  out  there,  and  he  extended  it  out  there.  A  mile  or  two  beyond  that  was  a  cemetery 
and  lots  of  people  wanted  to  go  out  to  the  cemetery,  and  they  extended  it  out  there.  A  little 
beyond  that  was  a  water  works  plant  and  ultimately  they  extended  it  out  there  because  a  few 


90  Electric  Railway  Problem 

people  worked  out  there  and  they  wanted  to  ride.  In  the  meantime  it  had  been  developed 
from  the  horse  car  to  the  trolley  car.  There  was  a  beautiful  hill  a  little  further  away  with  a 
lot  of  chestnut  trees  on  the  side,  and  a  lot  of  people  wanted  to  go  out  there,  and  so  they  built 
a  line  out  there  to  accommodate  the  people  who  wanted  to  go  out  to  gather  the  chestnuts. 
We  became  responsible  for  that  line. 

"The  Chairman:     Were   these   extensions   voluntary? 

"Mr.  Storrs:  Some  ot  tliem  were  at  the  request  of  the  community  and  some  of  them 
were  voluntary.  Most  of  them  were  at  the  urgent  request  of  the  community.  I  am  not  sure 
but  what  the  Chairman  of  the  Board  of  Selectmen  had  some  interest  in  the  chestnut  grove 
and  wanted  to  get  the  people  out  there  to  see  it. 

"The  result  has  been  that  during  the  last  year  that  line  with  only  one  car,  a  single- 
truck  car,  took  in  $2,000,  and  it  cost  $8,000  to  operate  the  car,  that  is,  out  of  pocket  cost; 
I  do  not  mean  to  say  the  depreciation  and  fi.xed  charges,  but  the  actual  dollars  of  outgo 
to  pay  for  the  construction  and  the  maintenance,  to  maintain  that  individual  car,  together 
with  the  actual  cost  of  the  power,  the  power  at  that  point  being  bought  on  the  kilowatt  basis. 

"This  was  frequently  the  case  throughout  the  communities,  a  gradual  development  of  in- 
consistent demands.  Of  course,  it  has  been  rather  inconsistent  or  rather  inconceivable  that 
the  owners  of  the  utility  would  seriously  oppose  the  insistent  demands  of  the  community, 
which  itself  gave  the  franchises  essential  to  the  life  of  the  corporation,  and  where  that  became 
a  serious  pressure  frequently  it  was  granted. 

"Commissioner  Meeker ;  In  the  end  do  you  think  that  such  extension  should  be  passed 
upon  by  a  state  commission  rather  than  by  local  authority? 

"Mr.  Storrs:  Those  in  New  England  are  passed  upon  so.  .\nd  in  connection  with  that 
there  is  now  unanswered  an  order  oi  the  Public  Utilities  Commission  in  one  of  the  New 
England  states  directing  the  electric  railway  to  build  an  extension,  in  this  case  only  about 
four  miles  long,  to  serve  a  little  community,  that  community  having  a  double-track  line 
between  the  center  and  the  large  city  adjacent,  but  the  town  hall  happened  to  be  in  one  part 
of  the  community  and  a  large  part  of  the  inhabitants  in  that  village  off  from  the  main  line 
of  transportation,  and  the  people  wanting  to  attend  town  meetings  had  to  take  the  trolley 
into  the  center  some  four  miles  and  back  out  to  the  town  hall  some  six  miles.  The  people 
in  that  community,  rather  important  politically  and  otherwise,  successfully  pressed  their  case 
before  the  commission  and  an  order  was  issued  directing  the  electric  railroad  to  build  a  line 
something  between  three  and  four  miles  as  I  recall,  to  connect  that  little  portion  of  the 
isolated  community  with  the  town  hall;  that  is  practically  what  it  was,  the  larger  portion 
of  the  community  having  already  a  double-track  line  and  practically  two  connecting  with 
the  main  civic  center.  There  was  a  case  in  which  the  commission  itself  had  ruled  upon  it, 
and  needless  to  say  the  corporation  has  not  been  able  to  obey  the  order  of  the  commission. 

"The  Chairman:    That  is  the  street  railway  corporation? 

"Mr.  Storrs:  The  street  railway  corporation  has  not  been  able  to  do  it.  The  authority 
was  issued  two  or  three  years  ago  and  we  came  upon  the  rocks  at  about  that  time  and  have 
not  been  able  to  finance  orders  of  that  sort,  and  the  commission  itself  has  not  pressed  its 
demands  to  the  court  nor  has  the  community  pressed  its  demands  to  the  court  and  through 
mandamus  forced  the  company  into  the  construction  of  the  line. 

"Commissioner   Wehle:     Is   that   in    Connecticut? 

"Mr.  Storrs :    Yes,  adjacent  to  New  Haven. 

"The  Chairman :  Have  you  taken  any  steps  to  abandon  that  track  which  cost  $8,000  to 
operate  with  $2,000  revenue? 

"Mr.  Storrs :  We  have  now  a  little  publicity  going  forward  to  an  immediate  cessation 
of  service  on  that  line. 

"The  Chairman:    So  there  is  a  remedy  for  the  company? 

"Mr.  Storrs:  Tliere  is.  What  the  local  remedy  is  we  do  not  know,  but  the  practical 
rcmedv  must   be  that. 

"Commissioner  Wehle:   What  is  the  name  of  that  point? 

"Mr.  Storrs :  That  is  up  to  Westp<irt.  from  the  railroad  station  below  Saugatuck.  You 
will  rerngnizc  that  going  up  above  Westport  and  on  up  to  the  water  works." 

Mr.  James  D.  Mortimer  showed  that  in  Wisconsin,  a  pioneer  state  in  public 
service  repfulation,  the  police  power  of  the  state  was  invoked  to  reduce  fares  below 
the  ordinance  rates.  His  testimony  on  this  point  is  found  at  pages  765  and  766 
of  the  Proceedings : 

"\{t.  Warren:    There  is  commission  regulation  in  Wisconsin,  is  there  not.  Mr  Mortimer? 

"Mr.   Mortimer:    There  has  licen  commission   regulation   in   Wisconsin   since   1905. 

"Mr.  Warri-n:  Your  company  has  been  subject  to  that  regulation  ever  since  it  was 
adopted  ? 

"Mr  Mortimer:  We  have  been  the  experimental  ground  for  most  of  the  regulation  for 
street  railways  in  Wisconsin,  and  also  the  experimental  ground  for  the  most  of  the  regulation 
for  street  railways  in  the  United  States. 


Police  Power  and  Improved  Service  91 

''Mr.  Warren:  Will  you  give  a  brief  sketch  of  the  regulation  and  its  effects  as  it  related 
to  your  company  ? 

"Mr.  Mortimer;  Regulation  in  Wisconsin  first  was  attempted  in  1896  by  the  Common 
Council  of  the  City  of  Milwaukee,  acting  under  its  police  powers.  It  sought,  following 
a  consolidation  of  seven  detached  lines  making  up  the  unified  system,  to  substitute  a  com- 
mutation fare  of  six  tickets  for  twenty-five  cents  in  lieu  of  the  five-cent  cash  fare,  with 
universal   transfers. 

"That  case  went  to  the  Federal  District  Court  on  the  ground  of  confiscation,  and  the 
Common  Council  resolution  was  declared  to  be  confiscatory.  No  appeal  was  ever  taken  by 
the  municipality.  It  was  one  of  the  early  cases  of  regulation  where  a  Federal  court  held 
that  street  railway  utilities  were  entitled  to  a  reasonable  return,  and  any  order  of  a  govern- 
mental body  reducing  such  return  below  current  ordinary  interest  rates  was  confiscatory, 
and  therefore  in  violation  of  the  Constitution. 

"In  1905,  the  Legislature  passed  the  Railroad  Commission  Law.  The  Railroad  Com- 
mission Law  was  primarily  designed  to  take  care  of  steam  railroads  and  telegraph  companies. 
It  was  not  entirely  clear  from  a  reading  of  the  statute  that  it  covered  street  railways. 

"Despite  that  fact,  a  case  was  brought  by  the  City  of  Milwaukee  in  the  following 
January  after  the  3-cent  fare  in  Cleveland,  to  have  the  railroad  commission  ordered  to 
discontinue  the  franchise  rates  of  fare  and  install  a  fare  of  three  cents. 

******** 

"The  3-cent  fare  case  was  reinstitutcd  again  in  1907,  following  the  enactment  of  an 
amendment  to  the  Railroad  Commission  Law,  which  clearly  put  the  street  railways  under  the 
jurisdiction  of  the  railroad  commission.  The  case  was  finally  decided  by  the  railroad  com- 
mission in  August,  1912.  The  details  of  the  testimony,  the  conclusions,  the  analyses,  and 
related  matters  are  clearly  set  forth  in  Mr.  Doolittle's  book  on  the  cost  of  passenger  trans- 
portation service.i  That  book  I  am  going  to  offer  to  the  commission  for  the  detailed  informa- 
tion. The  book  carries  data  dow-n  to  1912.  The  commission's  order  required  that  the  com- 
pany discontinue  the  sale  of  twenty-five  tickets  for  one  dollar,  and  substitute  in  lieu  thereof 
the  sale  of  thirteen  tickets  for  fifty  cents,  retaining  a  five-cent  cash  fare  and  six  tickets 
for  twenty-five  cents. 

"It  also  ordered  the  extension  of  the  single  fare  limits,  the  city  fare  limits,  the  five-cent 
limits,  out  a  distance — outward  from  the  center — of  a  mile  to  a  mile  and  a  half,  thereby  in- 
creasing the   length   of   the   ride." 

The  exercise  of  the  police  power  has  undoubtedly  gone  far  in  neutralizing 
the  effect  of  the  Dartmouth  College  case  and  in  casting  doubt  upon  the  vested 
rights  of  corporations  based  on  that  decision.  Obviously,  no  transportation  line 
can  be  so  advantageously  located  for  profit  as  to  be  proof  against  the  effects  of 
public  regulation,  calling  continually  for  more  service,  better  service  and  lower 
rates.  The  power  to  regulate,  like  the  power  to  tax,  if  unlimited,  is  the  power 
to  destroy.  The  electric  railways  generally  during  recent  years  have  professed 
faith  in  the  virtues  of  state  regulation,  but  their  advocacy  of  this  policy  appears 
to  have  had  its  basis  in  the  choice  of  what  they  have  regarded  as  the  lesser  of 
two  evils.  They  have  been  glad  to  appeal  from  the  local  authorities  to  a  state 
commission  supposed  to  be  more  free  from  the  pressure  of  interested  public 
opinion  and  better  equipped  to  render  decisions  based  upon  the  ascertainment 
and  recognition  of  vested  values.  It  is  maintained  by  many  electric  railway 
men  and  by  most  public  service  commissioners  that  state  regulation  has  had  a 
steadying  effect  upon  credit  and  has  in  fact  been  helpful  to  the  companies.  Still, 
the  discovery  of  a  means  by  which  the  public  obligations  that  are  a  corollary  of 
monopoly  in  the  rendering  of  an  essential  public  service  can  be  enforced  upon  an 
industry  whose  financial  structure  has  been  reared  upon  the  assumption  of  pro- 
tected privilege  for  exploitation  could  not  do  otherwise  than  have  a  disquieting 
effect  upon  the  holders  of  inflated  securities.  At  any  rate,  the  possibilities  of 
the  police  power  give  convincing  proof  that  the  best  bulwark  of  street  railway 
credit  is  public  good  will  and  cooperation,  not  the  guaranties  of  the  franchise 
and  the  mandates  of  the  court. 


Chapter  XVIII 
PUBLIC    REGULATION    OF    STOCK    AND    BOND    ISSUES 

The  reckless  tinancial  policies  pursued  by  the  electric  railways  in  matters  af- 
fecting capitalization  were  one  of  the  important  moving  causes  for  the  estab- 
lishment of  state  regulatory  commissions.  It  is  one  of  the  usual  functions  of 
these  commissions  to  exercise  control  over  new  security  issues.  This  power  of 
control  was  undoubtedly  given  more  for  the  protection  of  future  investors  than 
for  the  preservation  or  resuscitation  of  street  railway  credit.  It  was  the  thought 
that  the  companies  had  enjoyed  too  much  credit,  not  too  little,  and  by  abusing  it 
had  brought  great  losses  upon  the  investing  public.  It  was  the  theory  that  under 
public  service  commission  regulation  new  securities  could  not  be  issued  except  for 
cash,  and  that  the  cash  received  from  their  sale  would  be  put  iiUo  the  property 
for  proper  capital  purposes.  Thus  the  investor  would  be  sure  that  the  securities 
he  bought  would  represent  something  tangible.  It  was  supposed  that  this  assur- 
ance, given  by  a  responsible  state  commission,  would  make  new  security  issues 
attractive,  and  thus  in  fact  improve  their  salability.  This  improvement  in  street 
railway  credit,  however,  was  anticipated  as  a  by-product  of  regulation,  in  large 
measure  incidental  to  the  main  purpose,  namely,  the  protection  of  the  investors. 

The  fact  that  the  Massachusetts  street  railways  were  among  the  first  to  suffer 
a  general  collapse  of  credit  in  the  present  era  of  distress,  although  they  had 
enjoyed  the  benefits  of  state  regulation  longer  than  the  companies  of  other  states, 
raises  the  (jueslion  as  to  what  effect  public  regulation  has  had  upon  street  rail- 
way credit.  In  the  emergency  proceeding  for  increased  fares  instituted  by  the 
Public  Service  Railway  Company  in  1918,  Mr.  Thomas  X.  McCarter.  president 
of  the  company  and  at  that  time  chairman  of  the  War  Board  of  the  American 
Electric  Railway  Association,  answered  this  question  squarely.  Upon  cross- 
examination  by  Marshall  Van  Winkle,  Esq.,  counsel  for  the  New  Jersey  State 
League  of  Municipalities,  on  May  13,  1918,  he  made  the  following  statement, 
which  is  found  at  pages  1031  and  1032  of  the  transcript  of  the  proceedings  before 
the  New  Jersey  Board  of  Public  Utility  Commissioners: 

"Q.  The  Mass.i(-lnis(tt!;  Commission  has  been  a  pioneer,  has  it  not,  in  granting  in- 
creased  fares  to  street   railway   companies? 

"A.     It  has  iK-cn  one  of  the  earlier  commissions  to  do  it,  yes. 

"0  I^ci  you  know  that  the  Massachusetts  Commission  has  made  an  intensive  study  for 
a  number  of  years  of  these  problems? 

"A.  I  know  they  arc  now.  the  Massachusetts  Commission,  and  I  think  the  Legislature 
is  studying  the  working  out  of  a  very  serious  situation  they  have  in  that   state. 

"Q.  Wouldn't  you  agree  that  the  conclusions  of  the  Massachusetts  Commission  as  to 
the  necessity  of  the  business  control  under  a  commission  like  this,  for  instance,  that  we 
are  now  liefore.  going  along  with  any  increase  of  rates,  which  are  violative  of  franchise  con- 
tracts and  whicli  are  made  necessary  by  the  break-down  of  the  service  under  existing  private 
management,  are  entitled  to  great  weight,  I  mean,  by  this  Commission,  in  any  conclusions 
on  the  questions   involved   in   this   proceeding? 

92 


Public  Regulation  of  Securities  93 

"A.     What   is   entitled   to   great   weight? 

"Q.  The  Massachusetts  Commission's  findings  are  entitled  to  great  weight  by  this 
Commission. 

"A.  I  think  the  Massachusetts  Commission  is  a  strong,  vigorous  and  honest  Commis- 
sion. I  think  the  power  of  regulation,  as  administered  in  the  State  of  Massachusetts  in 
the  past  25  years,  has  brought  these  companies  to  the  brink  of  insolvency.  There  hasn't 
been  a  dollar  of  capital  issued  by  a  Massachusetts  utility  except  with  the  direct  approval 
of  the  commission  over  25  years,  and  the  whole  industry  in  the  State  of  Massachusetts  is  in 
practical   insolvency. 

"The  principle  of  regulation  in  Massachusetts  has  practically  brought  the  public  utilities 
in  Massachusetts  to  the  point  where  the  policy  of  regulation  as  enforced  by  the  Interstate 
Commerce  Commission  has  brought  the  railroad  companies.  We  might  as  well  look  the 
situation  right  in  the  face." 

Mr.  McCarter's  views  as  to  the  effect  of  state  regulation  upon  credit  do  not 
seem  to  be  shared  by  the  Massachusetts  witnesses  who  appeared  before  the 
Commission.  None  of  them  had  the  hardihood  to  claim  that  conservatism  in 
capitalization  was  the  real  cause  of  the  breakdown  of  credit  in  that  state.  Inter- 
state Commerce  Commissioner  Eastman,  who  gave  the  Commission  a  most  illum- 
inating analysis  of  the  Massachusetts  situation,  points  out  at  page  2059  of  the 
Proceedings  that  "the  chief  source  of  strength  has  been  the  supervision  over 
capitalization."  Nevertheless,  Mr.  McCarter's  challenge  raises  a  point  that  de- 
mands serious  consideration.  It  is  claimed  by  the  companies  and  admitted  by 
the  public  that  the  state  commissions  have  in  large  measure  failed.  The  present 
condition  of  the  electric  railway  industry  undoubtedly  puts  a  burden  of  explana- 
tion upon  the  commissions.  Is  it  a  case  of  too  much  regulation  or  too  little? 
Mr.  Harold  L.  Stuart,  testifying  from  the  point  of  view  of  an  investment  banker, 
expresses  the  opinion  at  page  186  of  the  Proceedings  that  state  commission  con- 
trol had  a  beneficial  effect  upon  credit.  In  reply  to  questions  by  Mr.  Warren, 
he  says : 

"Mr.  Warren:  To  what  extent  have  the  laws  of  any  particular  jurisdiction  had  an 
effect  upon  the  selling  quality  of  the  bonds   issued  by  utilities   in   that   jurisdiction? 

"Mr.  Stuart :  They  have  quite  a  considerable  influence.  For  example,  when  the  public 
service  commissions  throughout  the  countrv-  began  to  be  formed,  a  great  interest  was  aroused 
on  the  part  of  the  investors,  and  I  think  that  the  very  fact  of  those  public  utility  commis- 
sions being  formed  influenced  a  great  many  people  to  buy  street  railway  and  other  public 
utilities  securities  that  theretofore  were  not  interested.  They  believed  that  the  public  service 
commission  would  be  a  disinterested  party,  in  so  far  as  any  local  situation  was  concerned, 
whereas  the  local  authorities  would  be  very  much  interested,  and  the  investor  felt  that  he 
would  receive  better  and  fairer  treatment  from  the  disinterested  party  than  he  would  from 
the  interested  party. 

"Mr.  Warren:  If,  for  any  reason,  in  any  particular  state  or  other  jurisdiction,  a  system 
exists,  whether  of  law  or  franchise,  which  is  antagonistic,  or  is  not  calculated  to  promote 
the  development  and  security  of  a  public  utility,  what  effect  has  that  on  the  bonds? 

"Mr.  Stuart :  It  has  the  effect  of  keeping  people  out  of  the  state  entirely.  There  have 
been  such  situations.  For  example,  I  recall  a  few  years  ago,  in  both  Georgia  and  Texas,  the 
sentiment  in  those  states  \vzs  such  that  it  was  very  difficult,  or  impossible,  to  sell  public 
utility  securities  that  came  from  those  states.  The  investment  bankers  have  no  control  over 
what  their  client  does  with  the  money,  and  the  great  majority  of  clients  are  seekers  after 
information,  and  if  they  find  that  in  any  given  community  or  state,  or  in  any  given  industry, 
conditions  are  not  very   favorable,  their  money   will   go   elsewhere." 

It  cannot  be  doubted  that  the  adoption  of  the  policy  of  state  regulation  of 
stock  and  bond  issues  did  have  an  effect,  at  least  initially,  upon  the  credit  of  the 
electric  railways  by  stimulating  the  investor's  appetite  for  a  class  of  securities 
which  had  theretofore  come  to  be  regarded  as  highly  speculative.  It  cannot  be 
doubted,  either,  that  state  regulation  of  security  issues  did  not  have  the  effect 
of  putting  the  street  railways  upon  a  financial  basis  where  they  could  withstand 


94  Electric  Railway  Problem 

the  other  influences  at  work  to  undermine  and  destroy  their  credit.  The  ques- 
tion here  is  whether  the  restrictions  of  state  regulation  actually  lessened  the 
companies'  power  of  self-help  when  the  heavy  strain  came  upon  them.  The 
trouble  with  state  regulation  as  ordinarily  practiced  appears,  upon  analysis,  to  be 
this:  it  destroys  the  speculative  possibilities  of  the  investment,  without  giving  it 
the  guaranties  of  a  secured  investment.  The  process  of  disposing  of  bond  issues 
can  no  longer  be  "lubricated"  by  a  judicious  distribution  of  bonus  stock.  If  big 
earnings  in  the  future  promise  a  high  return  upon  the  investment,  regulation 
holds  out  the  counter-promise  that  the  benefit  will  be  taken  away  from  the  security 
holders  and  given  to  the  public,  or  at  the  least  the  investor  will  be  required  to 
share  the  benefit  with  the  public.  On  the  other  hand,  regulation  does  not  guar- 
antee earning  power:  it  merely  promises,  within  certain  limits,  an  opportunity 
to  try  to  earn.  Moreover,  the  commissions  generally  have  been  given  no 
authority  to  compel  financial  reorganization  and  the  reduction  of  existing  capital- 
ization. Under  these  circumstances,  about  all  they  can  do  is  to  make  sure  that 
new  bond  and  stock  issues  represent  new  money  used  for  proper  capital  purposes. 
If  the  bonds  already  out  are  in  excess  of  the  conservative  value  of  the  property 
or  constitute  an  undue  percentage  of  such  value,  then  the  security  of  new  bonds 
will  be  inadequate  although  they  represent  100  cents  on  the  dollar  of  new  cash 
invested  in  useful  and  necessary  street  railway  property.  Under  such  conditions, 
the  company  needs,  not  a  public  ser\'ice  commission,  but  a  receiver  to  give  security 
to  the  new  investor.  The  situation  is  even  more  desperate  where  the  new  money 
is  to  be  brought  into  the  enterprise  by  the  sale  of  stock.  Every  new  share,  unless 
an  issue  of  preferred  stock  is  put  out,  will  have  to  lie  in  the  same  bed  with  the 
shares  already  outstanding.  Under  these  conditions,  it  is  not  strange  that  under 
state  regulation,  except  as  affected  by  special  guarantees  under  service-at-cost  con- 
tracts or  by  the  good  will  and  parental  interest  of  holding  companies,  the  issu- 
ance of  street  railway  stocks  practically  came  to  an  end.  That  meant  that  new 
money  could  be  secured  only  by  the  sale  of  bonds,  and  that  the  proportion  of 
bonds  outstanding  to  total  capitalization  would  gradually  increase.  The  result 
of  this  would  be  the  absorption  of  a  larger  share  of  the  return  on  capital  by  the 
fixed  charges,  and  a  gradual  shrinkage  in  the  "margin  of  safety"  upon  which 
the  banker  depends  as  a  guaranty  warranting  the  purchase  and  distribution  of 
additional  bonds.  Of  course,  if  the  bonds  already  outstanding  represent  the 
entire  investment,  and  if  the  stock  has  never  earned  any  dividends,  the  issuance 
of  additional  bonds  on  account  of  new  investment,  without  any  corresponding 
issuance  of  stock,  will  not  make  the  bond  holders'  actual  security  any  less,  although 
it  will  "look"  less  because  of  the  smaller  nominal  amount  of  stock  outstanding 
representing  the  real  or  imaginary  equity  in  the  property. 

The  modern  tra  of  regulation  began  in  1907  when  the  public  utilities  laws 
of  New  York  and  Wisconsin  were  enacted.  The  special  census  report  on  street 
anfl  electric  railways  for  that  year  showed  a  total  of  $2,097,708,856  capital  stock 
and  $l,677.0r>3.240  funded  debt.  Ten  years  later  the  capital  stock  bad  increased 
17.9  per  cent,  while  the  funded  debt  had  increased  81.9  per  cent.  Indeed,  the 
increase  in  common  stock  was  only  1.V2  per  cent,  as  compared  with  a  43.9  per 
cent  increase  in  preferred  stock       In  1<>07  the  funded  debt  of  the  electric  railwavs 


Public  Regulation  of  Securities  95 

of   the  country   was  $420,645,616  less   than   the   capital   stock;   in    1917   it   was 
$577,332,621  more  than  the  capital  stock. 

The  defect  in  a  scheme  of  public  regulation  that  does  nothing  about  the 
securities  already  issued  while  attempting  to  control  future  issues  was  clearly 
brought  out  by  Mr.  W.  E.  Creed,  Counsel  for  the  San  Francisco-Oakland  Ter- 
minal Railways  Company,  at  pages  891  and  892  of  the  Proceedings,  where  he  says : 

"Now  there  is  just  one  other  thing.  You  were  speaking  about  the  California  Com- 
mission, and  I  think  this  thing  is  true  all  over  the  country.  We  have  had  an  inconsistent 
situation  in  public  regulation  due  to  the  fact  that  the  commissions  came  into  existence  very 
largely  after  1907  and  they  found  utilities,  street  railroads  and  others,  had  been  issuing 
securities  on  one  theory,  you  see.  and  the  commissions  came  in  and  took  control  of  the 
issuance  of  securities  and  they  fixed  rates  with  reference  to  companies  which  had  securities 
issued  in  large  part  on  a  different  theory  from  theirs,  on  the  theory  on  which  the  commis- 
sions themselves  issued  securities,  and  1  have  always  thought  the  only  thing  to  do  was  to 
treat  rate-fixing  as  a  financial  question  purely  and  simply  and  as  an  action  by  public  authori- 
ties to  maintain  credit  and  service  and  that  if  they  were  unwilling  to  support  the  securities 
which  were  already  out,  in  other  words  if  they  were  unwilling  to  permit  the  credit  of  the 
company  to  go  on,  the  commissions  might  just  as  well  frankly  force  reorganizations  in  those 
securities  and  cut  down  the  securities  to  where  they  could  handle  the  thing  as  a  whole.  Now, 
we  have  had  that  inconsistency  in  regulation  which  I  think  has  been  a  very  bad  thing.  I  found 
it  in  several  other  classes  of  utilities  where  we  have  had  securities  issued  and  put  out  in  good 
faith  and  our  credit  depended  upon  the  maintenance  of  revenue  to  support  those  securities. 
Now.  if  you  fi.x  rates  upon  an  entirely  dift'erent  theory  and  do  not  kick  out  those  securities, 
you  have  an  entirely  different  situation. 

"The  Chairman  :  The  California  Commission  has  sought  to  regulate  the  rates  so  as  to 
bring  a  fair  return  on  the  value  of  the  property? 

"Mr.  Creed:     Yes. 

"The  Chairman:     And  has  proceeded  to  value  the  property  in  very  many  cases? 

"Mr.  Creed :     Yes. 

"The  Chairman:     Do  you  think  that  to  be  a  proper  basis? 

"Mr.  Creed :  Yes,  I  approve  of  that,  but  I  think  it  is  merely  producing  a  slow  death 
to  go  on  without  removing  that  inconsistency. 

"Commissioner  Meeker:  Do  you  think  the  same  authority  should  regulate  the  issuance 
of  securities  that  regulate  rates  ? 

"Mr.  Creed  :     Yes.  sir. 

"Commissioner  Meeker:     Will  you  explain  w-hy? 

"Mr.  Creed:  Well,  because  the  credit  of  the  company  depends  upon  what  it  earns  and 
its  management,  and  it  requires  its  earnings  to  pay  its  operating  expenses,  take  care  of  its 
depreciation  and  pay  the  obligations  on  its  securities,  and  I  think  there  is  an  absolute  close  con- 
nection between  the  securities  out  and  the  revenue,  -^nd  I  would  go  even  further  than  that. 
I  would  give  the  state  regulating  authorities  the  power  to  control  financial  structiires  of  com- 
panies and  control  reorganizations.  If  you  are  going  to  have  regulation  you  might  as  well 
have  it  one  hundred  per  cent,  because  those  three  things  are  so  intimately  connected  that 
you  have  a  constant  struggle  unless  you  have  cooperation  in  the  issuance  of  the  securities, 
approval  of  the  securities  already  out  and  regulation  of  the  revenue  in  harmony  with  those 
securities." 

It  is  apparent  that  public  service  cominission  control  has  failed  at  least  to 
preserve  and  protect  the  credit  of  the  electric  railways,  and  it  is  by  no  means 
clear  that  in  certain  respects  commission  control  may  not  have  impaired  their 
credit.  The  public  has  required  the  companies  to  pursue  a  sounder  and  more 
conservative  policy  with  respect  to  the  issuance  of  new  securities,  but  has  left 
them  in  most  cases  to  stagger  along  under  the  capital  burdens  that  were  already 
tied  on  their  backs  before  the  establishment  of  the  state  commissions.  State 
regulation  of  street  railway  securities  has  been  incomplete  and  imperfect.  Both 
theoretically  and  practically  it  has  taken  away  the  new  investor's  chance  to  win, 
but  has  left  him  with  his  chance  to  lose.  Under  these  circumstances,  if  he 
"breaks  even,"  he  is  fortunate.  This  is  hardly  the  way  to  "attract"  new  capital. 
At  the  same  time  the  old  investors  who  went  into  the  enterprise  as  a  speculative 


96  Electric  Railway  Problem 

venture  have  fared  theoretically  much  better  at  the  hands  of  the  commissions, 
some  of  which  are  inclined  to  let  reproduction  cost  new  throw  its  protecting 
mantle  over  the  inflated  securities  of  the  past  and  even  to  let  superseded  property, 
early  losses  and  conceived  intangibles  swell  "fair  present  value"  to  a  point  where 
all  the  risks  of  the  early  days  will  be  cashed  in  by  those  who  now  hold  the  secur- 
ities. The  past  investor,  who  took  his  chance  and  lost,  is  now  clamoring  at  the 
doors  of  the  state  commissions  to  get  his  money  back.  In  the  unrecognized  con- 
flict between  the  old  investor  and  the  new,  many  commissions  are  apt  to  side  with 
the  old,  since  he  is  there  to  press  his  claim.  In  doing  so,  however,  they  are  not 
helping  the  credit  of  the  industry. 


Chapter   XIX 

SHARE  OF  COMPANIES  AND  PUBLIC  IN  RESPONSIBILITY  FOR 

LOSS  OF  CREDIT 

Many  causes  for  the  failure  of  the  credit  of  the  electric  railways  have  been 
elaborated  in  the  preceding  chapters  of  this  report.  The  causes  thus  far  dis- 
cussed had  their  origin  either  in  the  unsound  financial  policies  of  the  street  rail- 
ways themselves  or  in  the  restrictive  policies  adopted  by  the  public  with  respect 
to  them.  For  the  effects  of  these  policies  the  companies  and  the  public  must 
share  responsibility.  The  public  is  not  in  a  position  to  be  too  severe  with  the 
companies  so  long  as  it  maintains  an  attitude  of  unwillingness,  unreadiness  and 
incapacity  itself  to  initiate  or  carry  through  the  measures  required  for  the  per- 
formance of  a  public  function  so  necessary  as  urban  transportation.  While  state 
and  municipality  stand  around  and  say  "Let  George  do  it,"  they  are  not  called 
upon  to  abuse  George  for  doing  it  according  to  his  own  lights,  and  moreover 
they  will  have  to  tip  George  well  if  they  expect  him  to  be  amenable  to  reason, 
that  is,  to  their  reason.  From  the  point  of  view  of  the  electric  railway  companies, 
the  commissions  have  in  large  measure  failed.  The  fact  of  their  failure  is 
alleged  and  the  reasons  therefor  outlined  by  Mr.  Richard  Schaddelee,  a  witness 
for  the  Electric  Railway  Association.  At  to  what  the  people  expected  in  estab- 
lishing the  commissions  and  as  to  the  responsibility  of  the  commissions  themselves 
for  their  failure,  Mr.  Schaddelee  says  at  page  861  of  the  Proceedings: 

"Regulation  of  utilities  was  necessary,  the  people  felt,  not  only  for  their  own  protection 
but  also  for  the  protection  of  the  utilities. 

"The  people  were  convinced  that  such  regulation  must  be  done  by  men  possessing  the 
experience,  education,  judicial  temperament,  integrity  of  character  and  absolute  fearlessness 
necessary  to  intelligently  and  justly  exercise  such  regulatory  power. 

"Therefore,  the  people  established  these  state  commissions  with  practically  unlimited 
power  and  authority  over  the  utilities. 

"I  am  sure  that  your  committee  is  now  convinced  that  these  commissions  as  a  whole  have 
wholly  failed  to  live  up  to  expectations  and  the  intent  of  the  people  in  establishing  said 
commissions. 

"Inasmuch  as  the  commissions  were  given  unlimited  authority,  they  must  now  assume  full 
responsibility   for  their  failure. 

"No  man  accepting  authority  can  escape  or  deny  responsibility.  The  one  implies  the 
other." 

After  indicating  that  he  would  review  in  detail  the  reasons  for  the  failure 
of  the  commissions  to  attain  the  objects  for  which  they  were  established,  he  con- 
tinues on  page  861 : 

"Before  doing  so,  allow  me  to  emphasize  that  throughout  my  entire  paper  I  have  in 
mind  those  companies  that  are  well  operated,  economically  managed  and  honestly  financed. 
It  is  not  my  intent  to  hold  the  commissions  responsible  for  utility  companies'  ills  that  are 
due  to  inefficient  management  or  reckless  financing. 

"The  results  of  these  must  be  borne  by  the  companies  themselves,  and  it  is  the  duty  of 
the  commissions  to  see  that  the  people  are  not  made  to  suffer  from  them.  If  there  are  any 
such  companies,  I  am  sure  they  are  verj'  few  in  number  and  need  not  be  considered  here." 

97 


98  Electric  Railway  Problem 

From  the  last  sentence  of  the  above  quotation,  one  would  infer  that  how- 
ever up-to-date  Mr.  Schaddelee  may  be,  he  is  not  very  well  versed  in  street  rail- 
way history.  However,  he  states  a  rule  that  should  be  of  value  in  assessing  the 
blame  for  existing  troubles.  This  is  of  great  importance  because  any  solution  of 
the  general  street  railway  problem  must  be  based  on  equity  if  it  is  to  lay  a  secure 
foundation  for  the  full  development  of  local  transportation  as  a  public  function 
in  the  future.  The  most  difficult  immediate  aspect  of  the  problem  is  the  deter- 
mination of  the  amount  of  the  private  investment  in  any  particular  street  railway 
property  which  should  be  taken  as  a  base  for  determining  the  allowed  return  upon 
capital  while  private  ownership  continues,  and  which  should  be  taken  as  the 
purchase  price  in  the  event  of  the  acquisition  of  the  property  for  public  owner- 
ship and  operation.  It  is  necessary,  therefore,  to  assess  the  blame  for  past  policies 
and  results  in  order  that  present  and  future  responsibility  may  be  distributed  in 
the  extremely  practical  form  of  a  financial  settlement.  This  problem  is  rendered 
much  more  difficult  by  the  changes  that  have  taken  place  in  economic  conditions 
for  which  neither  the  companies  nor  the  governmental  agencies  representing  the 
public  can  be  held  responsible.  The  next  step  in  our  discussion  will  be  an  analysis 
of  these  changes. 


Chapter  XX 

EFFECT  OF  AUTOMOBILE  AND  JITNEY  COMPETITION 

UPON  CREDIT 

Obviously,  the  ultimate  basis  of  credit  is  earning  power.  Even  the  existence 
of  physical  property  which  could  not  be  reproduced  for  the  amount  of  the  in- 
vested capital  is  of  little  importance  in  establishing  or  preserving  credit  unless  it 
is  accompanied  by  earning  power.  The  electric  railway  industry  needs  faith, 
hope  and  earning  power,  but  the  greatest  of  these  is  earning  power.  Street  rail- 
way earning  power  is  a  composite  result  of  volume  of  trafific,  rates  of  fare  and 
cost  of  service.  Anything  that  restricts  traffic,  reduces  rates  or  increases  cost, 
in  itself  tends  to  destroy  earning  power.  Street  railways  were  in  many  com- 
munities constructed  on  a  competitive  basis,  but  the  conditions  under  which  they 
operate  led  almost  universally  to  the  theoretical  and  practical  recognition  that 
monopoly  is  an  essential  characteristic  of  this  service.  Just  as  the  public  had 
generally  come  to  acquiesce  in  this  fundamental  fact,  a  new  factor  came  into 
existence  that  tended  to  reestablish  in  practice  the  competition  that  in  theory  had 
been  given  up  by  general  agreement.  The  advent  of  the  automobile  and  the 
jitney  bus  is  shown  by  the  experience  of  the  electric  railways  of  the  country 
during  the  past  ten  years  to  have  been  a  momentous  event  from  the  point  of 
view  of  the  agency  already  in  the  field  rendering  local  transportation  service. 
It  was  shown  by  the  testimony  before  the  Commission  that  today  there  are  60 
passenger  automobiles  in  the  country  for  every  street  car.  This  multiplication 
of  motor  vehicles  engaged  in  the  transportation  of  people  to  and  from  their 
work  and  to  and  from  their  pleasures  is  a  fact  of  great  importance  to  the  street 
railways.  The  operation  of  jitney  buses  as  common  carriers  is  much  more  re- 
stricted than  the  operation  of  private  automobiles,  but  the  jitneys  have  a  definite 
and  intense  effect  upon  the  street  railway  situation  in  particular  communities,  for 
the  reason  that  they  engage  in  direct  and  in  some  respects  fatal  competition  with 
the  street  cars  as  public  carriers.  The  experience  of  numerous  communities,  even 
before  the  extraordinary  conditions  growing  out  of  the  war,  made  it  clear  that 
unrestricted  jitney  operation,  though  more  or  less  temporary  and  precarious  in 
character,  means  destruction  to  the  street  railway  from  the  financial  point  of 
view.  It  seems  to  be  the  general  opinion  of  those  who  have  given  the  subject 
study  that  the  two  agencies  of  local  transportation  cannot  exist  side  by  side  as 
free  competitors  for  urban  traffic  without  destroying  each  other. 

The  effect  of  automobile  competition  has  been  felt  from  California  to 
Massachusetts.  In  a  telegram  from  Los  Angeles,  dated  July  29,  1919,  Mr.  Paul 
Shoup,  President  of  the  Pacific  Electric  Railway  Company,  which  operates  an 
interurban  system  with  a  trackage  of  more  than  1000  miles  in  Southern  Cali- 

99 


100  Electric  Railway  Problem 

fornia,  refers  to  "the  desperate  situation  of  electric  lines  in  California."  He 
says  that  "the  jitneys  and  motor  trucks  competing  with  electric  lines  are  not  only 
not  taxed  for  maintenance  of  highways  but  are  permitted  to  operate  over  the 
very  pavements  which  electric  lines  are  required  to  build  and  maintain  for  all 
space  occupied  by  tracks  and  two  feet  outside  thereof."  He  says  that  "in  addi- 
tion the  state  income  tax  on  electric  lines  is  in  part  used  to  maintain  a  system 
of  good  roads  generally  so  freely  used  by  motor  trucks  and  jitney  competitors." 
Mr.  Shoup's  telegram  is  found  at  pages  608  and  609  of  the  Proceedings. 

Los  Angeles  was  one  of  the  earliest  cities  in  which  the  jitney  phenomenon 
manifested  itself.  While  the  jitneys  within  the  city  limits  were  pretty  well  regu- 
lated out  of  existence  by  an  ordinance  initiated  on  behalf  of  the  street  railway 
interests,  Mr.  Chas.  L.  Henry,  of  Indianapolis,  known  as  "the  father  of  the 
interurban  railway,"  reported  to  the  Commission  at  page  714  of  the  Proceedings 
that  "the  Pacific  Electric  Company  is  losing  $1,400  a  day.  $500,000  a  year,  from 
jitney  buses  doing  countrj-  business.  Now,  you  may  call  them  interurban  jitneys 
if  you  want  to.     They  are  absolutely  uncontrolled." 

Interstate  Commerce  Commissioner  Eastman,  in  pointing  out  what  kind  of 
a  report  he  would  want  to  make  if  he  had  the  task  of  the  Federal  Electric  Rail- 
ways Commission  to  do,  at  page  2066  of  the  Proceedings,  said : 

"I  should  want  to  point  out.  further,  to  the  public  ver>'  clearly  the  inroads  which  have 
been  made  by  automobile  competition.  There  is  no  doubt  whatever  that  that  has  been  a  very 
important  factor  in  dccreasiuK  the  revenue  of  street  railway  companies  all  over  the  country-, 
and  particularly  in  the  country  districts,  although  it  has  also  operated  in  the  cities.  No  one 
can  see  the  number  of  automobiles  which  operate  here  in  the  city  of  Washington,  for  in- 
stance, without  realizing  the  cflfcct  which  that  must  have  upon  street  railway  revenues." 

In  connection  with  Mr.  Eastman's  testimony,  Mr.  Warren  made  the  fol- 
lowing statement  as  to  the  effects  of  jitney  competition  in  Springfield,  Massa- 
chusetts, at  page  2066  of  the  Proceedings : 

"We  had  an  estimate  in  Springfield  as  to  how  much  the  jitneys  have  taken  from  the 
Springfield  Street  Railway,  assuming  that  the  jitney  passengers  would  ride  in  the  cars  if  they 
did  not  ride  in  the  jitneys.  The  estimates  vary  from  $300,000  to  $300,000  a  year,  because  of 
the  varying  numt)er  of  the  jitneys.  When  the  weather  is  had  they  do  not  run.  and  when  the 
weather  is  go<xl  they  do  run;  so  that  it  is  a  little  difficult  to  estiinate ;  but  from  $500  to  $1,000 
a  day  is  the  estimate  of  the  street  railway  officials." 

The  Special  Street  Railway  Investigation  Commission  of  the  Massachusetts 
Legislature,  which  reported  on  February  1,  1918,  discussed  "the  growth  of  the 
automobile  business"  at  pages  24  to  26  of  its  report,*  where  it  says: 

"This  subject  should  he  treated  under  two  heads: 

"(1)  The  privately  owned  automobile  which  carries  passengers,  not  for  hire,  some  of 
whom  would  otherwise  ride  on  the  street  cars. 

"(2)     The  so-called  jitney;  which  enters  into  direct  competition  with  the  street  railways. 

"(1)  Pritiilely  owned  .-tutos. — The  advent  of  the  automobile  has  been  one  of  those 
circunustances  whidi  no  human  mind  could  foresee.  In  this  connection  the  following  figures 
are  of  interest : 

"hi  1910,  31, .160  automobiles  were  registered  in  this  State,  including  commercial  trucks 
and  vehicles,  but  excluding  dealers'  cars. 

In  ,1912  the  number  was  50,132. 
In  1915  the  number  was  102,63,1. 
In  1916  the  number  was  1.%.809. 
In  1917  the  number  was  174,274. 

"Of  this  last  number,  147,310  were  mainly  pas.senger  cars,  i.e.,  with  trucks  and  com- 
mercial vehicles  excluded  .Xssuming  that  each  of  these  cars  takes  away  from  the  revenue 
of  the  street  railways  one  round-trip  ride  per  day,  paying  a  5-cent   fare  each   way,  the  loss 


Automobile  Competition  19I 

in  street  car  revenue  in  a  year  in  this  State  would  be  about  $5,000,000,  or  nearly  $15,000 
per  day.  It  is  estimated  that  a  private  auto  would  represent  two  fares  per  day,  which  would 
otherwise  be  paid  on  the  cars,  .^ny  one  watching  the  stream  of  cars  morning  and  night 
through  the  streets  of  Boston  which  lead  to  the  business  center  will  probably  agree  that  such 
cars  must  represent  a  material  loss  of  revenue  to  the  Boston  Elevated.  The  question  of 
just  how  many  dollars  are  thus  diverted  from  the  treasury  of  the  company  is  a  matter  im- 
possible to  estimate  exactly.  The  above  estimate  of  $5.0()0,00O  per  year  appears  reasonable. 
In  addition  to  the  private  autos  there  are  about  10.000  motorcycles  licensed  in  this  State, 
which  also  means  a  loss  in  revenue  to  the  street  railways.  The  large  number  of  automobiles 
also  causes  a  material  delay  to  traffic  at  important  street  intersections. 

"(2)  Jitneys. — The  jitney  represents  a  different  phase  of  the  automobile  situation.  In 
the  jitney  the  street  railway  has  a  direct  competitor  for  fares.  The  jitney  operates  in  the 
same  general  territory  as  the  street  railway,  picking  off  the  cream  of  the  traffic  (such  as  the 
short-haul  business),  operating  in  many  cases  only  under  favorable  weather  conditions,  and 
often  without  a  bond  sufficient  to  protect  either  the  pedestrian  or  the  passengers  in  the  case 
of  accidents.  The  jitneys  often  pay  licenses  locally,  but  in  many  cases  not  proportionate  to 
their  privileges.  In  this  State  the  jitneys  have  not  been  declared  common  carriers,  and  are 
therefore  not  subject  to  the  regulation  of  the  Public  Service  Commission.  Certain  cities  and 
towns  have  bonded  the  jitneys  so  that  the  public  is  reasonably  protected.  As  a  general  rule, 
however,  it  is  not  believed  that  these  jitneys  are  so  bonded. 

"The  street  railway  companies  are  thus  subjected  to  a  more  or  less  unfair  competition, 
by  which  the  jitneys  can  operate  in  general  how,  when  and  where  they  please,  without  having 
any  particular  responsibility  in  return  for  their  rights  to  engage  in  the  transportation  business. 
The  street  railways,  however,  mu.st  maintain  their  service,  under  all  conditions  of  weather, 
in  a  manner  satisfactory  to  the  general  public,  and  under  the  supervision  and  regulation  of 
the  Public  Service  Cornmission.  Recently  jitney  competition  has  been  so  severe  that  the 
Nahant  &  Lynn  has  threater.ed  to  cease  operations  unless  the  city  will  revise  the  conditions 
under  which  jitneys  are  allowed  to  operate." 

Mr.  Luther  S.  Storrs,  President  of  the  Connecticut  Company,  at  page  423 

of  the  Proceedings,  says: 

"The  rapid  development  of  the  automobile  business  has  had  a  tremendous  effect  upon  the 
earnings  of  electric  railroads  throughout  the  country ;  that,  attendant  with  the  ^  very  great 
development  of  the  perfected  highway  and  the  permanent  paving  of  city  streets." 

Mr.  Storrs  then  points  out,  at  page  424,  that  in  the  fifteen  years  from  1903 

to  1918  the  number  of  motor  vehicles  registered  in  Massachusetts  grew   from 

3,241  to  193.497,  and  adds: 

"During  that  period  the  history  of  the  electric  railroads  in  Massachusetts  is  one  of 
rapidly  approaching  insolvency.  Two  hundred  and  fifteen  miles  of  electric  railroad  tracks 
within  that  state  have  been  abandoned." 

Further  on,  at  pages  425  and  426,  he  describes  some  of  the  specific  effects 

of  cheap  automobiles  and  jitneys  upon  the  electric  railway  business.     On  this 

point,  he  says : 

"In  parts  of  the  Commonwealth  of  Massachusetts,  and  doubtless  it  is  true  in  other  parts 
of  the  United  States,  electric  lines  were  built  through  strictly  summer  resort  territory, 
such  as  the  Berkshire  Hills,  which  has  been  a  very  popular  summer  trip.  Some  years  ago  the 
tourists  came  in  and  spent  a  week  or  a  month  in  some  favorite  inn  with  an  occasional  trolley 
trip  through  the  hills.  Now  the  tourist  comes  in  in  his  automobile,  and  dependmg  upon  his 
standing,  a  verv  elaborate  one  or  a  very  simple  one,  stays  a  day  or  two  and  passes  on  to 
some  other  part  of  the  country.  That  has  had  a  most  disastrous  effect  upon  the  revenue 
of  the  electric  lines  in  the  territory,  necessitating  a  very  material  decrease  in  the  service 
rendered,  that  decrease  now  running  as  high  as  two-thirds;  that  is,  one-third  only  of  the 
service  which  was  originally  rendered  on  those  lines  which  are  still  in  operation  as  given. 
Some  lines  were  abandoned."  some  of  them  entirely  junked,  the  tracks  torn  up  and  the  wires 
torn  down,  and  on  other  lines  the  service  discontinued  entirely,  and  on  other  lines  a  measure  of 
local  relief  or  aid  given  to  the  corporation  for  continued  service  of  one  or  two  cars  to  serve 
the  little  villages  and  the  small  communities  around. 

"With  the  cheap  automobile  and  the  even  cheaper  second-hand  car  there  has  sprung  up 
a  measure  of  competition  with  the  electric  railroad  which,  when  not  recognized  as  competition, 
has  been  very  serious  upon  the  revenues  of  the  transportation  utility;  that  is,  the  jitney.  And 
there  is  the  development  of  the  small  second-hand  and  jitney  bus  automobile  carrying  20 
passengers.  In  those  communities  where  the  es.sential  need  of  transportation  has  been 
thoroughly   recognized  and   tlie   responsibility   of   the  transportation   utility   to  the  community 


idi  ■      ■    ■  Electric  Railway  Problem 

expressed  in  forms  of  statute,  that  is,  tlie  requiring  of  the  jitney  bus  a  regularity  of  service 
during  all  periods  of  the  day,  a  certainty  of  service  over  particular  routes,  a  responsibility  in 
case  of  accident  hazard  and  also  a  ineasure  of  tax  to  comix;nsate  for  the  pavement  and 
other  facilities  offered  by  the  city,  that  has  placed  that  competitor  upon  what  might  be  con- 
sidered a  legitimate  basis.  In  other  communities,  however,  as  yet  there  has  been  no  regulation 
which  has  been  effective  from  the  standpoint  of  the  community  in  giving  essential  means  of 
service,  and  in  those  parts  of  the  country  the  jitney  operates  in  casual  service  over  certain 
routes  or  as  far  as  the  individual  may  have  passengers,  turning  back  into  the  center  and 
picking  up  another  load,  and  if  by  any  chance  a  number  of  people  arc  waiting  to  go  into 
other  portions  of  the  city,  going  on  other  routes.  They  are  irresponsible,  the  title  to  the 
car  remaining  frequently  in  the  hands  of  the  manufacturer  or  in  the  name  of  the  wife  of 
the  driver ;  and  the  only  property  which  can  be  attached  from  the  standpoint  of  those  who 
might  be  injured  by  accident  l>eing  that  of  the  deteriorated  automobile,  of  little  or  no  value." 

After  referring  to  the  great  increase  in  the  number  of  jitneys  operating  in 
New  Jersey  "directly  attendant  upon  an  effort  of  the  electric  railway  utility  to 
obtain  increases  in  revenue  through  changes  in  its  rates  of  fare."  he  discusses 
the  result  of  a  careful  analysis  of  transportation  service  in  the  city  of  Bridge- 
port, which  he  describes  as  being  more  largely  overrun  with  jitneys  than  any 
other  city  in  Connecticut.-  The  detailed  figures  for  Bridgeport  are  given  at 
page  428  of  the  Proceedings,  as  follows: 

"COMP.ARISOX   OF    NUMBER   OF   PASSENGERS   CARRIED   BY 

STREET    R.MLWAY    AND    IITNEYS:    CLASSIFIED 

BY    LENGTH    OF    RIDK 

On  the  Per  Cent 

In   Both   Directions  Railway         On  the  Jitney  Total  Taking  Jitney 

Riding  within  1J4  miles  radius 

of  center  of   city 5.432,947  5.561.451  10,994,398  50.58 

Riding    more    than     \'/i    miles 

but  less  than  2  miles  from 

center    of    city..... 4,805.761  10,620,347  15,426,108  68.85 

Riding   more   than  2  miles   but 

less    than    2V4    miles    from 

center   of   city 3.395.431  2.758,041  6.153,472  44.82 

Riding    more    than    Zy^    miles 

but    less    than    3'/j    miles 

from    center   of    city 239.724  239.724  

Riding    more    than    i'/j    miles 

hut     less     than    4%     miles 

from   center   of   city 860,048  860,048  

Total     1 4.733^11  1.<1939.S.19  33,673750  56.245" 

And  still  the  wonder  grew.  At  page  429, Mr.  Storrs  tells  how  the  motor 
truck  has  produced  passenger  transportation  as  a  by-product.  It  appears  that  in 
Connecticut  a  man  does  not  have  to  be  a  Yankee  to  appreciate  a  good  thing  in 
the  tran.sportation  lino  when  he  sees  it.  after  having  been  accustomed  to  the  Con- 
necticut Company's  service,  as  witnesseth  Mr.  Storrs: 

"The  deyrlopment  of  the  motor  truck  has  also  had  a  serious  effect  upon  the  revenues 
of  the  electric  lines.  That  is  now  becoming  more  and  more  apparent  as  we  see  makeshift 
scats  placed  u|xin  the  nmlDr  trucks  or  trucks  loaded  to  full  carrying  capacity  in  space,  if  not 
in  lonnago.  of  those  Ixmnd  out  lor  picnics  or  to  other  places  of  resort. 

"A  case  in  |><>inl  that  will  l>e  of  interest  is  this :  Some  time  ago  in  one  of  the  New 
England  cities  there  sprinig  np  unexpectedly  (to  the  transportation  utility >  a  very  large  busi- 
ness in  shore  lathing  by  the  foreign  clement  entirely,  Russian  jews.  Lithuanians,  Italians  and 
Greeks,  which  required  an  immediate  increase  of  transportation  during  the  hotter  summer 
days  and  esjiecially  Saturdays  and  Sundays,  of  .some  twentv  to  thirty  extra  cars  of  full 
carrying  capacity,  that  is  a  carrying  capacity  of  75  to  100  passengers,  depi-nding  u|>on  the 
numlxT  that  might  stand.  That  ran  over  a  period  of  three  or  four  years,  and  as  there  was 
a  great  deal  of  ditTiiullv  to  gel  the  fares  from  all  the  mothers  of  the  small  foreigners,  they 
would  not  all  of  Ihrm  acknowledge  the  individual  children,  the  traction  utility  put  in  a  pre- 
payment enclosure  through  which  they  all  had  to  pass  and  pay  their  fare  going  in  That 
was  very  effective  in  getting  the  electric   railro.id   fares  but.  unfortunately,  the   fathers   in  a 


Automobile  Competition  103 

great  many  cases  were  vegetable  vendors  or  ice  vendors  or  something  of  that  kind,  and 
they  all  of  them  use  their  motor  trucks  which  are  normally  used  for  their  business,  by 
putting  in  extra  seats  and  taking  down  all  these  hordes  of  people  to  the  shore  with  the  result 
that  today  there  is  no  demand  whatever  for  transportation  by  the  utility." 

Mr.  Homer  Loring,  Chairman  of  the  Board  of  Public  Trustees  for  the 
operation  of  the  Eastern  Massachusetts  Street  Railway  Company,  was  em- 
phatic in  his  judgment  that  the  only  thing  to  do  with  the  jitney,  from  the  street 
railway  point  of  view,  is  to  put  it  out  of  business.  His  testimony  is  replete 
with  interest.  Beginning  at  page  1644  of  the  Proceedings,  Mr.  Loring  outlines 
the  policy  of  the  Board  of  Trustees,  as  follows : 

"The  broad  powers  we  have  had  have  enabled  us  to  combat  the  jitney  situation  and,  to 
my  mind,  that  is  our  greatest  problem  today.     The  jitneys  are  our  greatest  problem. 

"We  have  made  a  count  in  all  of  our  cities  every  month  to  determine  the  number  of 
jitneys  and  the  passengers  they  are  actually  carrying,  and  the  number  of  jitneys,  from  our 
May  count  to  our  August  count,  more  than  doubled ;  and  the  amount  of  money  which  they 
are  taking  away  from  us  increased  during  that  90  days  from  $18,000  to  $41,000  a  week,  or 
more  than  $2,000,000  a  year. 

"Commissioner  Gadsden :  It  naturally  would  increase  in  summer,  would  it  not,  and 
decrease  in  winter,  Mr.  Loring? 

"Mr.  Loring:  I  do  not  know,  Mr.  Gadsden.  The  jitneys  that  we  are  encountering, 
although  in  some  cities  it  is  the  Ford  automobile,  in  others  it  is  buses  seating  40  people, 
enclosed  buses,  which  certainly  have  been  built  with  the  idea  that  they  can  operate  365  days 
in  the  year. 

"The  Chairman:     Have  your  higher  fares  stimulated  that  jitney  development? 

"Mr.  Loring :  There  is  no  question  that  the  higher  fare  has  stimulated  it.  At  the  same 
time,  we  have  an  interesting  case  over  in  Massachusetts,  at  New  Bedford.  New  Bedford, 
undoubtedly,  has  given  for  years  the  best  service  of  any  city  in  the  State,  and  it  has  been 
in  a  class  by  itself,  and  it  is  still  running  on  a  5-cent  fare,  although  they  are  about  to  try 
to  get  a  higher  one. 

"Up  to  the  time  that  they  compelled  jitneys,  about  May  1st,  to  provide  a  surety  company 
bond,  they  had  more  jitneys  in  New  Bedford  with  the  S-cent  fare  and  with  better  service 
than  any  other  city,  than  in  any  other  city  in  the  State ;  they  had  250  of  them  there.  I  use 
that  frequently  when  some  one  comes  in  and  says:  'If  you  will  reduce  your  fares  the  jitneys 
will  drop  out.'  We  had  jitneys  with  the  S-cent  fare.  To  be  sure  we  did  not  have  as  many 
as  we  have  today ;  but  the  men  returning  from  the  war  have  been  quite  an  influence  in  their 
increase.  Then,  of  course,  the  automobile  people  are  exploiting  the  jitney  business  to  an 
extent  that  I  did  not  realize  until  a  few  days  ago.  The  department  stores  are  exploiting 
them.  One  department  store  in  Salem  has  loaned  $29,000  to  people  to  buy  jitneys  and  bring 
the  people  in  to  that  particular  store.     The  jitney  question  is  a  very  large  one. 

"The  Chairman:  In  that  case  of  that  department  store,  Mr.  Loring,  were  the  department 
store's  advertisements  on  the  side  of  the  jitney? 

"Mr.  Loring:  No;  but  they  ran  to  and  parked  in  front  of  that  store.  They  saw  that 
that  was  the  center. 

"We  had  an  interesting  case  the  other  day.  We  notified  the  City  of  Quincy  that  on 
what  is  called  Howe's  Neck  Road,  about  four  miles  long,  we  would  abandon  the  road  and 
discontinue  service  on  the  1st  of  October  unless  they  restricted  jitneys.  They  said  that 
they  would  not  do  it.  Finally,  however,  they  put  it  to  a  popular  vote  of  every  property 
owner,  and  the  vote  was  700  to  17  in  favor  of  the  street  railway.  That  was  the  first  real 
encouragement  we  have  had  over  in  our  territory. 

"We  take  the  position  that  the  two  cannot  live  in  the  same  community,  in  the  same  city. 
I  do  not  think  any  half-way  measure  is  going  to  help.  Jitneys  and  the  street  railway  cannot 
live.     It  is  wholly  unfair  and  unreasonable  competition. 

"Commissioner  Gadsden  :  Did  you  say  that  that  vote  was  by  property  owners'  vote  or 
citizens? 

"Mr.  Loring  :     Property  owners. 

******** 

"The  Chairman:     How  was  the  question  framed? 

"Mr.  Loring:  They  were  simply  asked  to  choose,  and  to  cross  out  one  or  the  other 
line.  One  was:  'Do  you  prefer  street  railway  service.'  and  the  other  was:  'Do  you  prefer 
jitney  service.'  Then  it  said  at  the  bottom:  'The  street  railway  will  not  operate  if  the  jitneys 
operate.  You  must  choose  one  or  the  other.'  It  was  a  perfectly  fair  test,  however,  and  to 
my  mind  was  a  very  very  important  one.  It  has  so  encouraged  the  Mayor  of  Quincy  that  I  feel 
that  there  is  a  fair  chance  of  getting  jitneys  out  of  the  entire  city. 
******** 

"Of  course,   we  have  a  great  many  cities  that  are  interested   in  their  jitney  service  and 


104  Electric  Railway  Problem 

say  that  it  ought  to  be  continued.  The  competition  is  so  luireasonable,  however,  that  it  cannot 
continue. 

"l'"or  instance,  \vc  showed  the  City  of  Lynn  the  other  day  that  we  paid  in  taxes  $30,000, 
and  we  ran  about  40  regular  cars;  that  is  $750  per  car,  figured  in  that  way.  The  jitney  bus 
scats  20  or  30  and  it  pays  an  average  of  about  $25.  Now,  of  course,  that  is  competition  that 
the  street  railway  cannot  meet ;  and  so  far  as  1  can  see  the  only  position  that  we  are  going 
to  take  is  that  they  cannot  exist  in  the  same  city,  and  the  people  ultimately  must  choose 
between  them,  because  the  way  they  increase  where  they  are  not  severely  restricted  is 
astonishing. 

"So  far  as  the  restrictions  are  concerned,  nothing  amounts  to  anything  except  a  rigid 
bond.  We  have  jitneys  running  in  cities  where,  apparently,  the  regulations  are  stringent, 
but  they  do  not  have  to  provide  a  surety  bond  and  they  can  get  some  near  relative,  or  the 
City  Treasurer  is  not  very  careful  alK)Ut  it,  and  it  does  not  deter  them  at  all.  They  do  not 
make  money  generally.  They  tell  us  that  they  do  not  make  money.  There  is  a  constant 
changing  of  ownership.  However,  it  is  pretty  attractive.  A  man  says,  "If  I  run  a  jitney 
I  can  be  my  own  boss,  and  go  home  to  lunch  when  I  want  to'  and  they  would  rather  work 
for  less  compensation,  I  think,  under  those  conditions.  I  know  they  would  work  under  those 
conditions  for  far  less  than  they  would  work  for  us  to  run  a  car. 

"Mr.  Warren:  Does  what  you  are  saying  api>ly  to  the  jitney  bus?  When  you  say  'jitney' 
do  you  mean  these  20  or  30  seaters? 

"Mr.  Lx)ring :    Yes;  1  mean  anything  from  the  Ford  to  those  that  we  have  that  seat  thirty. 

"Commissioner  Gadsden  :  Did  your  investigation  lead  you  to  think  that  these  buses  are 
an  economical  success?     Can  they  operate  successfully  commercially  in  your  judgment? 

"Mr.  Loring :  Mr.  Gadsden,  there  is  a  grave  question  about  it.  The  l-'ord  jitney  makes 
high  si)ced.  Some  of  the  mills  told  me  that  their  help  said  that  they  could  take  the  Fords 
and  load  up  with  four  or  five  of  the  help  and  run  to  the  other  side  of  the  city  with  no  stops 
and  they  could  get  their  lunch  and  return  that  way.  Now,  it  was  pretty  hard  to  give  any 
good  argument  as  to  why  they  should  not  do  that.  We  cannot  do  it  with  our  street  railway, 
because  the  more  people  you  carry  the  more  stops  you  have  to  make  and  the  slower  your 
running  time.  That  is  exactly  what  happens  as  the  jitney  buses  increase  in  size.  The  time 
slows  down  a  great  deal,  particularly   in  the  city. 

"So  I  gravely  doubt  whether  they  have  a  broad  economic  u.'se  in  our  cities. 

"I  think  it  is  going  to  lie  a  serious  matter  in  the  future,  anyway,  Mr.  Gadsden,  handling 
the  public  in  our  cities.  Our  streets  are  fixed  in  width,  the  traffic  in  them  has  increased 
enormously  in  the  last  few  years,  and  it  stands  to  increase  greatly  in  the  next  few  years, 
and  I  do  not  believe  that  there  is  any  way  found  yet  to  transport  people — I  am  talking  about 
city  traffic — as  well  as  street  cars  holding  a  good  many  people  and  occupying  a  certain  place 
in  the  street.     1  doubt  it  very  much.     However,  of  course,  it  remains  to  be  seen." 

.Mr.  I\o<jcr  W.  Babson,  President  of  Babson's  Statistical  Organization,  and 
a  director  in  the  Eastern  Massachusetts  .'street  Railway  Company,  expressed  the 
opinion  that  in  attacking  the  electric  railway  problem  there  are  "three  general 
methods  of  pursuit":  first,  private  ownership  and  public  regulation,  which  has 
already  broken  down;  .second,  municipal  owncrshi])  and  service-at-cost  plans, 
which  arc  good  from  the  investor's  standpoint,  but  arc  likely  to  cause  a  "back 
fire"  some  day ;  and,  based  upon  the  recognition  that  the  automobile  is  what  is 
the  matter  with  the  street  railway,  another  method  which  he  describes  and  ad- 
vocates at  pages  1054  and  1055  of  the  Proceedings,  as  follows: 

"The  third  method  would  be  for  the  communities  to  relieve  the  street  railways  of  their 
taxations  and  various  other  burdens  and  |KTmit  them  to  charge  what  fares  they  wish  to 
charge,  hut  to  protect  the  public  by  i)ermitting  a  proi)er  competition  in  the  line  of  judicious 
jitney   systems. 

"I  feel  very  strongly  that  in  the  end  the  street  railways  and  the  public  would  be  better 
oflf  by  opening  the  throttle  and  letting  the  street  railways  and  the  automobiles  fight  the  thing 
out  on  a  service  liasis,  and  each  class  charge  what  they  need  to  do  the  business.  In  some 
communities  the  street  railway  wouUl  go  out  of  business,  and  we  would  have  a  bus  service 
inste.-id.  In  other  communities  the  buses  would  go  out  of  .service,  and  we  would  have  a 
street  railway  service  instead.  Itut  in  all  the  communities  we  would  have  decent  service, 
which  we  are  not  having  at  the  present  lime. 

"I  think  the  stn'cl  railway  difliciillies  l)egan  in  Massachusetts,  for  instance,  when  the 
stale  came  in  and  practirally  fathered  the  roads.  The  slate  approved  the  issues  of  securities^ 
and  pnilectrt!  the  rojids  against  roiniiclition,  and  the  roads  became  lazy  and  indifferent,  the 
service   fell  down,  and  that  was  the  l)eKinning  of  the  trouble. 

"H  the  rcvads  had  l)cen  obliged  to  fight  for  their  existence   from  the  first,  h.id  l)ccn   free 


Automobile  Competition  105 

to  charge  what  fares  they  wanted  to  charge,  and  had  been  dependent  on  service  for  holding 
their   business,   1   do   not   think   we   would   have  the   trouble   so  acute   as   we   have   it   at   the 

present  time. 

******** 

"The  real  difficulty  with  the  street  railway  situation  came  with  the  automobile.  It  is  not 
the  labor  problem,  as  I  see  it.  It  is  not  the  high  cost  of  materials.  Those  are  factors.  But 
labor  has  always  gradually  increased  in  price,  the  materials  have  gradually  increased  in  price. 
It  was  Henry  Ford  who  hit  the  street  railway  system  a  blow  between  the  eyes.  If  he  had 
only  been  bright  enough  to  sell  street  railway  securities  short  when  he  built  his  plant,  he 
would  have  been  making  double  the  money  that  he  is  making  now. 

"Take  Massachusetts,  for  instance :  There  are  less  than  5000  street  cars  in  Massachusetts, 
and  there  are  186,000  automobiles.  There  are  186,000  automobiles  and  less  than  5,000  street 
cars.     There  is  the  fundamental  difficulty,  as  I  see  it,  with  the  street  railway  situation. 

"Now  we  are  in  it,  the  question  is,  how  are  we  going  to  get  out  of  it.  We  cannot  get 
out  of  it,  certainly,  by  having  our  hands  tied. 

"There  are  only  two  ways :  Either  to  sell  out  to  the  communities,  through  municipal 
ownership  or  service-at-cost  plan,  or  else  have  a  free  reign  to  win  out  on  the  basis  of  service. 

"There  are  some  communities  where  the  street  railway  companies  cannot  win  out  on  the 
basis  of  service,  but  there  are  other  communities  where  I  feci  very  strongly  that  the  street 
railways  could  win  out  if  they  were  free  to  charge  what  the  traffic  would  bear  and  were  freed 
from  restrictions  on  such  questions  as  paving,  which  is  simply  an  inheritance  from  the  old 
street  horse-car  days ;  the  reason  we  have  to  pay  for  the  paving  between  the  tracks  is  that  we 
used  to  have  horses  that  wore  out  the  dirt  between  the  tracks.  And  I  further  believe  that 
in  Boston,  for  instance,  where  we  have  the  10-cent  fare  today,  if  the  city  and  the  state  were 
not  holding  the  umbrella  over  the  Boston  Elevated  Company,  and  the  Boston  Elevated 
Company  was  free  to  charge  any  fare  that  it  wanted  to,  but  had  to  stand  on  its  own  basis, 
the  people  of  Boston  would  get  better  service,  and  lower  fares  than  they  have  got  today." 

Mr.  Babson  made  it  perfectly  clear  that  his  reason  for  advocating  the  re- 
moval of  restrictions  from  the  electric  railways  is  that  they  are  no  longer  mon- 
opolies.    At  page  1056,  he  says : 

"A  monopoly  should  he  regulated.  I  feel  that  very  strongly.  I  think  that  before  the 
auto  came  the  commission  did  right  in  regulating  these  street  railways  and  controlling  them; 
but  now  that  the  auto  has  come  into  the  field,  it  seems  to  me  that  a  monopoly  no  longer 
exists  and  there  is  no  reason  why  the  states  and  cities  should  shackle  these  roads,  until  they 
again  become  a  monopoly." 

At  pages  1056  and  1057  of  the  Proceedings,  Mr.  Babson  discusses  more 
fully  the  subject  of  street  railway  monopoly  and  the  absence  of  it.  Upon  this 
point  his  testimony  follows: 

"The  Chairman :  There  is  a  monopoly,  in  your  judgment,  where  a  street  car  company 
has  not  the  jitney  competition? 

"Mr.  Babson :    Yes. 

"The  Chairman :  But  the  fact  that  there  are  hundreds  of  thousands  of  automobiles, 
privately  owned,  carrying  persons  to  and  from  business  and  otherwise,  but  not  charging  for  it, 
is   competition,  of   course? 

"Mr.  Babson :  Yes ;  and  that  has  been  what  has  put  the  street  railways  on  the  blink — 
the  automobile. 

"The  Chairman:  You  do  not  expect  to  eliminate  competition  between  that  form  of 
convcvance  and  the  street  car  company,  do  you? 

"Mr.  Babson:  No;  and  that  has  removed  the  great  cause  of  public  regulation.  That 
has  opened  the  door.  When  I  was  a  boy,  or  even  fifteen  years  ago,  it  was  either  a  question 
of  taking  a  street  car  or  a  slower  conveyance :  the  street  car  people  had  the  service.  That 
is  the  real  thing  that  counts  in  this  world— service.  The  street  car  people  had  a  monopoly,  not 
of  the  streets,  but  thev  had  a  monopoly  of  serv-ice.  They  could  get  you  there  quicker  than 
anv  other  form  of  convevance.  That  is  where  their  monopoly  lay — not  in  the  fact  that  they 
had  the  streets,  but  in  the  fact  that  they  had  the  quickest  service.  Now  that  monopoly  has 
gone." 

Mr.  Babson's  views  upon  the  failure  of  private  ownership  and  public  regu- 
lation are  found  at  page  1061  of  the  Proceedings,  where  he  answers  Chairman 
Elmquist's  questions  as  follows: 

"The  Chairman :     Why  do  you  say  private  ownership  and  regulation  has  broken  down  ? 
"Mr.  Babson:     Because  the  roads,  so  many  of  them,  are  in  bankruptcy. 


106  Electric  Railway  Problem 

"The  Chairman:  Is  that  the  result  of  pri\'ate  owiiership  and  regulation,  or  is  it  the 
result  of  the  war,  with  its  attendant  high  prices,  high  cost? 

"Mr.  Babson ;     That  is  the  result  of  the  automobile. 

"The  Oiairman:     The  result  of  the  automobile? 

"Mr.  Babson :  The  result  of  the  automobile  absolutely.  It  is  the  automobile  that  puts 
the  street  railways  where  they  are.  We  have  less  than  5.000  street  cars  in  Massachusetts, 
and  we  have  186.000  automobiles.    There  is  the  answer  to  the  question. 

"The  Chairman  :  Do  you  feel  that  if  the  war  had  not  come,  your  street  car  industry 
in  Boston  would  still  be  a  broken  down  institution? 

"Mr.  Babson:  Yes,  I  do. 

"The   Chairman:    What   was  the  condition  before   the   war   started? 

"Mr.   Babson :    It   was  losing  money." 

The  Railroad  Commission  of  California,  in  the  San  Diego  fare  case  de- 
cided November  14,  1919,^  recognizes  the  changed  status  of  the  electric  railway  as 
a  result  of  automobile  competition. 

"The  kind  of  transportation  furnished  by  street  railway  companies  is  no  longer  a  mon- 
opoly," says  Commissioner  Devlin  in  the  opinion  in  that  ca,se.  "The  development  of  the 
automobile  has  brought  about  a  condition  where  the  motor  vehicle  will  automatically  take  the 
place  of  the  street  railway  if  this  kind  of  transportation  can  be  rendered  more  economically 
by  automobile  than  it  can  by  street  car.  This  is  especially  true  in  California.  I  am  not 
convinced,  however,  that  the  time  has  arrived  when  our  largest  cities  can  dispense  %vith  their 
street  car  systems.  I  am  also  satisfied  that  the  electrically  operated  street  car  will  have  the 
better  of  it  when  compared  with  the  motor  vehicle  in  regard  to  actual  costs,  and  when  all 
items  of  cost  are  taken  into  consideration  as  they  should  be  and  if  unfair  and  unequal  burdens 
are  not  placed  on  the  street  railways.  This  is  especially  apparent  when  modern  street  rail- 
way  equipment   is   taken    into  the  comparison." 

This  is  especiaily  true  in  California,  and  we  may  add.  in  Massachusetts 
and  the  intervening  states. 

The  evidence  against  the  automobile  as  a  wrecker  of  street  railway  credit 
appears  to  be  overwhelming.  Mr.  William  C.  Bliss,  Chairman  of  the  Public 
Service  Commission  of  Rhode  Island,  after  mentioning  "the  increased  cost  of 
labor  and  material"  and  "the  excessive  franchise  taxes  and  paving  obligations" 
as  two  of  the  "fundamental  causes  of  the  emergency  situation  that  exists,"  goes 
on  to  say  at  pages  1186  to  118<S  of  the  Proceedings: 

"The  third  cause  is  the  competition  of  the  priN-ately  owned  automobile.  The  privately 
owned  automobile  has  come  to  stay,  we  cannot  interfere  with  that.  That  is  going  to  remain, 
and  the  only  way  we  can  do  is  to  have  hard  times  and  force  people  to  dispose  of  their  auto- 
mobiles aiul  ride  in  the  cars.  W'c  do  not  want  that  as  a  remedy  of  the  situation.  But  the 
tremendi>us  increase  in  the  numlicr  of  privately  owned  automobiles,  the  influence  is  just  as 
strong  in  l'!h<Kle  Island  as  it  is  everywhere  else.  Every  improvement  of  state  highways  tends 
to  increa.se  the  lunnlwr  of  these  autmnobiles  and  the  use  of  the  roads. 

"The  estimates  of  the  effect  of  jitney  competition  as  shown  by  actual  ridings  taken  by 
the  commission  apiKar  in  the  report,  and  if  I  may  take  that,  1  will  refer  you  to  the  page 
so  you  will  have  it  in  your  record.  It  appears  upon  page  31  of  the  report  of  the  commis- 
sion.' where  we  have  indicated  that,  according  to  the  ridings  that  were  at  that  time  shown, 
the  loss  in  gross  revenue  to  the  Uhtnle  Island  Comiwny  was  probably  not  less  than  $300,000  a 
year.  With  the  application  of  each  increase  in  fares  the  jitney  competition  becomes  all  the 
more  severe.  The  regulation  as  it  exists  in  Rhode  Island  is  left  to  each  of  the  localities. 
In  the  City  of  Providence  and  the  City  of  Pawturket  where  the  jilncAs  are  in  principal  use  the 
re<|nircmcnt  is  a  $2.^  annual  license  fee,  a  $.^00  liond  for  eadi  i)as.sengcr.  up  to  the  capacity 
that  is  fixed  for  the  car:  five  iwssengcrs  is  the  conmion  amount,  and  a  $2,500  txjiid  and 
%2S  license  fee,  and  of  course  the  ordinary  registration  motor  vehicle   fee  to  the  .*state. 

"The  jitneys  are  under  no  other  regulation.  They  are  not  required  to  operate  over  par- 
ticular routes;  thoy  arc  not  required  to  operate  upon  particular  schedules.  I  Ix-licve  that 
the  jitney  furnishes  to  many  people  a  superior  service  to  thai  of  the  trolleys,  and  I  believe 
for  thai  reason  that  it  will  Ik-  impossible  to  atxilish  the  jitneys.  I  believe  they  should  be 
placed  under  the  strictest  regulation.  I  think  they  should  Ik-  reijuired  either  to  W  placed 
under  the  siipervisinn  of  the  city  authorities  or  inider  the  sum  rvision  of  the  commission  and 
requirc<l  to  run  upon  regular  routes  and  with  regular  schedules  and  they  should  be  required 
to    furnish    statistical   data    if   rc<|uircd. 

"Commissioner    Meeker :     You    spoke   of    putting    them    under    the    strictest    regulations. 


Automobile  Competition  107 

You  mean,  do  you  not.  the  same  regulations  that  apply  to  tlic  street  railway  companies 
practically;    you  would  not  make  the  regulations   more   severe   for  the  jitneys? 

"Mr.  Bliss:  No,  but  I  mean  for  instance  the  safety  features,  if  you  could  see  some 
of  the  jitneys  that  operate,  which  are  regularly  licensed,  and  some  of  the  drivers,  you  would 
think  they  ought  to  be  directed  to  the  Board  of  Health  for  fumigation,  and  some  of  the 
machines   sent   to   the    car   shop    for    repairs. 

"Commissioner  Meeker:  And  you  think  that  the  jitney  would  still  survive  as  a  severe 
competitor  to  the  street  railways  if  it  were  subject  to  severe  regulations,  practically  the 
same    regulations   as    street    railroads  ? 

"Mr.  Bliss:  I  think  it  would  operate  to  hurt  the  street  railways,  but  I  think  they  would 
be  very  greatly  reduced  in  number.  In  the  city  of  Providence  our  great  difficulty  is  our 
narrow  streets  and  corners  which  make  the  operation  of  these  large  cars  difficult.  The  con- 
gestion of  the  streets  with  jitneys  and  with  the  other  automobiles  tends  to  very  greatly  delay 
the  movement  of  the  cars  through  the  center  of  the  city.  That  is  one  reason  why  the 
recommendation  of  the  commission's  engineers  of  rerouting  these  lines  outside  the  center 
of  the  city — which  would  immediately  be  objected  to  by  the  Department  stores,  who  want 
every  car  to  go  by  their  doors — such  a  rerouting  would  operate  to  tremendously  increase  the 
speed  of  the  cars,  and  we  estimated  that  an  average  increased  speed  of  10''  would  mean  under 
the  operations  of  1917.  $150,000.  The  jitneys  operate  to  delay  the  movement  of  cars.  They 
crowd  in  in  front  of  cars  and  delay  the  movement  of  loading  the  passengers,  and  the  jitneys 
which  are  unregulated,  pull  right  in  between  the  white  posts  and  the  car  and  the  passengers, 
and  all  of  that  delays  the  movement  of  the  cars,  and  I  think  that  the  public  generally  would 
welcome  proper  regulation  of  the  jitneys,  but  they  would  oppose  the  absolute  suppression 
of  the  jitney,  because  the  jitney  does  render  a  superior  service  to  the  car.  It  gets  you  there 
quicker.  We  have  a  large  number  operating  between  Providence  and  Pawtucket  on  a  15- 
cent  rate  compared  with  the  trolley  car  rate  of  10  cents,  and  they  do  a  tremendous  and  profit- 
able business,  and  they  are  well  conducted  and  proper  cars  and  run  on  a  business-like  basis, 
and  I  think  the  public  are  willing  to  pay  for  that  service,  even  though  it  costs  half  as  much 
again  as  the  trolley  does.  But  to  leave  the  jitneys  unregulated  and  permit  them  to  come 
in  direct  competition  with  the  cars  is  a  very  serious  cause  of  the  present  situation." 

Mr.  Carl  H.  Mote,  at  that  time  Secretary  of  the  Public  Service  Commission 
of  Indiana,  explained  the  policy  of  that  commission  with  respect  to  the  protection 
of  old  investments  based  on  hopes  that  have  been  disappointed,  and  referred  to 
the  automobile  as  one  of  the  important  factors  in  causing  the  disappointment. 
At  pages  1088  and  1089  of  the  Proceedings,  he  says : 

"Indiana  by  no  means  has  escaped  the  effects  of  speculation  in  the  pioneer  days  of  elec- 
tric railway  building  and  financing,  else  the  reorganizations  already  consummated  and  now 
in  process  and  to  be  accomplished,  would  not  have  been  and  would  not  be  necessary.  I 
believe  it  is  the  theory  of  our  commission  that  we  are  not  called  upon  to  protect  the  return 
on  securities  that  represent  no  value  and  that  were  issued  in  pioneer  days  in  anticipation  of 
future  earning  power  that  has  not  been  realized. 

"The  truth  is  that  the  electric  interurban  railways  have  been  a  huge  disappointment 
to  the  hopes  and  judgment  of  their  promoters.  The  advent  of  the  automobile  was  not  fore- 
seen, and  I  do  not  think  we  have  reached  the  peak  of  its  efTect  on  interurban  traffic,  either 
passenger  or  freight.  The  building  of  hard  surface  roads  is  bound  to  bring  the  motor- 
driven  truck  into  more  active  competition  with  the  electric  railway  for  the  transportation 
of  short-haul  freight,  and  the  trouble  with  the  jitney  bus  is  already  well  recognized.  I 
look  upon  their  future  as  anything  but  promising." 

Mr.  Gaylord  C.  Cummin,  who,  during  his  career,  has  been  at  different  times 
city  engineer  of  Dayton,  Ohio,  city  manager  of  Jackson,  Michigan,  and  city 
manager  of  Grand  Rapids,  Michigan,  appeared  before  the  Commission  as  a 
representative  of  the  Institute  for  Public  Service.  At  page  31  of  the  Proceedings 
he  classifies  street  railways  into  two  groups:  one  group  "where  it  is  possible 
for  them  to  stand  on  their  own  feet,  by  means  of  increased  fares  and  decreased 
expense  of  various  kinds,  decreased  taxes,  perhaps,  and  so  on;"  and  another 
group  "where  the  earning  capacity  is  not  there,"  where  "the  rate  of  fare  that 
is  fixed  makes  absolutely  no  difference,"  where  the  companies  could  not  get  a 
sufficient  revenue  at  any  rate  of  fare  that  might  be  charged.  Further  on,  Com- 
missioner Gadsden  asks  him  what  is  to  be  done  with  this  second  class  of  utilities. 


108  Electric  Railway  Problem 

He  replies  that  the  choice  lies  between  a  partnership  scheme  with  a  public  subsidy, 
and  public  ownership.  The  witness  then  states  that  the  automobile  is  what  ails 
this  second  group  of  street  railway  properties  and  that  the  automobile  has  come 
to  stay.     The  following  colloquy  is  found  at  page  Z7  of  the  Proceedings : 

"Commissioner   Gadsden:    The  public   has   to  absorb  the   loss? 

"Mr.  Cummin:  The  public  has  to  absorb  the  loss.  They  are  necessary  facilities.  Un- 
fortunately, they  have  nothing  to  look  forward  to,  because  the  loss  that  they  have  suffered 
now  is  a  loss  due  to  the  automobile,  ver\-  largely,  and  the  use  of  the  automobile  is  going 
to  increase,  and  not  decrease,  and  the  probable  passengers  per  unit  of  population  served 
will  probably  tend  to  decrease  and  not  increase. 

******** 

"Commissioner  Gadsden :  I  want  to  bring  out  your  idea  of  what  is  going  to  be  that 
essential  service  that  could  not  pay  its  way. 

"Mr.  Cummin;  The  effect  of  the  automobile  now  can  be  shown  by  comparing  the  figures 
on  gasless  Sundays,  and  the  Sundays  that  were  not  gasless.  On  a  number  of  lines  I  found 
that  the  gasless  Sundays  added  from  20  to  40  per  cent  to  the  gross  revenue,  and  they  seemed 
to  average  some  place  around  ii  1/3  per  cent.  Now,  if  the  street  railroads  had  ii  1/3  per 
cent  more  gross  revenue  than  they  have  now,  it  would  go  a  long  way  toward  helping  the 
solution  of  the  difficulty,  even  under  present  prices." 

The  discussion  was  carried   further  at  page   54  of   the   Procedings,   where 

Commissioner  Sweet  asks  the  questions.     Here  Mr.  Cummin  testifies  as  follows: 

"Commissioner  Sweet :  You  said  that  the  automobile  was  having  a  very  material  effect 
in  diminishing  the  travel  upon  street  railways,  and  consequently  diminshing  their  earning 
capacity.     Can  you  see  any   remedy   for  that   from  the   street  railway   standpoint? 

"Mr.  Cummin  :  No,  1  do  not  know  that  I  can.  I  think  the  use  of  the  automobile  is  going 
to  increase  rather  than  decrease,  and  the  only  thing  I  can  see  is  ftir  the  street  railroads  to 
try  to  work  out  some  sclieme  to  make  riding  on  street  railroads  more  attractive  than  riding 
in  Fords.  If  they  can  do  that,  they  can  perhaps  make  inroads  on  these  deficits.  But  there 
is  the  situation :  .\  man  owns  a  car.  and  he  goes  tack  and  forth  to  work  in  it,  and  he  used 
to  ride  in  a  street  car ;  and  he  will  probably  seat  two  or  three  of  his  friends,  or  at  least 
one  friend,  probably  an  average  of  three  or  four  a  week ;  he  will  take  them  out  with  him 
as  he  passes  them  on  the  street.  Those  are  all  pt^tential  street  railroad  fares,  that  would 
be  street  railroad  fares  if  it  were  not  for  that  automobile;  and  you  multiply  that  by  thou- 
sands and  thousands  of  cases,  and  you  make  a  very  decided  inroad  on  the  earnings  of  the 
street   railway. 

"Commissioner  Sweet;  Of  the  two  kinds  of  street  railroads  you  spoke  of.  those  that 
are  almost  hopeless,  or  practically  so,  and  those  that  are  not,  which  would  be  the  more 
affected   by    the   automobile   competition? 

"Mr.  Cummin:    I  do  not  .see  that  it  would  make  any  particular  difference. 

"Commissioner  Sweet ;  Don't  you  think  that  these  street  railroads  that  I  think  you,  or 
perhaps  judge  Taft  said  never  ought  to  have  been  built,  that  there  was  no  logical  reason 
for  building,  out  into  the  suburbs,  would  be  more  afTected,  in  proportion,  than  those  in  the 
center  of   the  city? 

"Mr.  Cummin:  Oh,  yes.  Take  a  line  that  is  built  info  a  high  class  residential  dis- 
trict, and  it  might  lie  pretty  nearly  put  out  of  business  by  the  automobile  traffic.  You  take 
lines  in  the  City  of  New  York,  and  they  might  be  very  little  affected.  I  mean,  the  per- 
centage is  probably  very  much  less  than  it  would  he  in  a  smaller  city,  but  that  is  taking  the 
extremes,  of  course.  I  liclieve  if  you  take  cities  the  size  of  Detroit  and  Cleveland  and 
cities  of  that  general  class,  you  will  find  that  the  automobile  has  cut  very,  verv'  heavily  into 
the  revenues  of  the  street  railway  companies.  It  is  easy  enough  to  siitiply  go  out  in  the 
street  and  coimt  them  up — what  would  lie  street  car  fares  if  it  were  not  for  the  automobiles. 

"Commissioner  Sweet:  In  the  cases  you  have  in  mind  is  the  jitney  playing  any  part 
in   your  estimate? 

".\Ir  Cnmroin  :  Under  certain  circumstances  and  in  certain  cases  tlie  jitney  may  lie  a 
very  .serious  competitor;  but  taking  the  question  and  generalizing  upon  it,  the  serious  thing 
is  the  automobile  as  a  whole — the  privately  owned  automobile  and  the  jitney  and  every 
thing  all  together ;  that  is  the  thing  that  the  street  railroads  must  face,  the  competition 
of  the  automobile.  The  jitney  comiKtifion  you  can  control.  The  priv'atc  automobile  com- 
petition  you  cannot  control. 

"Commissioner  Sweet;    That  is  likely  to  grow  worse,  rather  than  better? 

"Mr.  Cummin;  I  would  judge  so.  at  least  by  the  plans  that  the  automobile  manufac- 
turers  have." 

The  effect  of  jitney  competition  in  Dallas,  Texas,  upon  the  revenues  of  the 

street  railway  was  shown  by  the  testimony  of  Mr.  \V.  R.  Head,  Vice-President 


Automobile  Competition  109 

of  the  Dallas  Railway  Company.  He  describes  the  sliding-scale,  service-at-cost 
franchise  under  which  his  company  is  now  operating  at  a  five-cent  fare  and 
getting  a  four  per  cent  return  on  property  value.  Then,  at  pages  634  and  635 
of  the  Proceedings,  occurs  the  following: 

"The  Chairman:  Has  it  not  looked  to  you  as  if  the  city  got  everything  in  this  contract, 
and   you   got   nothing? 

"Mr.  Head:   Well,  I  quite  agree  with  you,  Mr.  Commissioner,  that  they  got  the  best  of  it. 

"The  Chairman:    Well,  what  did  you  get  out  of  it? 

"Mr.  Head:  H  conditions  had  continued  as  they  were  in  1913  and  1914,  as  to  the  cost 
of  materials  and  labor,  I  think  that  we  would  have  been  earning  at  this  time  about  eight  per 
cent  on  the  property  value,  and  the  people  would  have  been  riding  at  six  tickets  for  a  quarter. 
Now,  we  did  not  have  to  support  that,  or,  rather,  some  of  us  did  feel  that  there  might  come 
a  time  when  the  fare  would  have  to  be  made  above  five  cents  as  a  straight  fare,  but  at  the 
time  the  franchises  were  negotiated,  we  had  the  severe  jitney  competition,  that  is,  the  old 
company  management  had  jitney  competition,  and  one  of  the  agreements  of  the  city  was, 
what  you  might  term  a  side  agreement,  that  they  would  pass  an  ordinance  that  would  relieve 
the  railway  company  of  this  jitney  competition. 

"The    Chairman :     Has    that    been    done  ? 

"Mr.  Head:  Yes,  sir;  but  it  took  a  good  long  time.  It  got  into  the  courts,  and  we 
have  only  been  relieved  of  it  in  the  month  of  May  of  this  year.  That  was  the  first  month 
that  we  have  had  in  which  to  make  a  comparison. 

"Mr.   Warren:    What   was   the   result   of   that   comparison,   Mr.   Head? 

"Mr.  Head:  It  is  interesting.  The  receipts  jumped  up  in  May  of  this  year  over  May 
of  last  year  about  SO  per  cent.     We  never  knew  how  much  they   were  taking. 

"Mr.  Warren:    Fifty  per  cent? 

"Mr.   Head:    Yes. 

"The  Chairman:  Of  course,  you  know,  Dallas  is  still  growing,  and  has  been  growing 
some  since  last  May. 

"Mr.  Warren:    You  think  30  per  cent  may  have  been  the  normal  growth? 

"Mr.  Head  :  The  June  statement  shows  an  increase  in  June  this  year  over  June  of  last 
year,  with  no  jitneys  last  year,  of  about  10  per  cent.  The  increase  in  May  this  year  over 
May  last  year  was  48.3  per  cent.  May,  1919,  as  compared  with  May,  1918,  increased  48.3 
per  cent. 

"Mr.  Warren:    And  the  next  month  it  increased  10  per  cent? 

"Mr.  Head :    The  next  month  it  was  10  per  cent. 

"Mr.  Warren :    Because  they  had  been  cut  ofT  in  June  a  year  ago  ? 

"Mr.  Head :    Yes ;    because  they  had  been  cut  off  in  June  a  year  ago." 

In  an  earlier  chapter  of  this  report  I  quoted  Mr.  Henry  G.  Bradlee's  letter 
of  October  1,  1919,  in  which  he  shows  that  street  railway  traffic  is  booming  on 
the  Stone  &  Webster  lines,  and  even  intimates  that  perhaps  the  automobile  has 
done  the  electric  railway  a  good  turn  after  all  by  stimulating  movement  and  cul- 
tivating the  riding  habit.  What  we  are  chiefly  concerned  with  in  this  chapter 
is  the  effect  of  automobile  coinpetition,  marking  as  it  does  a  change  in  economic 
conditions,  upon  the  credit  of  the  electric  railways.  The  evidence  is  clear  and 
cumulative  that  the  automobile  has  raised  a  serious  doubt  in  the  public  inind  as 
to  the  permanence  of  the  electric  railway  as  the  chief  means  of  local  transpor- 
tation. Doubt  is  the  negation  of  credit.  Yet  the  issue  is  of  such  vast  impor- 
tance that  if  somebody  sees  a  silver  lining  on  the  dark  clouds  hanging  over  the 
future  course  of  the  utility,  it  is  comforting  and  may  lead  to  a  revival  of  drooping 
spirits.  The  witnesses  are  nearly,  if  not  quite  unanimous,  that  the  regulation  of 
jitneys  so  as  to  do  away  with  their  unequal  and  unfair  competition  is  quite 
within  the  bounds  of  public  policy,  but  that  the  competition  of  private  automo- 
biles for  traffic  cannot  well  be  regulated.  The  question  is  this,  therefore :  If 
jitneys  are  abolished,  or  at  least  subjected  to  regulation  and  taxation  equivalent 
to  the  regulation  and  taxation  that  are  applied  to  the  electric  railways,  can  the 
latter  survive  or  perhaps  even  profit  by  the  competition  of  the  automobile?    Put 


110  Electric  Railway  Problem 

in  another  way,  is  there  anything  in  the  remarkable  recent  development  of  motor 
transportation  to  destroy  street  railway  credit  permanently?  Mr.  Richard  Schad- 
delee,  looking  out  upon  the  electric  railway  world  of  the  Middle  West  from  his 
headquarters  in  Grand  Rapids,  Michigan,  sees  nothing  to  fear  in  the  automobile, 
if  the  jitney  can  be  made  to  keep  its  place.  His  testimony  on  this  point  is  found 
at  pages  867  and  868  of  the  Proceedings,  where  he  says: 

"You  have  heard  a  lot  about  the  jitney  competition.  Well,  we  have  had  jitney  com- 
petition in  past  years,  too,  and  the  only  reason  that  we  had  that  competition  is  because 
the  politicians  and  the  public  officials  allowed  those  jitneys  to  compete  with  us  on  an  uneven 
and  unfair  basis.  I  am  not  afraid  of  jitney  competition  it  you  put  on  those  jitneys  the  same 
burdens  you  put  on  us,  not  a  bit.  1  told  one  of  our  council  wlien  they  had  the  jitney  com- 
petition up,  1  said,  'I  will  stop  the  street  cars  for  a  month  if  you  say  so,  and  let  the  jitneys 
do  all  the  business.  Then  we  will  stop  the  jitneys  a  month  and  we  will  do  it  all.  You  can 
be  your  own  judges  as  to  which  is  the  Ixjtter  mode  of  transportation.' 

"You  know  what  we  want  is  justice  and  fairness,  and  jitneys  or  any  other  mode  of 
locomotion  is  a  revolutionar)-  mode  over  our  system  of  transportation.  We  cannot  prevent 
that  going  into  effect.  There  is  no  private  enten>rise  that  can  oppose  or  retard  to  any  extent 
the  working  of  an  evolution  in  transportation.  We  might  just  as  well  lay  down,  but  I  do 
not  want  to  lay  down  imless  the  competition  is  fair. 

"Mr.   Warren:     Is  there  any   regulation   of  jitneys  there? 

"Mr.  Schaddelee :    Well,  the  court  has  regulated  them  out  of  business. 

"Mr.  Warren:    The  courts  have? 

"Mr.  Schaddelee:  Yes,  and  that  is  another  thing  where  the  commission  failed  to  do  its 
plain  duty  under  the  law.  The  Illinois  law  says  that  nobody  engaged  in  the  transportation 
of  persons  in  Illinois  can  engage  in  that  unless  they  first  have  a  certificate  of  convenience. 

"Mr.  Warren:     From  the  commission? 

"Mr.  Schaddelee:  Yes,  sir,  and  that  is  the  duty  of  the  commission  to  enforce  that  law. 
They  never  made  any  effort  to  enforce  it.  Finally  we  got  them,  after  long  work,  and  after 
keeping  at  it  all  the  time,  they  finally  issued  an  order  telling  them  to  desist.  Do  you  suppose 
they  desisted?  Not  a  bit.  They  increased.  They  did  not  care  for  it,  they  were  nothing 
but  a  lot  of  outlaws,  and  as  long  as  they  could  operate  as  outlaws  they  could  stay.  The 
minute  they  were  compelled  to  abide  by  the  law  they  could  not  live.  Any  outlaw  can  live 
as   long  as  nobody   interferes   with   him. 

"Mr.  Warren:  What  did  you  do,  go  to  the  court  and  get  an  order  to  enforce  the 
commission's  order? 

"Mr.  Schaddelee:  Yes,  we  got  a  blanket  order,  I  do  not  know  if  any  court  has  ever 
issued  an  order  of  that  kind,  but  we  got  it,  and  there  are  no  jitneys  now  and  there  won't 
l>e  any  more  down  there.    If  they  do  come  we  will  take  care  of  them. 

"The  Chairman :  Do  you  not  think  it  was  a  good  thing  for  the  people  to  be  fed  on 
jitneys   for  a  while  so  as  to  have  the  full  experience? 

"Mr.  Schaddelee  :  Well.  I  had  no  objection  to  their  being  fed,  but  we  had  objection  to 
the  nourishment  to  feed  them  being  withdrawn  from  us,  that  is  what  we  objected  to.  Those 
jitneys,  you  know,  in  the  winter-time  when  the  snow  was  on  the  ground — there  would  be 
two  feet  of  snow  on  the  ground  and  the  jitneys  would  not  nm  until  we  had  cleared  the 
snow  from  the  streets  and  then  the  jitneys  would  go  right  ahead  of  our  street  cars  and 
take  all  our  business  away  from  us,  and  llu-n  they  .say  the  street  car  company  has  a  com- 
petitor.    That   is  a  fine  competitor,  that  is.'' 

That   the  jitney  has  pointed  the  way  to  a  radical   improvement  in  electric 

railway  service  through  a  revolution  in  operation  methods,  and  has  changed  the 

electric  railway  from  a  monopoly  to  a  business,  was  the  opinion  of  Mr.  Walter 

Jackson,  a   consulting  expert   on   street   railway    fares    and   bus   operation,   who 

until  recently  was  on  the  staff  of  the  Electric  Railway  Journal  for  manv  years. 

Mr.  Jackson's  testimony  does  not  controvert  the  view  that  automobile  competition 

has  been  a  leading  factor  in  the  collapse  of  street  railway  credit,  but  it  strongly 

maintains  that  the  electric  railways,  to  great  extent,  have  their  future  in  their 

own  hands.     At  pages  1590  to  1592  of  the  Proceedings,  Mr.  Jackson  says: 

"Perhaps  the  larger  difficulty  of  the  electric  railway  industn.'  is  not  merely  the  greatly 
increased  cost  of  operation  due  to  the  war.  or  accelerated  by  the  war.  but  the  necessity  of 
changing  its  point  of  view  from  that  of  a  monopoly,  a  monopolistic  industn,-,  to  that  of  a 
business. 


Automobile  Competition  HI 

"When  the  electric  railway  was  a  monopoly  it  did  not  have  the  necessity  to  progress  that 
is   common   in  any   commercial   undertaking. 

"If,  for  example,  an  improvement  in  apparatus  were  brought  before  an  electric  rail- 
way, the  failure  to  adopt  that  improvement  would  not  be  as  dire  and  show  up  in  as  bad  a 
light  the  operator  as  would  be  the  case  where  a  manufacturer  rejected  an  improvement. 
The  rejection  of  an  improvement  by  a  competing  manufacturer  spells  ruin.  Rejection  of,  an 
improvement  by  a  monopoly  does  not  spell  ruin  immediately,  but  spells  lower  income  and 
poorer  service.  There  is  not  the  same  means  for  checking  up  whether  that  monopoly  is 
efficient. 

"The  electric  railway  had  a  double  handicap  as  compared  with  other  public  utilities. 
Monopoly,  in  itself,  dulls  the  spirit  of  enteriirise ;  but  when  you  add  to  that  the  handicap 
of  being  obliged  to  sell  your  product  at  a  given  price  regardless  of  quantity  or  quality  you 
have  a  factor  that  well  nigh  makes  it  impossible  for  men  to  exhibit  a  spirit  of  enterprise 
comparable   with   commercial   life. 

"We,  therefore,  find,  in  comparing  various  public  utilities,  that  the  electric  light  and 
gas  man  shows  a  greater  spirit  of  enterprise  than  the  electric  railway  man — very  often  de- 
partments in  the  same  company.  Apparently  the  gas  and  electric  men  act  under  the  stimu- 
lus of  competition.  Their  respective  fields  overlap  to  a  degree,  and  they  also  have  the 
advantage  of  having  something  tangible  to  sell.  In  addition  to  selling  electricity  or  gas, 
as  the  case  may  be,  they  sell  utensils,  appliances  of  one  kind  or  another  which  promote  the 
increased  use  of  the  intangible  article  that  they  have;  but  the  electric  railway  man,  who 
has  just  one  intangible  thing — transportation — has   not   the   same   incentive. 

"The  electric  railways,  particularly  the  larger  ones,  did  not  appreciate  the  necessity  of 
going  to  a  different  method  of  selling  their  product  until  the  automobile  jitney  competitor 
came  along. 

"The  Chairman :  Strictly  speaking,  can  you  call  an  electric  railway  company  a  monopoly, 
in  view  of  the  automobile  and  other  competition? 

"Mr.  Jackson  :  Not  today,  Mr.  Chairman,  that  is  the  point  I  am  trying  to  make — that 
we  are  in  a  readjustment  period.  A  monopoly  is  changing  over  into  a  business  and  busi- 
ness  implies   competition. 

"That  feeling,  that  you  could  sell  your  product,  did  not  impress  itself  upon  the  electric 
railways  until  the  coming  of  the  automobile  jitney  competitor.  This  competitor  chose  to 
sell  only  a  certain  quantity  of  transportation,  leaving  to  the  electric  railway  the  long  rider 
at  the  same  flat  price.  It  took  something  of  that  kind  to  bring  out  the  illogical  system 
of   fares  that  had  been  built  up   in   .-America. 

"It  stands  to  reason,  of  course,  that  the  electric  railways  alone  were  not  to  blame  for 
that.  You  may  say  this  was  an  .American  policy  and  a  municipal  policy ;  the  flat  fare  was 
very  often  the  price  paid  for  consolidation.  Nevertheless,  it  was  one  of  the  factors  that 
kept   the   electric   railway   operator    from  developing   into   a   business    man. 

"With  the  coming  of  the  automobile  competitor,  the  first  effort  of  the  railway  operator 
was  to  get  him  off  the  street  on  the  plea  of  unfairness,  that  the  competitor  did  not  pay 
the  same  taxes,  share  the  same  burdens,  and  so  forth.  In  fact,  it  was  declared  to  be  a 
breach  of  contract  to  permit  him  to  operate  on  the  streets  at  all. 

"Be  that  as  it  may,  no  sooner  had  the  public  tasted  a  better  mode  of  transportation,  a 
greater  frequency  of  transportation,  greater  speed,  greater  convenience,  than  no  condition 
of  unfairness  at  all  will  cause  the  permanent  elimination  of  the  competing  form  of  trans- 
portation. 

"You  cannot  conceive,  for  example,  that  in  a  city  where  people  are  used  to  getting  a 
jitney  every  two  or  three  minutes  they  will  permit  the  return  of  a  system  where  trolley  cars 
come  at  intervals  of  ten  or  fifteen  minutes.  That  is  inconceivable.  They  will  not  permit 
that.  The  question  of  fairness,  gentlemen,  does  not  enter  at  all,  because  people  are  swayed 
by  motives  of  selfish  convenience. 

"I  need  only  call  to  your  attention  this  fact,  that  in  England,  where  so  many  of  the 
tramways  are  owned  by  the  municipalities,  it  has  been  impossible  to  secure  a  law  that 
would  place  the  motor  bus  on  the  same  basis  as  the  street  car.  The  street  car,  operated 
by  the  city,  pays  taxes  to  the  city  far  in  excess  of  the  motorbus  operated  by  a  private  com- 
pany. If  the  public  of  England  would  not  permit  the  taxing  of  the  motorbus  to  a  degree 
that  would'  make  it  impossible  to  compete  with  the  tramway,  even  though  the  tramways 
are  owned  so  largely  by  the  cities,  what  hope  have  we  that  the  American  public  will  oblige 
the   privately  operated   electric   railway   in   that   direction? 

"Some  other  means  must  be  found  to  eliminate  that  competition.  That  means,  of  course, 
is  good  service,  to  which   I   shall   refer  later. 

"I  also  believe  that  the  American  electric  railway  is  not  a  100  per  cent  modem  electric 
railway  unless  it  includes  any  motorbus  services  that  may  be  required  in  the  community. 
In  other  words,  all  the  popular  or  mass  transportation  of  a  community  ought  to  be  under 
one  central  direction.  That  is  a  lesson  that  we  can  study  profitably  from  experiences 
on  the  other  side. 

"If  the  electric  railway  could  not  produce  mass  transportation  today  cheaper  than  any 
other  form  of  locomotion,  it  would  be  on  its  way  to  Dodo  Land ;    but  we  do  know  that  you 


112  Electric  Railway  Problem 

can,  today,  still  produce  electric  railway  transportation  cheaper  and  more  satisfactorily  than 
any  other  kind.  It  therefore  remains  to  ask  what  the  electric  railways  of  the  country  can 
do  to  produce  that  transportation  more  cheaply  and  then,  having  produced  it  more  cheaply, 
sell  it  instead  of  ofTering  it." 

And  SO,  as  Mr.  Jackson  views  it,  the  jitney  is  a  bright  angel  to  the  electric 
railway  industry  after  all.  Yet  his  optimism  cannot  lead  further  than  the  hope 
that  obvious  misfortune  will  prove  to  be  a  blessing  in  disguise.  Walter  Jackson 
and  Roger  Babson  unite  in  the  opinion  that  competition  is  good  for  monopoly 
because  it  destroys  it.  Here  lies  an  issue  that  goes  to  the  very  root  of  the 
electric  railway  problem.  For  the  present,  it  is  sufficient  that  street  railway 
credit  is  gone,  and  that  automobile  competition  was  one  of  the  band  of  conspira- 
tors that  caused  it  to  vanish  from  the  sight  of  men.  The  private  automobile 
and  the  jitney  bus  came  into  serious  competition  with  the  electric  railways  just 
as  the  latter  were  beginning  to  feel  most  keenly  the  effects  of  public  policy  that 
found  expression  in  special  taxes  and  public  demands  for  better  service  enforced 
by  regulatory  commissions.  The  foundations  of  the  hopes  that  had  been  capital- 
ized were  one  by  one  being  swept  away,  with  the  result  that  even  prior  to  the 
beginning  of  the  World  War  the  earning  power  of  the  electric  railways  was 
already  proven  to  be  insufficient  to  support  the  financial  structure  which  had 
been  erected  on  it  as  a  base. 


Chapter  XXI 
INCREASING  DEMANDS  OF  LABOR 

Street  railway  profits  in  the  early  days  were  largely  the  product  of  low  wages 
and  long  hours  of  labor  for  the  men  engaged  in  street  railway  service.  An 
abundant  supply  of  labor,  and  the  fact  that  conductors  and  motormen  required 
very  little  technical  training  to  prepare  them  for  their  jobs,  made  it  comparatively 
easy  for  street  railway  companies  to  resist  the  unionization  of  their  employes 
and  to  hold  wages  down.  Before  the  coming  of  the  automobiles  in  the  enormous 
numbers  that  characterize  the  present  time,  the  suspension  of  street  railway 
service  was  an  even  greater  disaster  than  it  is  today.  If  men  were  available 
to  run  the  cars,  and  the  companies  under  their  franchise  obligations  were  re- 
quired to  give  continuous  service,  they  had  a  good  claim  upon  the  municipal 
authorities  to  furnish  the  police  protection  that  would  enable  them  to  break  a 
strike.  Of  course,  the  employes,  if  organized,  had  power  to  inflict  great  losses 
upon  the  companies,  especially  if  public  opinion  was  on  the  side  of  the  men, 
but  a  high  resolve  to  walk  until  the  company  gave  in  was  not  likely  to  appeal 
to  the  general  mass  of  the  people,  unless  the  company  was  clearly  guilty  of  out- 
rageous conduct  in  its  relation  to  its  employes.  Nevertheless,  taking  the  coun- 
try as  a  whole,  street  railway  employes  were  getting  better  and  better  organized 
from  year  to  year  and  were  demanding  and  receiving  higher  wages  and  better 
conditions  of  work,  with  the  result  that  the  labor  cost,  which  is  an  element  of 
unusual  importance  in  the  electric  railway  business,  gradually  increased. 

However,  an  analysis  of  the  available  statistics  does  not  warrant  the  con- 
clusion that  labor  has  been  getting  as  rapidly  increasing  a  share  of  electric  rail- 
way revenues  as  might  be  supposed  from  a  cursory  inspection  of  the  tables  of 
wage  rate  increases.  The  statistics  of  wages  presented  by  Mr.  James  W.  Welsh, 
for  the  Electric  Railway  Association,  indicate  an  increase  of  31  per  cent  in  train- 
men's average  hourly  rate  of  pay  from  1907  to  1917,  and  of  course  a  big  jump 
in  wages  is  shown  from  1917  to  1918.  A  further  increase  would  be  shown  for 
1919  if  the  figures  were  available.^  Yet,  as  Mr.  Welsh  shows,  wages  have  re- 
mained a  nearly  constant  factor  in  relation  to  operating  expenses  as  a  whole.  It  is 
the  relation  of  wages  to  revenues  that  offers  the  most  important  comparison  in  con- 
nection with  our  present  discussion.  The  following  tabulation  is  based  on  the  census 
figures  for  1902,  1907,  1912  and  1917,  and  on  Mr.  Welsh's  estimates  for  1918: 

Salaries  and 

Railzvay  Salaries  UKiges  to  Railway 

Year                                          Operating  Revenues  and  zvages  Operating  Revenues 

1902 $247,.SS3,999  $  88,2 10,1 6S  35.2% 

1907 400,8%,034  150,991,099  2,7.7% 

1912 535,996,122  200.890,939  37.5% 

1917 650,149,806  267,240.362  41.1% 

1918 691,131,682  313,748,577  45.4% 

113 


114  Electric  Railway  Problem 

It  will  be  observed  that  in  1902  salaries  and  wages  took  35.2  per  cent  of 
railway  operating  revenues;  in  1917,  they  took  41.1  per  cent;  and  in  1918,  if  Mr. 
Welsh's  estimates  are  correct,  45.4  per  cent.  The  census  figures  show  that  the 
total  railway  operating  revenues  per  employe  steadily  increased  from  period  to 
period  as  will  be  seen  from  the  following: 

Railway  Operating 
Total  Number  Revenue  per 

y'ear  of  Employes  Employe 

1902 140.769  $1,758.58 

1907 221,429  1,802.36 

1912 282,461  1,897.59 

1917 294,826  2,205.20 

These  figures  indicate  an  increase  of  25.34  per  cent  from  1902  to  1917  in  the 
average  earning  capacity  for  the  company  of  the  men  employed  by  it.  This  is 
doubtless  due  mainly  to  the  increasing  size  of  cars  and  the  increasing  density  of 
traffic  on  the  electric  railway  lines  generally.  It  remains  a  fact,  however,  that 
notwithstanding  the  increase  in  revenues  per  employe,  salaries  and  wages  in- 
creased more  rapidly  so  that  in  1917  they  absorbed  about  six  cents  more  out  of 
every  dollar  of  revenue  than  they  did  in  1902.  It  must  not  be  overlooked  that 
the  figures  used  do  not  relate  to  the  conductors  and  motormen  alone,  or  even 
to  all  the  wage  earners  taken  together,  but  to  all  employes  from  the  president 
down  to  the  car  cleaner.  Mr.  Lauck  in  his  brief  for  the  Amalgamated  Associa- 
tion, shows  that  the  total  amount  of  wages  paid  to  trainmen  did  not  increase 
in  as  great  a  proportion  as  the  salary  roll  increased,  or  as  the  payroll  of  classes 
of  workmen  other  than  conductors  and  motormen.  He  shows  that  in  1902,  there 
were  20,000  more  conductors  and  motormen  than  all  other  employes,  while  in 
1917  there  were  20,000  fewer.  No  doubt  the  increase  in  maintenance  and  re- 
habilitation accounts  in  part  for  the  relative  decline  in  the  number  of  trainmen 
employed.  Also,  the  introduction  of  larger  cars  slowed  down  the  rate  of  increase 
in  the  number  of  trainmen. 

While  it  seems  to  have  been  clearly  shown  that  the  trainmen  were  under- 
paid before  the  war  and  that  in  most  cases  they  are  still  underpaid,  nevertheless, 
the  fact  is  that  their  share  in  the  gross  earnings  increased,  and  that  to  this 
extent  the  proportion  of  the  total  revenues  left  for  the  investor  decreased. 

At  this  point  consideration  must  be  given  to  the  conclusions  reached  by 
Mr.  Lauck  in  his  brief.     At  pages  29  and  30  of  that  document,  he  says: 

"It  may  Ik  statiil  as  a  general  conclusion  that  a  review  of  the  past  history  of  street- 
railway  companies,  in  general,  di.scloses  the  fact  that  the  cxtraordiiian-  gains  in  revenue, 
which  have  arisen  frum  the  grt)wth  in  the  itopulation  of  cities,  the  granting  of  special  fran- 
chises, the  devildpnuiit  of  trade  and  industry  in  and  around  urban  centers,  the  adoption  of 
meclianical  devices  and  improved  operating  methods,  added  capital,  investment,  or  the  in- 
creasing work  and  efficiency  of  employes,  have  to  a  large  extent  been  ahsorlied  by  fictitious 
capitalization,  or  dissipated  by  irnpropcr  or  misguided  financial  mismanagement. 

"The  ccinclusion  is  irresistible  that  the  present  deplorable  financial  condition  in  which 
the  street-railway  companies  find  themselves  has  not  been  due  to  an  advance  in  operating  cost 
arising  from  increasing  outlays  to  lab<ir,  but  has  primarily  arisen  from  past  mismanagement 
of  the  finances  of  these  public  utilities.  Had  these  companies  been  properly  managed  and 
their  earnings  consrr\T<l  in  the  w:iy  they  should  have  lieen.  they  would  find  themselves  in 
a  very  prosperous  condition  at  the  present  time.  The  operating  revenues  would  be  amply 
sufficient  on  the  basis  of  a  5-cent  fare  not  only  to  pay  liberal  and  attractive  returns  on  the 
capital  actually   invested,  to  provide   for   new   financing  and   better   roadbed  and  equipment. 


Demands  of  Labor  115 

but  even  after  all  of  these  deductions  from  net  operating  returns,  there  would  be  a  surplus 
sufficient  to  yield  a  living  wage  to  employes,  and  to  furnish  every  facility  for  the  safety 
and  convenience  of  the  public.  Payments  to  employes  of  the  industry  have  not  only  had 
no  eflfect  upon  the  present  finances  of  the  companies,  but,  as  a  matter  of  fact,  the  employes 
have  not  had  an  equitable  participation  in  the  results  of  their  own  labors.  Their  past  pro- 
ductive efficiency  has  been  absorbed  by  fictitious  capitalization,  and,  if  existing  methods  and 
security  issues  were  to  be  allowed  to  be  continued  into  the  future,  the  fruits  of  the  labor 
of  employes  as  yet  unborn  would  be  absorbed  by  fictitious  securities  now  outstanding.  Un- 
less the  present  basis  of  financial  management  and  control  is  changed  the  future  is  without 
hope  to  the  employes  of  the  street  railway  companies  or  to  the  public." 

These  conclusions  are  very  important,  if  true.  It  seems  clear  from  the  tes- 
timony and  from  our  analysis  of  the  data  made  available  to  the  Commission,  that 
Mr.  Lauck's  general  conclusion  has  an  element  of  exaggeration  in  it.  The  im- 
portance of  past  mismanagement  as  a  factor  in  the  destruction  of  credit  is  un- 
doubtedly great,  as  I  have  clearly  shown.  It  seems  also  to  be  quite  true  that 
wage  increases  awarded  to  trainmen  by  the  National  W'ar  Labor  Board  or  as 
a  result  of  the  Board's  activities  are  not  primarily  and  fundamentally  responsible 
for  the  loss  of  earning  power  that  has  caused  credit  to  collapse.  Yet,  if  we 
note  the  fact  that  in  1917  when  the  five-cent  fare  was  still  generally  in  vogue 
the  total  railway  operating  revenues  amounted  to  $2,201.81  per  employe,  while 
the  trainmen  claim  $2000  as  a  proper  minimum  living  wage  under  present  con- 
ditions, we  are  forced  to  the  conclusion  that  in  absorbing  ten-elevenths  of  all  the 
street  railway  revenues,  the  employes  would  be  crowding  the  other  claimants 
for  a  share  in  the  nickel  pretty  hard.  It  is  not  certain  that  the  nickel  would  be 
enough  to  go  around !  At  least  it  might  be  necessary  to  cut  down  the  number 
of  employes  somewhat. 

The  economic  changes  which  I  have  described  in  this  and  the  preceding 
chapter  had  begun  to  make  themselves  felt  before  the  war.  Automobiles  and 
labor  problems  were  a  menace  to  the  hopes  of  the  speculative  investors  in  street 
railway  securities.  The  nickel,  representing  the  inexhaustible  source  of  street 
railway  prosperity,  had  been  attacked  from  so  many  angles  that  the  investor 
as  the  residuary  legatee  of  the  5-cent  fare  already  saw  his  share  of  the  estate 
shrinking  toward  the  vanishing  point. 

Thus  stood  the  electric  railway  industry  when  the  political  and  financial 
structure  of  the  entire  world  was  brought  into  sudden  danger  by  the  attempt  of 
western  civilization  to  commit  hara-kiri. 


Chapter  XXII 
THE  WAR  AND  THE  DOLLAR 

From  the  point  of  view  of  the  American  electric  railways  and  of  the  Ameri- 
can public,  the  World  War  was  wholly  unexpected,  and,  without  question,  it 
brought  about  economic  changes  of  overwhelming  importance.  The  competition 
of  the  automobile  and  the  jitney,  the  gradual  increase  in  the  share  of  earnings 
claimed  by  labor,  the  public  policies  relating  to  taxes,  sen-ice  and  the  issuance 
of  securities,  the  limitation  of  fares  and  the  gradual  extension  of  ticket  conces- 
sions and  free  transfers,  the  failure  of  the  companies  to  make  adequate  provision 
for  depreciation,  and  the  policy  of  overcapitalization,  as  factors  in  the  develop- 
ment of  the  electric  railway  problem  and  in  the  curtailment  of  electric  railway 
credit,  all  worked  more  or  less  slowly  and  by  degrees,  although  quite  relentlessly, 
toward  the  final  result.  The  war  came  suddenly  and  in  its  effects  swallowed  up 
everything  else. 

Many  of  the  witnesses  appearing  for  the  electric  railways  admitted  that 
the  industry  had  never  been  on  a  sound  financial  basis,  but  they  all  maintained  that 
it  was  the  war  and  the  sudden  economic  changes  resulting  from  it  that  justified 
the  industry  in  appealing  to  the  National  (iovemment  for  help.  The  increase 
in  prices  of  labor  and  materials  entering  into  the  construction,  maintenance  and 
operation  of  electric  railways  during  the  war  period  has  come  along  in  the  stream 
of  increases  in  the  prices  of  general  commodities  and  in  the  wages  of  labor  in  all 
industries.  To  the  electric  railway  man  the  problem  appears  relatively  simple. 
He  alleges  that  the  margin  between  operating  expenses  and  gross  revenue  has 
been  rapiilly  shrinking  and  that,  as  a  consequence,  the  share  of  the  revenues  avail- 
able for  return  upon  capital  is  disa|)pearing;  and  that  in  some  cases  the  revenues 
are  not  even  sufficient  to  pay  the  expenses  of  current  operation.  He  sees  that 
more  revenue  is  iu'e<led  and  points  to  the  fact  that  the  price  of  "everything  else" 
has  doubled,  or  trebled,  or  quadrupled,  and  asks  why,  under  those  conditions, 
the  price  of  electric  railway  transportation  should  remain  the  same.  He  alleges 
that  the  electric  railways  arc  the  victims  of  this  unexpected  revolution  in  economic 
conditions  brought  on  by  the  World  War — a  revolution  that  has  been  world-wide, 
and  the  effects  of  which,  so  far  as  present  indications  go,  are  likelv  to  continue 
for  a  long  time.  He  takes  the  i)Osition  that  the  5-cent  fare,  or  whatever  fare 
it  was  that  was  being  charged  on  a  particular  railway  during  normal  times  prior 
to  the  war,  may  be  presumed  to  have  been  a  reasonable  charge,  or,  according 
to  his  present  lights,  at  least  not  an  excessive  one,  and  that  therefore  the  relief 
to  which  the  electric  railways  are  entitled  in  the  emergency  that  has  arisen  is  to 
have  their  fares  raised  and  their  revenues  increased  in  proportion  to  the  increase 
in  the  cost  of  the  service  rendered. 

116 


The  War  and  the  Dollar  117 

It  has  not  been  difficult  at  any  time  during  the  past  two  or  three  years  for 
an  electric  railway  to  demonstrate  to  a  regulating  authority  that  wages  have  in- 
creased and  that  the  prices  of  materials  have  gone  up.  Operating  expenses  are, 
undoubtedly,  much  greater  than  they  were,'  and  the  cost  of  a  given  amount  of 
new  construction  and  replacements  is  also  much  greater  than  it  was  before  the 
war.  Upon  the  simple  basis  of  the  facts  of  experience  in  any  given  street  rail- 
way case,  it  can  readily  be  proven  that  if  the  revenues  derived  from  the  public 
for  the  service  rendered  under  pre-war  conditions  were  not  excessive  then  the 
revenues  now  derived  at  the  same  rates  of  fare  for  the  same  amount  of  service 
are  clearly  insufficient. 

There  are  several  reasons  why  the  problem  is  not  as  sin^ple  as  it  seems : 

1.  Under  the  conditions  that  prevailed  before  the  war,  street  railway  rates 
were  generally  fixed  by  contract.  Very  few  electric  railways  had  come  under 
the  supervision  of  public  service  commissions  to  the  extent  of  having  their  prop- 
erties valued  and  their  rates  of  fare  established  without  reference  to  the  limita- 
tions prescribed  by  contract  or  custom.  In  many  cases  the  public,  over  a  long 
period  of  years,  had  been  demanding  lower  fares  but  had  been  met  by  the  claim 
that  the  contracts  were  inviolable,  and  that  fares  could  not  be  reduced  below 
five  cents.  Thus,  although  the  street  railways  had  generally  been  brought  tmder 
public  regulation  to  a  greater  or  less  extent  with  respect  to  service  and  new 
capitalization,  yet,  as  a  whole,  they  had  not  reached  a  stable  position  as  a  regulated 
industry  with  the  police  powers  of  the  state  ettectively  used  to  fix  just  and  reason- 
able rates.  For  this  reason,  the  public  has  been  inclined  to  deny  the  validity  of 
the  assumption  urged  by  the  electric  railways  that  the  rates  in  vogue  before  the 
war  were  necessarily  fair. 

2.  The  cost  of  labor  and  materials  entering  into  street  railway  construction 
and  operation,  though  affected  by  the  same  general  causes  which  have  affected 
wages  and  the  prices  of  commodities  in  general,  may  not  have  been  affected 
to  the  same  extent.  The  fact  that  the  cost  of  living,  as  measured  in  the  usual 
way  by  Dun's  or  Bradstreet's  index  or  by  the  indices  of  the  Department  of  Labor, 
has  doubled  or  trebled  does  not  prove  that  the  cost  of  labor  and  materials  enter- 
ing into  street  railway  operation  has  doubled  or  trebled.  The  general  increase 
in  the  cost  of  living  is  merely  a  rough  indication  that  the  necessary  cost  of  any 
service,  including  street  railway  service,  will  probably  be  greater. 

3.  Taxes  and  other  public  burdens,  while  subject  in  some  measure  to  the 
changes  which  affect  general  commodity  prices,  are  not  likely  to  change  in  the 
same  proportion  as  ordinary  operating  expenses. 

4.  The  cost  of  capital,  which  is  a  considerable  but  largely  undetermined 
element  in  the  cost  of  street  railway  service,  is  not  afifected  by  a  change  in  the 
general  price  level  to  the  same  extent,  or  necessarily  in  the  same  way,  as  operating 
expenses  are  affected.  More  than  half  of  the  capitalization  of  the  street  rail- 
ways, and  perhaps  nearly  all  of  the  actual  investment  in  street  railway  facilities, 
is  in  the  form  of  long-term  bonds,  or  shares  of  stock  with  dividends  guaranteed 
by  long-term  leases,  so  that  the  fixed  charges  which  are  a  part  of  the  cost  of 
electric  railway  service  do  not  change;  they  are  fixed  by  contract.  Moreover, 
the  rate  of  interest  necessary  to  attract  new  capital  into  the  business  may  or  may 


118  Electric  Railway  Problem 

not  change  with  the  general  price  level.  Interest  rates  are  determined  by  other 
considerations. 

5.  The  alleged  obligation  of  an  electric  railway  to  make  use  of  a  surplus 
accumulated  in  years  of  prosperity  to  tide  over  an  emergency  period,  when  the 
current  margin  of  profit  is  diminished  or  wiped  out  by  the  increased  cost  of 
service,  comes  in  as  a  disturbing  factor  in  the  determination  of  the  fares  which 
the  electric  railway  is  entitled  to  charge. 

All  these  things  go  to  prove  that  what  the  electric  railway  men  often  point 
to  as  a  perfectly  simple  proposition  is  extremely  complex.  Great  confusion  has 
been  brought  into  the  discussion  by  the  attempt  sometimes  made  by  the  electric 
railways  to  prove  their  case  by  evidence  as  to  the  purchasing  power  of  the  dollar 
without  depending  entirely  upon  direct  and  detailed  evidence  of  the  increasing 
cost  of  service  measured  in  terms  of  dollars.  In  the  presentation  of  a  company's 
claims  for  increased  rates  before  a  public  service  commission,  doubt  is  often 
raised  as  to  whether  the  commission  is  being  called  upon  to  determine  the  cost 
of  railway  service  and  to  stabilize  the  rate  of  return  upon  the  investment,  or  to 
investigate  the  purchasing  power  of  money  and  to  stabilize  the  value  of  the  dollar. 
In  the  confusion,  it  seems  to  escape  the  attention  of  a  great  many  people  that 
it  is  impracticable  for  ever}'  national^  state  or  municipal  regulating  body  to  set 
up  as  an  authority  for  stabilizing  the  currency,  and  that  an  appeal  on  this  basis 
to  particular  regulating  agencies  without  authority  to  deal  with  the  problem  as  a 
whole  only  makes  confusion  worse  confounded. 

It  cannot  be  denied  that  a  great  economic  change  affecting  the  cost  of  living 
and  the  purchasing  power  of  money  has  a  far-reaching  effect  upon  particular 
values  and  upon  credit.  Because  of  the  existence  of  fixed  capital,  and  con- 
tractual relations  which  are  the  basis  of  credit,  any  radical  change  in  the  pur- 
chasing power  of  money  has  the  result  of  automatically  transferring  values  from 
one  group  of  property  owners  to  another.  When  general  prices  are  rising,  bond- 
holders and  all  those  who  get  fixed  returns  upon  their  investment,  or  fixed  com- 
pensation for  their  services,  are  losing  money,  while  other  classes  are  making  corre- 
s])onding  gains.  In  a  rough,  general  way  the  bondholder  loses  and  the  stockholder 
gains  when  prices  arc  rising,  and  the  stockholder  loses  and  the  bondholder  gains 
when  prices  are  falling.  These  changes  lake  place;  they  do  not  wait  for  the  edict 
of  some  regulating  body,  and  when  such  a  body  is  called  upon  in  a  particular 
case  to  restore  values  to  those  who  have  lost  them,  in  reality  it  is  being  called 
upon  to  take  values  out  of  somebody's  pocket  and  i)Ut  them  in  some  other  body's 
pocket.  If  it  attem])ts  to  do  so.  it  not  only  increases  the  confusion,  but  is  likely 
to  ()erpetrate  new  robberies  in  its  effort  to  follow  up  and  neutralize  the  effects 
of  economic  law.  For  example,  in  the  case  of  the  electric  railwavs  there  have 
been  two  sets  of  contractual  relations:  the  first,  between  the  public  and  the 
companies,  and  the  second,  between  the  operating  stockholders  on  one  side  and 
the  bondholders  and  gtiaranteed  stockholders  on  the  other.  With  fixed  fares 
and  standards  of  service,  the  public  loses  as  prices  go  down,  and  the  companies 
lose  as  prices  go  up.  If  the  fares  and  standards  of  service  are  not  fixed  and 
inflexible,  but  arc  adjusted  from  time  to  time,  automatically  or  otherwise,  to 
changes  in  the  cost  of  service,  then  the  bondholders  lose  as  prices  go  up  and 


The  War  and  the  Dollar  119 

the  unguaranteed  stockholders  gain,  and  vice  versa.  If  the  contracts  with  the 
public  are  broken  in  a  period  of  rising  prices,  as  is  now  demanded  by  the  electric 
railways  generally,  then  the  public  loses  the  benefit  of  its  contract,  while  the 
stockholders  not  only  save  themselves  from  the  loss  that  under  their  contracts 
they  were  bound  to  incur,  but  also  gain  all  that  the  bondholders  lose  by  virtue 
of  the  contracts  by  which  the  annual  rate  of  interest  and  the  amount  of  the 
principal  ultimately  to  be  repaid  are  fixed  in  terms  of  dollars.  While  the  com- 
panies are  eager  to  induce  or  compel  the  public  to  pay  the  cost  of  service  in  good 
"American"  dollars,  they  do  not  consider  for  a  moment  the  readjustment  of  the 
contracts  as  a  result  of  which  the  "secured"  investors  get  paid  in  "Mexican" 
dollars. 

Beyond  doubt  economic  changes  affecting  the  purchasing  power  of  money 
work  enormous  injustices  and  the  stabilizing  of  the  purchasing  power  of  money 
would  help  to  make  possible  the  establishment  of  security  and  orderly  develop- 
ment in  the  financial  arrangements  of  the  electric  railways  and  other  utilities. 
But  credit  is  based  upon  contract ;  and  contract  is  based  upon  the  recognition  of 
values  as  measured  by  the  monetary  standard  established  in  the  country  under 
whose  laws  the  contracts  are  made.  There  is  the  same  reason  for  the  enforce- 
ment of  contracts  between  municipalities  and  electric  railway  companies  as 
there  is  for  the  enforcement  of  contracts  between  individuals.  If  they  can 
be  enforced,  and  are  not,  then  the  result  is  that  a  particular  class  of  contractors 
is  picked  out  to  receive  community  favors.  All  other  special  interests  and  the 
interests  of  the  community  as  a  whole  are  made  to  pay  the  price  of  this  favoritism. 
Of  course,  the  enforcement  of  a  public  contract,  like  the  enforcement  of  a  private 
contract,  is  limited  by  the  ability  of  the  contractor  to  fulfill  his  obligations.  "You 
cannot  get  blood  out  of  a  turnip,"  and  in  the  case  of  a  necessary  public  service 
such  as  local  transportation,  the  public  in  an  emergency  resulting  from  economic 
changes  or  any  other  cause  must  make  any  shift  that  may  be  necessary  to 
get  the  transportation. 

Disclaiming  any  special  knowledge  of  the  electric  railway  problem,  Profes- 
sor Irving  Fisher  of  Yale  University  appeared  before  the  Commission  at  its 
request  to  discuss  the  purchasing  power  of  money,  the  reasons  for  its  ups  and 
downs  and  the  general  effects  of  its  fluctuations  upon  industry.  His  testimony 
is  illustrative  and  illuminating,  though  evidently  not  intended  to  be  entirely  exact 
in  the  figures  used.  How  certain  classes  of  people  lose  and  others  gain  by  the 
depreciation  of  the  dollar  in  terms  of  its  purchasing  power,  is  shown  by  Professor 
Fisher  at  pages  1330  and  1331  of  the  Proceedings,  where  he  says: 

"Some  people  would  be  inclined  to  say  that  the  rise  of  prices  is  really  simply  the  deprecia- 
tion of  money;  if  prices  are  now  twice  as  high  as  they  were  before  the  war  simply  because 
we  have  a  50-cent  dollar,  so  to  speak,  then  it  ought  to  make  no  difference  to  anybody,  because 
if  everybody  has  twice  as  much  money  and  every  price  is  double,  nobody  is  better  or  worse  off. 
And  in  fact  that  is  true  if  the  premises  were  correct.    The  trouble  is  the  premises  are  not  correct. 

"In  this  upheaval  there  are  some  things  that  cannot  step  lively  as  the  other  things  do; 
some  things  that  lag  behind.  All  those  things  that  are  fixed  by  contract ;  if  there  is  a 
contract  price,  it  must  be  kept,  even  though  it  would  naturally  be  raised.  If  there  is  a  law 
or  a  franchise  fixing  a  5-cent  fare  it  cannot  be  changed  with  the  inflation  which  changes  other 
prices.  If  a  government  clerk  has  a  salary  of  $2,000,  it  is  not  going  to  change  as  the  prices 
of  wheat  change  in  the  market,  it  will  stay  unchanged  for  years  at  a  time.  If  a  wage  earner 
has  a  certain  wage  scale  it  will  not  be  adjusted  automatically  to  the  change  in  the  cost  of 
living.     *     *     * 


120  Electric  Railway  Problem 

"For  instance,  consider  a  saving  bank  depositor.  Take  a  working  girl  who  puts  $100  in 
the  savings  bank  just  before  the  war.  Now  she  will  liave  about  $12U,  but  when  she  comes  to 
spend  that  $120  she  will  get  tor  it  only  bO  per  cent  ot  what  she  could  have  gotten  i£  she 
had  spent  her  $100  four  years  ago.  So  she  has  really  been  cheated  out  ol  all  her  interest 
and  4U  per  cent  of  the  principal  as  well  by  the  depreciation  of  the  dollar. 

"Now  the  fault  is  not  in  the  grocerynian  or  the  tradesman  from  whom  she  buys  the  high 
priced  goods ;  it  is  not  in  the  savings  bank,  but  it  is  in  the  dollar  in  terrns  of  which  her 
account  has  been  kept.  There  lias  been  a  wrong  yardstick  used  in  measuring  her  accounts 
and  the  accounts  of  the  rest  of  us. 

"In  the  same  way  a  bondholder  has  not  been  getting  any  real  income  since  1896.  That 
is  a  startling  statement  to  make,  but  it  is  absolutely  true,  and  the  fact  that  it  is  not  appre- 
ciated is  simply  due  to  the  fact  that  people  do  not  talk  in  terms  of  monetary  depreciation 
when   they   ought. 

"But  you  take  a  widow  who  was  left  say  a  fortune  of  $100,000  in  1896.  This  is  invested 
in  4  per  cent  coupon  bonds  and  she  cuts  her  cou[)ons  and  gets  $4,000  a  year  and  lives  on  it 
between  that  time  and  this.  As  a  matter  of  fact  she  has  been  eating  up  her  capital,  and 
that  is  all  she  has  been  doing,  because  while  nominally  she  still  has  $100,000  of  capital,  that 
today  is  only  one-third  of  the  capital  with  which  she  started,  in  actual  purchasing  power. 
She  has  used  up  two-thirds  of  her  actual  purchasing  power  in  this  time." 

Professor  Fisher  assigned  great  importance  to  "index  numbers"  in  the  mea- 
surement of  the  purchasing  power  of  money,  and  showed  that  with  our  present 
unstable  dollar,  price  levels  are  always  changing.  At  page  1121  of  the  Pro- 
ceedings, he  says: 

"Commissioner  Meeker's  index  numbers  arc  carefully  weighted,  the  wholesale  index 
numbers,  on  the  basis  of  the  volume  of  transactions,  or  the  value  of  the  volume  of  trans- 
actions of  the  different  commodities.  The  commodities  which  are  sold  in  the  markets  in 
large  quantities  have  a  greater  importance  in  the  average  than  tlie  commodities  which  are 
sold  in  small  quantities.  i>o  that  it  is,  1  think,  the  most  scientihc  iiide.x.  number  that  we  have 
had  in  the  world. 

"This  instrument,  the  index  number,  is  a  very  approximately  accurate  measure  of  changes 
in  the  price  level,  as  is  shown  by  the  fact  that,  whether  your  index  number  is  scientific  or 
unscientific,   it  gives   very   much  the  same   result. 

"We  find  the  index  numljcr  of  prices  has  constantly  changed.  It  is  not  a  question 
simply  of  a  changed  price  level  since  tlie  war. 

"Some  |K-ople  stem  to  talk  about  reaching  a  new  level  of  prices,  as  though  we  were 
going  to  keep  them  up.  We  are  not  going  to  keep  them  up.  \\  e  never  have  kept  a  price 
level  for  five  years  at  a  time.  It  constantly  changes.  \\  c  were  complaining  about  the  high 
cost  of  living  before  we  entered  the  war.  There  had  luen  a  rise  of  50  per  cent  in  the  price 
level  between  1890  and  1914,  when  we  entered  the  war,  and  there  had  been  a  great  fall  in 
the  price  level  prior  to  1890.  going  back  to  187J  in  the  world  in  general,  and  to  1802-1865  in 
the  United  States  in  particular.    And  before  that  the  price  level  had  changed." 

For  convenience  in  discussing  the  trend  of  general  prices,  it  should  be  noted 
that  the  Labor  Department  takes  the  prices  of  1913  as  100,  and  that  the  1913 
index  represented  very  nearly  the  average  for  the  five  years  immediately  pre- 
ceding the  rise  in  prices  due  to  the  war;  also  that  the  index  number  at  the  low 
price  level  in  1896  was  approximately  66,  and  that  in  December,  1919,  the  index 
number  had  risen  to  237.  I  refer  to  the  Department  of  Labor's  index  number 
based  upon  wholesale  commodity  prices. 

At  pages  1331  and  1332  of  the  Proceedings,  Professor  Fisher  continues  his  tes- 
timony with  respect  to  the  relative  fortunes  of  bondholders  and  stockholders,  under 
shifting  conditions  with  respect  to  the  commodity  value  of  the  dollar,  as  follows: 

"And  .so  it  is  that  l><)iulholdcrs  have  not  been  making  any  money  since  1896.  They  are 
among  the  ones  who  have  been  losing  money.  On  the  other  hand,'  between  1873  and'  1896 
It  was  the  bondholder  who  was  getting  rich  because  of  the  appreciation  of  the  dollar  in  terms 
of   which  his  IxjikIs  were  reckoned. 

"C»n  the  other  hand,  the  stockholder,  excepting  the  stockholder  in  concerns  like  electric 
railways,  where  the  price  of  the  prcKluct  is  the  thing  that  does  not  change  the  stockholder 
has  iK-en  winning  what  the  Nrndholdcr  has  lost  and  losing  what  the  bondholder  has  gained, 
lictwccn  187J  and  189b  the  stockholder  was  losing  and  the  independent  priKlucer  generally 
was  losing,  the  fanner  was  losing,  and  that  loss  made  a  gricN-ance  which  culminated  in  the 


The  War  and  the  Dollar  121 

Bryan  campaign  in  1896,  wliich  was  largely  a  Populist  and  farmer  discontent.  The  debtor 
class  was  much  mentioned  there.  People  who  had  farms  wliich  were  mortgaged  could  not 
pay  their  mortgages  because  the  mortgage  was  a  mill-stone  around  their  neck  and  getting 
heavier  and  heavier  while  the  price  of  wheat  was  going  down.  It  w^ls  really  the  appreciation 
of  money  which  was  ruining  the  fanner,  and  that  produced  a  form  of  discontent  at  that 
time  called  Populism  which  died  down  as  the  price  turned  the  other  way,  and  you  can  not 
find  a  Populist  in  Kansas  today  because  the  conditions  which  generated  that  condition  have 
disappeared. 

"Now  we  have  the  opposite  situation  and  we  find  the  bondholder  and  the  savmgs  bank 
depositor  is  losing,  the  salaried  class  is  losing  and  the  utilities  corporations,  like  the  electric 
railways  are  losing,  and  the  gain  is  being  absorbed  by  the  stockholder,  and  we  are  dubbing 
him  the  profiteer;  just  as  in  1896  we  nick-named  the  bondholder  'the  bloated  bondholder' 
and  complained  of  him,  so  now  we  are  nick-naming  the  man  who  gets  the  gain,  the  profiteer. 

"Commissioner  Meeker :  You  are  not  including  the  stockholders  in  the  street  railways 
among  the  bloated  profiteers,  are  you? 

"Mr.  Fisher:  Not  the  street  railroad  companies,  but  I  think  the  stockholders  in  general 
are  the  so-called  profiteers  today.  The  profiteeering  today  which  we  hear  so  much  of  is  one  of 
these  consequences  of  this  maladjustment,  and  not  because  of  the  price  level.  They  are  the 
by-product  and  I  lament  the  fact  that  the  public  eye  is  fixed  so  much  on  this  today  as  to  cause 
a  class  hatred  which  is  not  justified,  instead  of  a  realization  of  an  impersonal  cause  as  the 
true  reason.  I  do  not  mean  that  there  is  not  criminal  profiteering.  There  is,  or  I  suppose 
there  is,  but  it  certainly  is  not  responsible  for  this  rise  in  prices. 

"This  has  switched  billions  and  hundreds  of  billions  of  dollars  worth  of  wealth  from 
one  class  to  another.  You  will  find  on  Fifth  Avenue,  I  understand,  an  entirely  new  class 
of  rich  people  today  compared  with  what  were  there  at  the  end  of  the  long  period  of  falling 
prices.  In  1896  there  were  the  old  Knickerbocker  families  with  their  property  invested  in  bonds 
who  were  having  a  comfortable  home  and  living  at  the  low  prices  very  well,  but  they  could 
not  stand  the  gafT  when  prices  began  to  go  up.  They  did  not  see  that  their  money  was  de- 
preciating and  so  they  were  losing  all  their  income.  They  expressed  it  in  terms  of  com- 
modities but  not  of  money,  and  they  realized  they  were  losing,  and  they  sold  out  to  the 
stockholders,  the  profiteers." 

That  the  normal  result  of  the  depreciation  of  money,  as  indicated  by  Profes- 
sor Fisher's  testimony  just  quoted,  has  not  in  fact  been  shown  in  a  redistribution 
of  values  as  between  the  stockholders  and  the  bondholders  of  the  electric  railways 
is  indicated  by  Mr.  Babson's  testimony  with  respect  to  the  shrinkage  in  the  value 
of  stocks  and  bonds  during  the  war  period.  At  page  1067  of  the  Proceedings, 
appears  the  following: 

"Commissioner  Gadsden :  I  wish  you  would  give  us  some  information  along  the  lines 
from  an  investment  standpoint  of  the  shrinkage  in  values  of  street  railway  securities.  You 
have  made  a  study  of  that  problem,  have  you  not?  Just  leave  the  question  of  fares  and  rates 
out  of  it  and  let  us  discuss  for  a  moment  what  the  effect  on  the  investment  feature  has  been. 

"Mr.  Babson :  Taking  all  the  street  railway  bond  issues  of  the  country,  the  shrinkage 
has  been  about  25  per  cent  and  considering  all  stock  issues  of  the  country  the  shrinkage 
has  been  about  75  per  cent. 

"Commissioner  Gadsden:    Can  you  approximate   what   that   means   in  dollars  and   cents? 

"Mr.  Babson :  It  amounts  to  over  a  billion  dollars ;  it  amounts  to  over  a  billion  dollars 
and  of  course  a  great  deal  of  these  securities  are  held  by  the  banks  and  trust  companies 
and   insurance  companies   and   the   mass  of   the   people. 

"Commissioner  Gadsden :  Is  it  not  a  fact  that  up  to  five  or  six  years  ago  street  railway 
securities  were  considered  rather  a   favorite  security  in  the  market? 

"Mr.  Babson :  Well,  the  savings  bank  investment  laws  of  Massachusetts  are  generally 
considered  as  the  strictest  of  any  state  in  the  country;  that  is  to  say,  judges  all  over  the 
country  when  it  comes  to  guardianship  questions  will  state  that  the  money  may  be  invested 
in  anything  legal  for  Massachusetts  savings  banks,  as  they  are  the  most  strict  of  any  of  the 
laws.  Now,  the  State  of  Massachusetts  made  street  railways  legal  for  Massachusetts  savings 
banks  some  ten  years  ago. 

"Mr.   Warren:    Massachusetts  street  railway  securities? 

"Mr.  Babson :  Yes,  Massachusetts  street  railway  securities.  And  I  was  looking  over 
the  accounts  of  a  bank  the  other  day  in  Massachusetts,  a  savings  bank  where  they  had  bought 
the  first  mortgage  bonds  of  the  Warren.  Brookfield  &  Spencer  Street  Railway  Company, 
bonded  for  only  $8,000  a  mile,  legal  for  Massachusetts  savings  banks,  and  where  there  was 
an  absolutely  total  loss.  The  stockholders  not  only  lost  all  they  put  in,  those  bondholders 
lost  all  they  put  in,  and  when  the  tracks  were  ripped  up  a  few  months  ago  and  sold  for  junk 
there  was  only  enough  to  pay  the  lawyers  and  receivers'  certificates.  So  I  feel  very  strongly 
on  that  point." 


122  Electric  Railway  Problem 

The  electric  railway  bondholders  have  lost  25  per  cent  and  the  stockholders 
75  per  cent  according  to  Mr.  Babson.  The  same  tendency  is  shown  in  the  case  of 
the  securities  of  tiie  trolley  lines  of  Xew  Jersey.  In  May,  1919,  Mr.  Thomas  N. 
McCarter,  President  of  the  Public  Service  Railway  Company  and  also  of  the 
Public  Service  Corporation  of  Xew  Jersey,  submitted  to  the  Xew  Jersey  Board 
of  Public  Utility  Commissioners  statements  showing  that  from  December  31,  1915, 
to  May  1,  1919,  there  had  been  a  shrinkage  in  the  market  value  of  the  bonds 
and  underlying  guaranteed  stocks  of  the  Public  Service  Railway  system  from 
$93,004,555  to  $75,116,665,  without  any  allowance  for  the  intervening  deprecia- 
tion in  the  purchasing  power  of  the  dollar.  During  this  same  period  the  Public 
Service  Corporation's  common  stock,  supported  by  an  equity  in  the  common  stock 
of  the  Public  Service  Railway  Company  and  its  affiliated  companies  in  the  gas 
and  electric  fields,  decreased  in  market  value  from  $116  per  share  to  $80  per 
share,  and  by  December  15,  1919,  this  stock  had  fallen  to  $65  bid.  In  the  "Mem- 
oranda and  Data"  submitted  to  officials  of  the  Treasury  Department,  January-  8, 
1918,  by  the  special  committee  representing  the  gas,  electric  and  street  railway 
interests,  a  table  was  presented  showing  that  the  market  value  of  the  common 
capital  stock  of  seventeen  leading  public  utility  companies,  some  of  them  holding 
companies,  and  many  of  them  interested  in  gas  and  electricity  only,  had  shrunk 
from  the  highest  prices  of  the  preceding  five-year  period  to  the  then  low  level 
no  less  than  $352,652,976  in  the  aggregate  or  53.1  per  cent.  All  this  goes  to 
show  that  public  utilities  in  general  and  electric  railways  in  particular  are  not  in 
the  same  class  with  ordinary  industrials,  and  the  reason  for  it  undoubtedly  is  that 
these  utilities,  even  where  their  rates  are  not  controlled  by  contract,  are  never- 
theless in  a  position  where  their  charges  are  restricted  by  the  regulatory  power  of 
the  government.  In  effect,  the  electric  railways  and  other  utilities,  in  asking 
that  they  be  left  free  to  adjust  themselves  to  changing  economic  conditions  the 
same  as  other  industries  are  asking  the  impossible;  they  are  asking  to  be  per- 
mitted to  surrender  their  charters  as  public  utilities  and  to  withdraw  from  the 
field  of  public  regulation  altogether.  They  demand  that  an  entirely  new  relation 
between  themselves  and  the  community  be  established.  They  say  that  regula- 
tion has  broken  down  in  an  emergency ;  and  that  they  "cannot  go  on  this  way" 
any  longer.  The  issue  seems  to  be  this:  shall  the  utilities  be  permitted  to  lapse 
into  the  status  of  private  industries,  or  shall  they  be  transformed  into  full-fledged 
public  services  for  which  the  community,  for  better  or  for  worse,  accepts  com- 
plete responsibility  ? 

We  must  now  turn  from  the  fascinating  discussion  of  depreciation  in  the 
value  of  money,  which  leads  only  to  confusion  and  bewilderment  when  applied 
to  the  problem  of  electric  railway  credit,  to  the  specific  changes  in  the  cost 
of  electric  railway  service  that  have  grown  out  of  the  war.  The  real  test  of 
the  elTect  of  increasing  prices  in  the  electric  railway  field  upon  the  credit  of 
the  industrj-  will  be  found  in  two  questions:  first,  is  the  margin  left  for  return 
on  investment  after  the  payment  of  all  prior  charges  less  than  it  was  before? 
and,  second,  does  the  investment  require  an  even  larger  return  than  it  did  before 
when  there  was  more  for  it? 

The  first  question  is  answered  by  a  study  of  operating  ratios.     As  used 


The  War  and  the  Dollar  123 

here,  the  operating  ratio  is  the  proportion  of  gross  operating  revenues  that  is 
consumed  by  operating  expenses  exclusive  of  taxes.  The  special  census  reporte 
show  the  general  operating  ratio  for  the  street  railways  of  the  country  to  have 
fluctuated  as  follows :  /?„„„  ^f  operating 

Expenses  to 
Year  Operating  Revenues 

1890     68.4  per  cent 

1902     57.5  per  cent 

1907 61.1  per  cent 

1912     58.7  per  cent 

1917     63.8  per  cent 

Mr.  James  W.  Welsh,  in  his  testimony  on  behalf  of  the  American  Electric 

Railway  Association,  submitted  figures  in  connection  with  Chart  C-120  to  show 

that  the  operating  ratio  was  60.01  in  1916;  64.98  in  1917;  72.08  in  1918;  and  76.43 

for  the  first  four  months  of  1919.     These  ratios  were  worked  out  on  the  basis 

of  car  mile  statistics  submitted  by  a  large  number  of  companies  to  the  Electric 

Railway  Association.     It  will  be  observed  that  Mr.  Welsh's  operating  ratio  for 

1917  is  64.98  as  compared  with  63.8  derived  from  the  census  figures.     In  the 

Electric  Railway  Journal,   issue  of   September  6,    1919,  appears  a  consolidated 

income  statement  for  124  companies  for  the  month  of  IMay,   1919,  showing  an 

operating  ratio  of  72.62  per  cent.     In  the  issue  of  the  Journal  for  February  14, 

1920,  a  combined  income  statement  of  81  companies  for  the  month  of  October, 

1919,  shows  an  operating  ratio  of  76.7  per  cent ;  and  in  the  issue  of  March  6,  1920, 

appears  a  combined  statement  for  87  companies  for  the  month  of    November, 

1919,  showing  a  ratio  of  76.85  per  cent.     It  is  clear  beyond  a  doubt  that  there 

has  been  a  considerable  increase  in  the  operating  ratio  on  most  electric  railways 

since  1917,  and  the  census  figures  show  an  increase  of  five  points  from  1912  to 

1917.     However,  from  1902  to  1912  the  increase  had  been  only  1.2  points,  and 

going  back  to   1890  when  the  process  of   electrification  was  only  nicely  begun, 

we  find  a  ratio  of  68.4,  which  is  4.6  points  higher  than  1917.     Of  course,  it  must 

not  be  overlooked  that  where  rates  have  been  increased,  or  where  traffic  shows 

an  extraordinary  growth,  the  increase  in  revenues  may  keep  pace  with  the  increase 

in  operating  expenses  so  as  to  hold  the  operating  ratio  steady.     The  figures  for 

all  the  electric  railways  operating  in  New  York  City  during  the  past  ten  years 

are  significant,  as  they  represent  results  obtained  in  a  metropolitan  community 

where  street  railway  fares  have  not  been  materially  increased.     The  total  street 

railway  operating  revenues,  the  total  operating  expenses,  and  the  operating  ratio 

for  each  year  ended  June  30,  from  1910  to  1919.  inclusive,  were  as  follows: 

STREET  RAILWAYS  OF  NEW  YORK  CITY 

Total  Street 

Raihvay  Operating  Total  Operating  Operating 

Year  Ended  June  30                                Revenues  Expenses  Ratio 

1910     $79,420,911.33  $43,451,147.50  54.71 

1911  84,424,435.17  46,613,435.73  55.21 

1912  88.242,093.66  47,746,580.78  54.11 

1913  92.140.054.06  48,661.244.41  52.81 

1914  94.153.673.93  50.108,516.28  53.22 

1915  93.644.428.41  50.322,473.15  53.74 

1916  98.628.185.20  52,038,406.95  .5,3.77 

1917     100,18.?,784.61  55,716,495.04  55.61 

1918     103,5TO,189.17  60,606,538.43  58.55 

1919    110,191,682.33  75,945,712.61  68.92 


124  Electric  Railway  Problem 

The  jump  of  10  points  in  1919  is  significant.  Any  rise  in  the  operating 
ratio  of  an  electric  railway  makes  a  direct  attack  upon  its  credit,  as  it  means 
a  shrinkage  in  the  margin  of  earnings  left  for  taxes  and  capital  charges.  The 
question  remains:  Is  there  enough  left,  even  after  the  operating  ratio  has  risen? 
Upon  this  point,  it  is  interesting  and  instructive  to  compare  the  operating 
ratios  given  above  with  the  operating  ratio  of  the  Cleveland  Railway  Company, 
which  has  enjoyed  a  position  of  unique  strength  during  the  war  period.  The 
Cleveland  Railway  operating  ratio  has  fluctuated  as  follows: 

Year  Operating  Ratio  Year  Operating  Ratio 

1913   75.26  1916  73.40 

1914   77.56  1917  78.84 

1915   70.14  1918  76.30 

This  was  under  the  Tayler  service-at-cost  franchise ;  the  revenues  were  less  than 
the  cost  of  service  in  the  years  1913.  1914  and  1917,  and  more  than  the  cost  of 
service  in  1915,  1916  and  1918.  Taxes  in  Cleveland  absorbed  6.04  per  cent  of 
the  gross  revenues  during  1913,  1914  and  1916;  5.71  per  cent  in  1915;  6.27  per 
cent  in  1917  and  5.79  per  cent  in  1918.  It  will  be  seen,  therefore,  that  the  residue 
left  for  surplus  and  return  upon  investment  was  18.7  per  cent  in  1913;  16.4  per 
cent  in  1914;  24.15  per  cent  in  1915;  20.56  per  cent  in  1916;  14.89  per  cent  in 
1917,  and  17.91  per  cent  in  1918.  It  is  significant  that  the  Cleveland  Railway 
Company  has  been  able  to  preserve  its  credit  with  an  operating  ratio  which  in 
1918  was  as  high  as  76.3  per  cent,  or  7.38  points  higher  than  the  operating  ratio 
in  New  York  City  for  the  year  ended  June  30,  1919.  Taxes  on  New  York  City 
systems  absorbed  7.18  per  cent  of  gross  revenues,  as  compared  with  5.79  per  cent 
in  Oeveland  during  1918.  With  operating  expenses  and  taxes  deducted  from 
gross  revenue  the  Cleveland  Railway  Company,  in  1918,  had  5.99  cents  less 
per  dollar  of  revenue  for  return  upon  capital  than  the  electric  railways  of  New 
York  City  had  during  the  year  ended  June  30,  1919.  Yet  the  credit  of  the  Cleve- 
land Railway  Company  was  the  best  in  the  country,  while  the  New  York  City 
lines  were  in  bankruptcy  or  trembling  on  the  verge  of  it.  It  cannot  be  doubted 
that  the  difference  was  chiefly  due  to  the  differences  in  capitalization  and  public 
relations. 

We  may  now  turn  to  an  examination  of  the  evidence  submitted  to  the  Com- 
mission with  respect  to  actual  increases  during  the  war  period  in  the  cost  of 
materials  and  labor  entering  into  electric  railway  construction,  maintenance  and 
operation.  Mr.  John  G.  Barry,  sales  manager  of  the  General  Electric  Company, 
testified  for  the  American  Electric  Railway  Association  with  respect  to  electrical 
apparatus  and  supplies  used  by  electric  railways,  and  submitted,  at  page  388  of 
the  I'roccedings,  the  following  figures  of  average  cost  for  each  year  from  1912 
to  1919,  counting  the  price  during  1914  as  100  per  cent: 

■•AVERAGE  COST  OF  ALL  ELECTRIC.\L  APPAR.ATUS  AND  SUPPLIES   USED 

BY  ELECTRIC  RAILWAYS 

\l]i    104%  1916   130% 

\l\l    Ol^"  '"'7    '75% 

\l\i    "9%  1918   204% 

1^15    104%  1919   197%" 


The  War  and  the  Dollar  125 

At  pages  392  and  393  of  the  Proceedings,  Mr.  Barry  discussed  the  present 
condition  of  the  electric  railways,  and  the  remedy  therefor  as  follows : 

"Commissioner  Sweet :  Have  you  any  distinct  idea  now  as  to  what  is  the  matter  with  the 
street  railway  companies  and  what  would  be  the  best  remedy  for  it? 

"Mr.  Barry;  Well,  my  notion  is  this — of  course,  the  street  railways  are  reduced  to  the 
deplorable  condition  in  which  they  are  now  due  to  the  tremendous  increases  they  have  had  to 
pay  for  their  materials,  the  tremendous  increase  they  have  had  to  pay  for  wages  and  taxes  and — 

"Commissioner  Sweet:   Without  a  proportionate  increase  in  income? 

"Mr.  Barry :  Without  the  income.  Now  while  I  do  not  know  very  much  about  the  financial 
or  operating  conditions  of  electric  railways  outside  of  unfortunately  investing  some  of  my 
personal  money  in  electric  railways,  my  notion  is  that  the  electric  railway  companies  must  be 
given  immediate  relief  by  an  increase  in  fare  or  many  more  of  them  are  going  to  the  wall. 
I  think  that  if  it  were  possible  to  give  the  electric  railways  an  increase  to  6  cents  or  7  cents 
or  whatever  is  considered  reasonable,  that  that  is  the  only  method  of  saving  many  electric 
railway  companies  from  bankruptcy." 

Mr.  Miles  B.  Lambert,  assistant  manager  of  the  Railway  Department  of  the 
Westinghouse  Electric  Manufacturing  Company,  also  testified  upon  the  subject 
of  price  increases.     At  pages  393  and  394  of  the  Proceedings,  he  says: 

"The  Westinghouse  Company  is  engaged  in  the  manufacture  and  sale  of  electric  street 
railways  and  railway  motors  and  car  equipment  to  electric  street  railways :  controlling  appa- 
ratus, locomotives,  rotary  converters,  transformers,  switchboards,  motor  generator  sets,  tur- 
bines and  other  electrical  apparatus. 

"Our  pre-war  average  gross  sales  of  this  apparatus  and  equipment  ran  from  seven  million 
to  fifteen  million  dollars  a  year;  it  varies  that  way,  within  the  United  States,  our  customers 
being  generally  throughout  "the  United  States.  During  the  past  two  years  it  has  ranged  from 
30  to  40  per  cent  of  this  normal. 

"Beginning  with  about  the  middle  of  the  year  1915  there  has  been  a  steady  and  steadily 
accelerating  increase  in  the  prices  of  the  various  equipment  and  apparatus  until  at  the  present 
time  as  compared  with  the  middle  of  the  year  1915  the  percentages  are  about  as  follows; 

Railway  motors  and  car  equipment,  appro.ximately  87  per  cent  increase. 

Locomotives,  approximately  87  per  cent  increase. 

Rotary  converters,  approximately  75  per  cent  increase. 

Transformers,  approximately  70  per  cent  increase. 

Switchboards,   100  per  cent. 

Motor  generator  sets,  95  per  cent. 

Turbines.  100  per  cent. 

"I  have  given  some  thought  to  the  future  conditions  and  prices,  but  can  see  nothing  at 
present  which  would  indicate  to  me  a  substantial  reduction  in  prices  other  than  the  slight 
reduction  that  has  taken  place  during  the  past  two  months. 

"These  increases  in  our  prices  as  manufacturers  and  producers  of  electrical  equipment 
have  been  caused  by  our  increased  cost  of  raw  material,  manufacturing  machinery  and  labor. 
In  comparing  the  present  time  with  the  latter  part  of  the  year  1914  and  the  first  half  of  1915,  I 
find  that  machine  tools  which  we  must  purchase  to  manufacture  our  apparatus  and  equipment 
show  an  increase  of  approximately  100  per  cent. 

******** 

".\11  raw  materials  have  shown  great  increases,  as  shown  by  the  following  tabulation ; 

Pig  iron,  approximately  106  per  cent. 

Steel  plates.  141  per  cent. 

Copper.  58  per  cent 

"That  corrected  as  of  today  would  go  up  a  bit,  because  copper  has  gone  up  from  the  time 
I  had  this  tabulation  made. 

Steel  castings,  220  per  cent. 

"I  might  digress  here  for  a  moment  for  the  benefit  of  the  Commissioner  who  is  asking 
about  the  discrepancy  in  the  high  cost  of  cars.  The  reason  for  the  high  cost  of  cars  is  because 
of  the  steel  castings  which  both  companies  get  from  the  foundries  and  the  Carnegie  Steel 
Comnanv :    so  the  price  of  materials  entering  into  cars  has  gone  up  220  per  cent. 

"Spelter.  30  per  cent;  coke.  35  per  cent;  mica,  100  per  cent;  asbestos  material,  which  we 
use  a  great  deal  of,  560  per  cent;  other  insulating  materials,  125  per  cent;  magnetic  sheet 
steel,  280  per  cent." 

At  page  395,  Mr.  Lambert  touched  upon  labor  costs  as  follows : 

"In  my  iudgment  the  price  of  labor  during  the  next  year  and  perhaps  the  next  two  years 
is  going  to  increase  unless,  as  a  former  witness  said,  the  high  cost  of  living  comes  down  very 
rapidly. 


126  Electric  Railway  Problem 

"It  might  be  well  to  mention  there.  Mr.  Warren,  that  when  you  stop  to  consider  it,  and 
segregating  the  price  of  materials  and  labor  as  two  distinct  and  separate  (actors,  labor  after 
all  is  nearly  the  whole  thing  when  you  take  everything  from  its  source.  Take  the  ore,  for 
instance ;  you  might  say  that  the  raw  materials  cost  nothing,  it  is  the  cost  of  labor  producing 
them.  They  are  in  the  earth.  Therefore  the  content  of  labor  enters  into  the  whole  thing 
and  therefore  prices  are  not  going  down;    in  fact  I  think  thy  are  going  to  increase  moderately." 

Mr.  William  H.  Heulings,  Jr.,  Vice-President  of  the  J.  G.  Brill  Company, 
manufacturers  of  cars,  gave  interesting  testimony  with  respect  to  the  use  of 
car  trust  certificates  as  a  means  of  facilitating  the  purchase  of  safety  cars  by 
impecunious  companies,  and  also  with  respect  to  the  effect  of  standardizing  equip- 
ment upon  price  increases.     At  page  400  of  the  Proceedings,  he  says : 

"The  Chairman:  Is  the  industry,  speaking  of  it  as  a  whole,  having  any  difficulty  in 
financing  its  purchases  with  you? 

"Mr.  Heulings  :    Oh,  yes. 

"The  Chairman :    How  do  they  do  it  ? 

"Mr.  Heulings:  Well,  they  do  it  as  Mr.  Barry  just  referred  to.  We  are  jointly  interested 
with  him  in  the  car  trust  matter.  That  is  how  we  are  being  able  to  finance  quite  a  few  of 
the  purchasers  of  these  safety  cars  and  to  help  the  railroads  make  economies  which  they 
will  provide  them  with. 

"Commissioner  Gadsden :  Are  you  requiring  certificates  on  other  types  of  cars  than  the 
safety  cars? 

"Mr.  Heulings:  No.  We  cannot  handle  them.  You  see  they  are  not  a  standard  article. 
Barring  the  safety  cars  we  have  never  duplicated  an  order.  Except  in  one  instance  have  we 
ever  duplicated  an  order  for  e.xactly  the  same  style  as  the  other  order.  We  built  fifteen 
hundred  cars  for  Philadelphia  in  a  period  of  four  years  and  they  are  so  nearly  the  same  you 
cannot  tell  the  difference,  but  each  particular  set  required  a  new  set  of  drawings  and  speci- 
fications. 

"Commissioner  Gadsden :  Does  not  that  suggest  one  of  the  economies  that  the  railway 
people  could  work  out.  in  the  standardization  of  equipment? 

"Mr.  Heulings :   Unquestionably  they  could,  and  they  could  do  us  great  good  and  economize. 

"Commissioner  Gadsden:  If  we  could  cc.me  out  of  this  hearing  by  standardizing  the  rail- 
way equipment  would  not  that  help  solve  this  problem? 

"Mr.  Heulings:    You  would  take  a  great  step  in  the  right  direction. 

"Commissioner  Sweet:  How  much  difference  do  you  think  it  .would  make  if  the  cars 
were  standardized  instead  of  having  different  specifications  for  each  car? 

"Mr.  Heulings:  I  might  answer  that  by  the  experience  of  the  safety  car.  The  safety 
car  is  practically  standard.  The  total  amount  of  advance  in  the  safety  car  was  al»ut  fifty 
per  cent,  and  that  was  due  to  the  fact  it  was  standardized  and  we  could  run  them  through 
in  one  hundred  and  two  hundred  car  lots  and  sell  them  to  the  individual  as  he  wanted  them 
and  practically  take  them  ofT  the  shelf.  Now  other  cars  have  advanced  over  100  per  cent. 
That  is  the  best  answer." 

Mr.  Francis  H.  Sisson,  Vice-President  of  the  Guaranty  Trust  Company, 
discussed,  from  the  banker's  viewpoint,  the  effects  of  war  prices  upon  credit.  At 
pages  321  and  322  of  the  Proceedings,  in  response  to  questions  asked  by  Com- 
missioner Sweet,  he  says : 

"Commissioner  Sweet :  At  the  time  when  the  ."i-cent  fare  was  originally  agreed  upon, 
apparently,  between  the  cities  and  the  public  service  corporations,  in  the  granting  of  the  fran- 
chises, that  was  sufficient  pay  for  all  necessar>'  expenses  and  a  fair  return  upon  the  invest- 
ment, was  it  not  ? 

"Mr.  Sisson  :    It  was. 

"Commissioner  Sweet :   And,  in  some  cases,  I  suppose,  rather  a  large  return  ? 

"Mr.   Sisson:    Yes. 

"Comrnissidiicr  Sweet :    .^nd  that  naturally  offered  an  inducement  to  investors? 

"Mr.  Sis.son :   Yes. 

"Commissioner  Sweet :  So  that  institutions  like  insurance  companies  and  people  in  a 
fiduciary  relation  representing  an  aggregation  of  comparatively  poor  people  invested  in  them, 
because  they  paid  well,  and  were  Uwked  upon  as  exceedingly  safe? 

".Mr.  Sisson :    Vcs. 

"Commissioner  Sweet:    Is  that  a  fact? 

"Mr  Sisson:  It  is  so.  The  popular  selling  argument,  and  one  very  generally  used  in 
those  days,  was  that  you  could  count  upon  the  revemie-prodiicing  power  of  utilities  of  our 
great  cities  more  definitely  than  you  could  upon  any  other  class  of  securities. 


The  War  and  the  Dollar  127 

"Commissioner  Sweet:    Up  to  about  what  time  did  that  condition  continue? 

"Mr.  Sisson :  It  existed  until  about  the  outbreal<  of  the  war.  I  should  say  when  the  recent 
rise  in  the  cost  of  labor  and  materials  overtook  the  revenues — perhaps  beginning  with   1915. 

"Commissioner  Sweet :    Has  the  change  been  gradual  ? 

"Mr.  Sisson:  It  was  rather  abrupt.  I  think  it  has  been  staccato,  rather  than  gradual,  in 
many  instances,  but  it  has  been  constant   for  four  years. 

"Commissioner  Sweet:    Is  it  as  great  today  as  it  was  three  or  four  months  ago? 

"Mr.  Sisson  :  No,  it  is  not,  although  there  are  still  rising  costs  in  labor  and  there  are 
rising  costs  in  material  that  must  be  met  in  many  instances,  but  the  ratio  of  increase  is  smaller 
today  than  it  was  before. 

"Commissioner  Sweet :    How  do  you  account  for  that  ? 

"Mr.  Sisson  ;  Well,  largely  because  the  costs  of  labor  and  material,  both,  have  almost 
reached  the  breaking  point,  and  it  was  not  possible  for  them  to  increase  ratably  as  much  as 
they  had  for  the  last  three  years,  and  still  find  a  market. 

"Commissioner  Sweet:  Do  you  mean  to  say,  then,  that  there  is  an  increase  up  to  the 
present  time? 

"Mr.  Sisson :   Yes. 

"Commissioner  Sweet :  But  that  the  rate  of  increase  has  been  somewhat  less  in  the  last 
two  months? 

"Mr.  Sisson:    Yes. 

"Commissioner  Sweet :  But  that  the  point  reached  at  the  present  time  is  the  high-water 
mark  ? 

"Mr.  Sisson :    Yes.     Up  to  this  point,  yes. 

"Commissioner  Sweet:    In  your  judgment,  what  is  the  prospect  for  the  future? 

"Mr.  Sisson  :  I  think  you  will  find  still  higher  costs  of  material  and  higher  cost  of  labor. 
I  think  we  will  have  to  reckon  with  them  for  an  indefinite  period  of  time." 

Yet,  there  is  considerable  testimony  to  the  effect  that  before  the  war  broke 
upon  the  world,  the  causes  which  I  have  discussed  in  earlier  chapters  of  this 
report  were  at  work.  At  pages  371  and  372  of  the  Proceedings,  Mr.  C.  L.  S. 
Tingley,  Vice-President  of  the  American  Railways  Company,  a  holding  concern 
interested  in  many  different  utility  properties,  testified  as  follows: 

"The  Chairman:  And  the  diiSculty  which  now  confronts  you  is  due  wholly  to  war  con- 
ditions ? 

"Mr.  Tingley;  Absolutely,  sir,  wholly.  Well,  I  would  not  say  to  the  war  conditions, 
but  whollv  due  to  the  increase  in  wages  and  material,  which,  of  course 

"The' Chairman  :    Which,  of  course,  would  not  have  come  without  the  European  war? 

"Mr.  Tingley:  Well,  they  were  coming  before  the  war  came.  sir.  The  war  has  simply 
hastened  it  and  aggraN-ated  it.  Wages  were  rising  and  rising  steadily,  and  have  for  the  last 
twenty  years." 

Dr.  Dugald  C.  Jackson,  consulting  engineer,  head  of  the  Department  of  Elec- 
trical Engineering  in  the  Massachusetts  Institute  of  Technology  and  joint  author 
of  the  book  "Street  Railway  Fares,"  ^  expressed  the  opinion  that  the  fundamental 
causes  of  the  present  street  railway  trouble  antedate  the  war.  At  page  1416 
of  the  Proceedings,  he  says : 

"The  present  situation  may  be  described  as  a  state  of  public  irritation  over  increasing 
unit  fares  for  travel  accompanied  by  criticism  of  the  service,  and  at  the  same  time  the  railway 
companies  are  drifting  into  bankruptcy  caused  by  the  condition  of  war  wages  and  cost  of 
materials.  The  unfortunate  status  of  local  passenger  transportation  companies,  however,  is 
not  whollv  war  produced.  Increased  fares  have,  as  a  rule,  only  partially  offset  increased 
wage  and  material  costs  during  the  war  period,  and  the  trend  of  the  companies  to  the  bad  has, 
therefore,  been  accelerated  by  the  war.  but  the  trend  was  unmistakably  present  before  the 
war,  and  therefore,  it  becomes  a  question  of  determining  what  were  the  causes  and  whose 
were  the  faults." 

Again,  at  page  1420  of  the  Proceedings,  he  says: 

"The  causes,  then,  which  have  brought  this  problem  into  your  hands  may  be  summed  up 
as  inherent  in  the  way  in  which  this  special  business  has  been  dealt  with  by  both  the  cities 
and  the  companies  and  the  war  has  only  exaggerated  the  troubles  and  brought  more  quickly 
upon  the  traction  companies  a  crisis  which  was  creeping  upon  them.  This  complex,  difficult 
and  special  problem  of  local  passenger  transportation  cannot  be  successfully  dealt  with  without 
consideration  of  its  distinguishing  conditions  from  ordinary  commercial,  mercantile  and  in- 
dustrial businesses." 


128  Electric  Railway  Problem 

L'pon  this  point,  at  least,  Mr.  Morris  L.  Cooke,  of  Philadelphia,  agreed  with 
Dr.  Jackson.  The  war  precipitated  the  present  street  railway  situation,  but  was 
not  the  primary  cause  of  it.  Mr.  Cooke  makes  a  charge  of  inefficient  manage- 
ment against  the  electric  railway  industry.  At  page  1688  of  the  Proceedings, 
he  says : 

"Our  street  railroads  constitute,  broadly  speaking,  the  most  completely  discredited  feature 
in  the  administration  of  a  city.  The  public,  remembering  not  only  past  wrongs,  but  having 
in  mind  present  day  inefficiencies,  not  only  takes  no  interest  in  lightening  the  burdens  of  those 
who  arc  responsible  for  the  operation  of  these  properties,  but  seems  actually  anxious  to  pre- 
cipitate the  final  stages  of  what  may  easily  develop  into  a  national  tragedy. 

"In  the  widespread  antipathy  to  the  owners  of  these  properties,  and  further  in  the  con- 
viction so  generally  entertained  by  the  public  that  all  adventure  has  gone  out  of  the  street  rail- 
road business  operated  as  a  private  undertaking,  this  Commission,  I  Ijelieve.  will  find  the 
greatest  obstacle  to  putting  into  effective  oi>eration  such  constructive  suggestion  as  it  may 
make. 

"Continued  adversity  might  possibly  win  over  the  most  obdurate  and  old  fogey  director 
to  enlightened  management  and  a  square  deal ;  but  without  the  hearty  cooperation  of  the 
public,  almost  nothing  can  be  done. 

"My  own  impression  is  that  the  diflferences  between  the  public  and  private  interests  in- 
volved have  become  irreconcilable.  The  operators  of  these  properties,  and  especially  their 
promoters  have  erred  so  grievously  against  the  public  that,  e.xccpt  with  isolated  properties  and 
where  conditions  are  exceptional  no  compromise  is  likely.  In  most  situations  with  which  I 
am  familiar,  it  would  seem  to  me  highly  improper  that  a  compromise  should  be  reached  on 
any  basis  thus   far  suggested  by  the  private  interests   involved." 

Further  on,  at  page  1689  of  the  Proceedings,  he  says: 

"It  is  because  those  in  charge  have  had  their  attention  centered  on  financial,  rather  than 
on  operating  considerations  that  past  and  present  untoward  tendencies  have  not  been  dis- 
counted and  offset  more  eflfectually." 

Again,  at  page  1690  of  the  Proceedings,  he  sums  up  the  situation  as  follows : 

"The  present  deplorable  state  of  our  street  railroads  was  not  reached  over  night,  and  is  not 
due  to  any  one  single  cause.  If  their  managers  had  been  on  their  jobs,  these  remedial  meas- 
ures which  you  are  now  discussing  would  have  been   inaugurated  years  ago. 

"The  point  1  want  to  make  is  that  while  the  situation  has  doubtless  I)een  precipitated  by  the 
war,  conditions  incident  to  the  war  had  really  vcr>-  little  to  do  with  it. 

"The  attitude  of  the  owners  of  these  properties  is  such  as  to  make  it  very  difficult  for  the 
public  to  get  at  the  real  facts.  Propaganda  supporting  officially  authorized  theories  of  valua- 
tion, methods  of  accounting,  principles  of  management  and  so  forth  are  carried  on  in  every 
direction." 

And  so  we  find  that  the  war  and  the  liij;li  prices  having  given  the  electric 
railway  "house  of  cards"  the  push  that  precipitated  its  collapse,  we  are  led  on 
to  the  fundamental  question  of  future  policies.  Shall  we  take  cognizance  of  the 
past  and  put  the  electric  railways  of  the  country  upon  a  new  basis,  or  shall  we 
connive  at  the  building  of  a  new  house  of  cards,  a  "more  stately  mansion"  that 
will  shut  the  electric  railway  industry  "from  heaven  with  a  dome  more  vast" 
than  the  dome  that  is  now  falling  about  its  ears? 


Chapter  XXIII 
HOW  CAN  CREDIT  BE  RESTORED? 

We  have  seen  that  credit  is  necessary  to  the  continued  existence  and  normal 
expansion  of  the  electric  railways  as  a  public  utility ;  and  that  for  divers  good  and 
sufficient  reasons  electric  railway  credit  has  disappeared  except  in  isolated  spots. 
We  must  now  face  the  constructive  problem  of  its  restoration. 

The  issue,  as  seen  by  the  Committee  of  One  Hundred  representing  the 
American  Electric  Railway  Association,  is  put  squarely  and  frankly  by  General 
Guy  E.  Tripp  in  his  statement  at  pages  68  and  69  of  the  Proceedings,  where  he 
says: 

"The  present  methods  of  regulation  and  control  have  failed.  It  requires  no  argument  to 
prove  tliat.  The  fact  that  an  industr\-  scattered  all  over  the  United  States  and  operating 
under  different  local  conditions — the  mere  fact  that  such  an  industry  is  as  a  whole  on  the 
verge  of  bankruptcy  at  a  time  when  unregulated  industry  is  at  the  height  of  prosperity, 
speaks  for  itself. 

"The  present  system  of  regulation  and  control  is  entirely  too  inelastic  to  respond  to  the 
stress  of  changing  conditions,  particularly  such  as  now  exist,  and  they  do  not  permit  of  the 
prompt  adjustment  of  the  price  of  the  product  or  the  cost  of  the  product.  And  any  method 
of  control  or  regulation  which  does  not  permit  of  the  application  of  this  simple  rule  will 
always  fail.  I  have  no  doubt  that  this  is  a  fundamental  truth  which  is  recognized  by  every- 
body, but  in  the  case  of  electric  railways  a  peculiar  psychological  factor  has  been  introduced 
which  has  hindered  the  adjustment  of  electric  railway  problems. 

"The  old  system  of  contracts  between  a  municipality  and  a  railway  under  which  the  railway 
agreed  for  a  certain  fixed  fare  to  perform  certain  service  raised  a  popular  belief  that  the 
performance  of  a  railway  service  through  the  medium  of  private  enterprise  amounted  to 
giving  away  public  privileges  to  private  individuals  out  of  which  enormous  profits  have  been 
reaped.  It  has  been  impossible  hitherto  to  eradicate  that  idea  from  the  public  mind.  I  do  not 
believe  that  the  relations  between  municipalities  and  electric  railways  can  be  satisfactorily  ad- 
justed upon  the  basis  of  a  simple  contract  such  as  might  exist  between  two  individuals  or  cor- 
porations. I  entirely  subscribe  to  the  theory  of  state  regulation  and  control,  and  that  theory 
having  been  admitted,  I  believe  it  is  impossible  for  the  parties  to  stand  in  simple  contractual 
relations  with  each  other,  and  the  idea  should,  if  possible,  be  entirely  removed  from  the  public 
mind  and  a  new  conception  of  the  functions  of  electric  railways  substituted.  That  concept 
I  believe  to  be  that  the  electric  railway  is  an  agent  of  the  public  to  furnish  it  service  and  for 
that  service  it  is  entitled  to  a  fair  and  just  return  upon  capital  honestly  invested  in  the  service 
and  upon  conditions  which  will  respond  to  changing  conditions  of  operation  and  of  finance. 

"I  think  the  electric  railway  industry  is  facing  three  alternatives  and  that  the  issue  will 
come  immediately : 

"First  is  municipal  ownership;  second,  private  ownership  and  operation  under  a  sound 
fundamental  basis  of  regulation  and  control;  third,  complete  disappearance  of  the  service. 
In  some  cases  the  service  has  already  disappeared  and  the  tracks  have  been  taken  up,  but  I 
believe  that  alternative  is  unthinkable  in  large  communities  except   perhaps   in   part. 

"I  believe  our  experience  in  the  Governmental  operation  of  those  utilities  which  are 
more  or  less  complex  in  character  has  not  been  reassuring,  and  I  further  believe  that  a  ma- 
jority of  the  people  believe  in  private  operation  under  proper  regulation  and  control." 

Here  we  have  the  formulation  and  recognition  of  the  agency  theory,  which 
calls  for  continuous  public  regulation  upon  the  basis  that  the  agents  of  the  public 
— the  electric  railway  companies — are  entitled  to  "a  fair  and  just  return  upon 
capital  honestly  invested  in  the  service." 

We  must  not  lose  sight  of  the  fact  that  General  Tripp's  testimony  was  in 

129 


130  Electric  Railway  Problem 

some  respects  inconsistent  with  itself.  For  instance,  in  his  opening  statement, 
quoted  above,  Genera!  Tripp  gives  his  allegiance  to  state  regulation  and  expressly 
condemns  the  perpetuation  of  the  simple  contractual  relationship  between  the 
companies  and  the  municipalities.  By  inference,  also,  he  condemns  the  main- 
tenance of  a  contractual  relationship  between  the  companies  and  the  state.  Near 
the  close  of  his  testimony,  however,  he  expressed  the  view,  in  reply  to  questions 
asked  by  Chairman  Elmquist,  that  the  ideal  service-at-cost  plan  would  take  the 
form  of  a  contract  between  the  company  and  the  municipality,  with  an  automatic 
or  nearly  automatic  adjustment  of  fares  to  changes  in  the  cost  of  service.  His 
testimony  on  this  point  is  found  at  pages  181  and  182  of  the  Proceedings,  as 
follows : 

"The  Chairman :  Vou  spoke  this  morning  about  establishing  a  new  relationship  between 
the  utilities  and  the  public  and  investors.  Of  course,  that  presumes  a  proper  form  of  regu- 
lation? 

"Gen.  Tripp :    Yes,  sir. 

"The  Chairman:    \\hat  should  that  be? 

"Gen.  Tripp:    Do  you  ask  whether  it  should  be  state  regulation  or  local  regulation? 

"The  Chairman :    I  am  asking  you  what  should  be  the  proper   form  of   regulation. 

"Gen.  Tripp:  If  the  new  contract  between  the  municipality  and  the  company  were  of 
such  a  nature — and  I  think  it  should  be — that  it  amounted  to  a  practical  guaranty  of  a  fair 
return  upon  a  fair  investment  in  the  property,  then  it  would  seem  safe  to  leave  the  regulation 
of  the  local  utility  to  the  local  authorities  who  have  made  the  guaranty. 

"The  Chairman:  In  your  judgment,  will  the  service-at-cost  plan  result  in  excluding  the 
states  from  the  regulation  of  these  utilities? 

"Gen.  Tripp:  It  is  difficult  for  me  to  say,  without  giving  the  matter  much  consideration, 
what  place  the  state  commissions  would  have  in  such  a  relationship. 

"The  Chairman  :  Under  a  proper  service-at-cost  plan,  tlie  rates  rise  or  fall  automatically, 
according  to  the  earnings,  do  they  not? 

"Gen.  Tripp:    Yes,  sir. 

"The  Giairman  :  Is  there  any  rule  for  a  regulating  commission  to  exercise  judgment  in 
determining  the   reasonableness  of  the  rate  under  such  plan? 

"Gen.  Tripp :    No :  I   should  think  not. 

"The  Chairman :  That  being  so,  can  you  see  a  good  reason  for  having  the  state  commis- 
sions given  any  control  over  the  service  of  these  utilities  where  the  cost  of  service  plan  has 
been  adopted? 

"Gen.  Tripp :    I  cannot  see  any  reason  now. 

"The  Chairman:  Do  you  see  that  they  should  exercise  any  control  over  extensions  of  the 
properties? 

"Gen.  Trijip :    I  do  not  see  any  reason  why  they  should. 

"The  Chairman  :    Or  the  capitalization  ? 

"Gen.  Tripp:  No;  the  capitalization  in  tliat  case  would  be  a  matter  of  no  moment  to 
anyone  except  the  company. 

"The  Chairman :  Do  you  believe  that  the  highest  quality  of  service  and  best  form  of 
protection  to  the  public,  as  vs'cll  as  to  the  utilities,  would  be  .secured  through  local  regulation 
rather  than  state  regulation? 

"Gen.  Tripp :  Provided  always  that  there  is  a  relationship  which  imposes  an  obligation 
upon  the  mimicipality,  which  amounts  to  a  guaranty  of  a  fair  return  on  the  fair  investment, 
I  think  a  heller  admini.stration  of  that  relationship  would  probably  lie  in  the  hands  of  the 
municii>alily. 

"The  Chairman :  But  it  prc-supposes,  does  it  not.  the  fact  that  the  municipalitv  has  the 
intelligence  to  properly  examine  the  operating  sheet  of  a  railroad  to  .see  that  the  accounts  are 
properly  kept,  and  to  clearly  understand  how  to  regulate  such  a  utility? 

"Gen.  Trip :  It  prc-supposcs  that,  but  the  test  comes  in  the  cash  in  the  cash-drawer  to 
pay   this   fair   return. 

"The  Chairman :  Well,  from  the  experience  you  have  had  in  this  work,  is  it  your  opinion 
that  municipalilics,  generally  speaking,  give  close  attention  to  the  operation  of  these  utilities 
and  the  control  of  their  securities  and  cxpcn.ses  in  such  a  wav  that  the  public  can  safely 
trust  them  with  that  responsibility  ? 

"Gen.  Tripp:  I  should  answer  that  by  saying  that  my  observation  is  that  probably  not, 
under  the  form  of  contract,  at  least,  which  has  been  in  common  use. 

"The  Chainnan  :  If  the  service-at-cost  plan  is  .ndopled.  is  it  not  possible  that  there  will 
be  a  RtKKl  deal  of  irritation  Iwtwcen  the  utilities  and  the  public  growing  out  of  a  shifting 
charge   for  the  ser\'ice? 


How  TO  Restore  Credit  131 

"Gen.  Tripp :    Yes,  that  might  be  possible. 
"The  Chairman:    What  will  that  lead  to? 

"Gen.  Tripp :  It  will  probably  lead  to  municipal  ownership  if  such  an  irritation  did  arise 
that  was  severe  enough." 

Mr.  Harlow  C.  Clark,  editor  of  "Aera,"'  the  official  organ  of  the  American 
Electric  Railway  Association,  presented  to  the  Commission  a  careful  analysis  of 
the  electric  railway  problem,  and  submitted  suggestions  for  emergency  relief  and 
for  the  formulation  of  a  permanent  plan.  He  recognizes  clearly  that  local  trans- 
portation is  a  public  function.     At  page  897  of  the  Proceedings,  he  says : 

"The  continued  furnishing  of  efficient  and  sufficient  urban  and  interurban  transportation 
is  a  recognized  vital  necessity  of  modern  community  life. 

"It  is  recognized  to  be  a  function  of  the  government  of  each  state  to  provide  that  such 
service  shall  be  performed. 

"Heretofore  the  custom,  with  few  exceptions,  has  been  that  these  necessary  facilities 
should  be  provided  by  private  agencies,  with  the  use  of  private  capital,  and  subject  to  such 
regulations  by  governmental  agencies  as  would  insure  that  the  service  should  be  continuous, 
reasonable,  sufficient  and  efficiently  rendered. 

"To  provide  a  service  of  this  character  by  private  capital,  it  is  necessary  that  the  terms 
and  conditions  prescribed  by  the  authorities  shall  make  such  investments  safe  and  enable  them 
to  secure  a  return  which  will  induce  private  capita!  to  select  investment  in  the  utility  to  such 
an  e.xtent  as  will  provide  the  necessary  funds  for  capital  purposes.  Such  further  return  should 
be  allowed  as  would  stimulate  the  operating  utility  to  the  greatest  measure  of  economy,  effi- 
ciency and  initiative  and  thus  insure  the  development  of  the  art  and  the  maintenance  of  the 
public  service  at  the  high  standard  demanded  by  the  .American  public ;  otherwise,  private 
capital  w-ill  elect  to  seek  other  investments,  the  standard  of  service  will  be  depreciated,  and  the 
maintenance  and  improvement  of  these  properties  will  have  to  be  provided  for  from  state 
or  municipal  sources,  and  deficits  in  operation  made  up  by  taxation,  or  the  service  permitted 
to  deteriorate  and  finally  terminate.  As  the  last  alternative  is  impossible  in  modern  life,  tlie 
actual  question  is : 

"Shall  the  service  be  provided  by  the  use  of  private  capita),  or  by  the  use  of  public 
credit  and  resources  ?" 

Mr.  Clark  assumes  that  municipal  ownership  cannot  be  immediately  adopted 
as  a  general  policy,  and  that  therefore  some  plan  must  be  adopted  by  which 
private  capital  will  continue  to  support  the  industry.  At  pages  897  and  898  of 
the  Proceedings,  he  outlines  his  plan  as  follows : 

"As  existing  law'S  and  conditions  in  the  different  states  do  not  make  a  general  adoption  of 
the  principle  of  municipal  ownership  or  operation  feasible  at  this  time,  the  industry  must  be 
conducted  by  the  use  of  private  capital,  whatever  final  policy  the  public  may  adopt  in  this 
respect. 

"This  is  feasible  if  the  following  suggestions  for  emergency  relief  and  for  a  permanent 
plan   are    followed : 

"Emergency  relief.  Such  an  immediate  temporary  increase  in  the  charges  for  transpor- 
tation (subject  to  revision  by  the  subsequent  permanent  plan)  as  is  necessary  to  meet  the 
present  crisis  and  to  prevent  tliat  financial  disaster  which  is  imminent  to  a  large  majority  of 
the  industry. 

"This  would  maintain  the  service  during  the  development  and  formulation  of  the  perma- 
nent plan,  by  which  also  any  suitable  revision  in  such  emergency  increase  could  be  made. 

"Pennanetit  [ilan.  .\  plan  for  the  permanent  conduct  of  the  business,  under  state  or 
municipal  regulation,  capable  of  automatically  adjusting  itself  from  time  to  time  to  varying 
conditions. 

"The  machinery  for  such  permanent  plan  should  include : 

(a)  The  ascertainment  of  the  amount  upon  which  the  enterprise  should,  in  fairness 
and  justice  to  both  the  investors  and  the  public,  be  allowed  to  earn  a  return. 

(b)  The  establishment  by  the  authorities  of  a  system  of  charges  for  service  by  which 
rates  will  automatically  increase  or  decrease  above  or  below  the  initial  rates  named  in  the 
permanent  plan  by  a  defined  method  and  schedule  .so  as  to  yield  at  all  times  sufficient  revenue 
to  meet  all  the  payments  contemplated  by  the  plan,  including  such  protective  reserves  as 
should  be  established,  and  also  sufficient  opportunity  for  participation  in  benefits  resulting 
from  economy,  efficiency  and  initiative  to  induce  the  greatest  eflforts  by  the  utility. 

(c)  Power  of  regulation,  either  by  state  or  municipal  authorities,  in  respect  to  all  matters 
affecting  conditions  and  character  of  service,  including  extensions,  improvements  and  bet- 
terments. 


132  Electric  Railway  Problem 

(d)  The  utility  to  be  conducted  on  the  so-called  indeterminate  franchise  principle  and 
to  be  subject  to  such  regulation  as  may  be  prescribed  by  law  in  respect  to  accounts,  to  capital 
investments,  and  other  matters. 

(e)  The  establishment  of  the  right  of  the  municipality  or  other  governmental  agency 
to  purchase,  as  shall  be  set  forth  in  the  plan,  which  shall  in  particular  establish  the  price  or 
the  method  ol  ascertaining  the  price. 

(f)  .Ml  special  ta.xcs  and  all  special  charges  and  assessments  paid  by  the  utility  are 
in  fact  paid  by  the  car  rider,  being  a  part  of  the  cost  of  transportation.  Car  riders  as  a  class 
should  not  be  subjected  to  such  indirect  or  special  taxation  and  should,  so  far  as  the  particular 
circumstances  in  each  community  will  permit,  be  relieved  therefrom." 

Mr.  Henry  J.  Pierce,  of  Seattle,  formerly  President  of  the  International 
Railway  Company,  of  Buffalo,  testifying  on  behalf  of  the  American  Electric 
Railway  Association,  was  one  of  the  few  company  witnesses  who  recommended 
the  continuation  of  the  five-cent  fare.  His  solution  of  the  street  railway  problem 
was  outlined  at  pages  S73  to  875  of  the  Proceedings,  where  he  says : 

"For  over  a  quarter  of  a  century  the  people  who  have  ridden  on  street  cars  have  been 
accustomed  to  pay  the  five-cent  fare  and  they  have  come  to  believe  that  five  cents  is  the  value 
and  the  proper  value  of  a  street  car  ride.  .\nd  when  attempts  have  been  made  to  raise  the 
fare  to  si.x,  seven,  eight  or  nine  cents  the  public  have  resented  it,  there  is  not  any  question 
about  that.  I  ride  on  the  street  cars  myself  and  have  ridden  on  the  street  cars  in  cities 
where  the  fare  has  been  rai.sed,  and  I  know  there  is  a  lot  of  resentment  on  the  part  of  the 
public  because  they  do  not  understand  it.  They  have  been  educated  along  the  lines  of  a  five- 
cent  rate.  Therefore,  if  it  is  a  possible  thing  to  keep  the  street  car  fare  at  five  cents  it  shoukl 
be  done.  I  am  inclined  to  think  that  it  can  be  done  through  some  readjustment  of  the  relations 
that  now  exist  and  wliich  have  existed  between  the  municipalities  and  the  street  railroad  cor- 
porations, and  it  is  along  those  lines  that  1  wish  to  convey  these  suggestions  to  you. 

"I  would  have  the  fare  a  straight  five-cent  cash  fare,  no  tickets.  I  would  abolish  transfers 
absolutely.  I  would  have  the  municipalities  remit  all  taxes  and  I  would  have  the  munici- 
palities do  the  paving.  If  that  is  not  enough — I  think  it  would  he  enough  in  many  cases  to 
settle  these  difficulties,  these  very  serious  difficulties  which  confront  this  industry — hut  if 
it  were  not  sufficient  then  I  would  charge  an  extra  five-cent  fare  outside  of  a  central  zone 
three  miles  in  diameter. 

"I  would  then  allow  the  street  car  company  eight  per  cent  upon  its  investment,  and  by 
its  investment  I  mean  its  cost  in  money  that  it  has  invested,  not  in  any  event  to  be  greater 
than  reconstruction  cost,  and  in  that  cost  I  would  include  as  a  matter  of  fairness  what  might 
be  termed  the  replacements  of  obsolescence  in  machinery  and  equipment  which  had  been  made 
necessary  through  improvements  of  the  art. 

******** 

"Then  I  would  have  all  money,  all  further  surplus  beyond  that  eight  per  cent  go  back  into 
the  city  treasury. 

"I  believe  that  in  this  way  this  difficulty  would  be  solved.  I  believe  that  the  street  car 
companies  could  finance  and  refinance  their  property.  I  think  that  they  could  deal  with  the 
bankers.  1  think  that  the  people's  interests  would  be  protected,  the  investors'  interest  would 
be  protected  and  everylxidy  would  be  treated  fairly.     I  do  not  think  any  other  way 

The  Chairman :  The  general  complaint  here  for  the  past  ten  days  is  that  a  five-cent 
fare  will  not  even  pay  operating  costs. 

"Mr.  Pierce:    Yes. 

"The  Chairman :  How  are  you  going  to  pay  eight  per  cent  on  the  capital  and  turn 
something  over  to  the  others  with  a  five-cent   fare? 

"Mr.  Pierce:  Through  the  abolition  of  transfers,  through  the  abolition  of  taxes  and 
through  the  municipality  paying  for  the  paving,  and  if  that  is  not  enough,  through  tlie  five- 
cent  extra  fare  outside  of  a  three  mile  zone.  Mr.  Chairman.  I  do  not  think  it  is  right,  anyway, 
for  the  street  car  company  to  pay  for  paving  in  the  street,  because  these  streets  or  roads  canie 
down  to  us  from  the  olden  times  as  the  king's  highway  through  which  the  people  might 
ride  and  walk.  The  street  car  is  the  poor  man's  vehicle  and  I  suppose  90  per  cent  of  the 
people  who  ride  on  street  cars  are  not  well  enough  off  to  own  horses  and  automobiles :  there- 
fore, they  have  to  ride.  But  the  man  who  has  a  horse  or  an  automobile  may  go  through 
streets  without  paying  taxes.  I  think  it  is  only  fair  in  any  event  that  the  paving  should  be 
done  by  the  city. 

"Now  the  only  alternative  to  this  to  my  mind  would  he  for  the  municipalities  to  take  over 
and  operate  the  street  railroads  of  the  country.  That  I  consider  un-.\merican.  That  I  should 
very  much   dislike  to   sec. 

"I  think  the  function  of  government  is  to  go\Tm  and  regulate,  not  to  own  or  operate 
public  utilities.  I  have  lived  in  all  perhaps  ten  years  of  my  life  in  Europe.  T  have  ridden 
on  their  railroads  which  were  operated  by  government  or  bv  municipalities,  and   I  tell   vou 


How  TO  Restore  Credit  133 

that  I  have  met  a  good  many  czars  and  a  good  many  kaisers  on  those  cars.  They  do  not 
treat  the  people  with  the  courtesy  that  our  privately  operated  street  railroads  and  railways 
treat  them  here.  It  is  un-American  and  I  am  totally  opposed  to  it  and  hope  we  will  never  see 
it  in  this  country-." 

Mr.  T-  K.  Newman,  of  New  Orleans,  also  testified  as  a  witness  for  the 
Electric  Railway  Association.  He  was  particularly  frank  in  his  description  of 
the  historical  methods  which  brought  the  electric  railways  into  public  disrepute, 
and  undermined  their  credit.  He  was  convinced  that  public  opinion  would  not 
support  municipal  ownership  as  a  remedy,  and  that  a  service-at-cost  plan,  with 
complete  guaranties  that  the  companies  will  not  repeat  the  wrong-doings  and 
follies  of  their  past,  is  the  only  solution.  His  views  on  the  present  financial  dif- 
ficulties of  the  electric  railways  and  the  impracticability  of  municipal  ownership 
as  a  remedy  for  their  present  troubles  are  set  forth  at  pages  556  and  557  of 
the  Proceedings,  as  follows: 

"Then,  we  find  the  roads  breaking  down  under  their  old  system  of  accounting.  We  find 
that  they  cannot  do  any  financing.  We  are  finding  this,  too,  that  when  they  have  to  come  out 
from  under  their  old  system  of  financing,  there  must  be  established  a  complete  new  financial 
set-up.  a  complete  new  process  of  financing. 

"Now,  what  is  going  to  happen?  I  have  had  to  do  with  putting  six  properties  in  the  hands 
of  receivers.     The  interest  is  being  cut  on  all  of  the  bonds. 

"The  Chairman:    During  the  last  year  or  so? 

"Mr.  Newman :  During  the  past  year,  and  we  have  a  serious  problem,  a  problem  which  is 
far  more  serious  than  the  public  has  any  idea  of,  and  I  believe  far  more  serious  than  the 
members  of  this  Commission  believe. 

"How  are  we  going  to  get  around  it;    how  are  we  going  to  solve  it? 

"Let  us  talk  municipal  ownership  for  a  minute.  There  is  a  constitutional  prohibition  in 
the  charters  of  all  of  the  cities,  that  they  cannot  take  over  the  street  railways  by  any  system 
of  guaranty,  because  it  is  not  legally  possible. 

"The  next  thing  is  that  they  do  not  want  to  do  it.  There  was  a  cry  for  municipal  owner- 
ship, but  I  do  not  know  of  a  community  today  that  would  take  over  these  properties.  Why? 
Because  the  politician  lives  on  public  favor,  and  the  moment  the  politician  attempts  to  raise 
the  street  car  fare,  the  public  are  against  him,  and  he  will  lose  out  at  the  next  election. 
They  do  not  want  to  enter  into  that;  so,  frankly,  I  have  given  up  all  hope  of  municipal  owner- 
ship. 

"Mr.  Warren:  Before  you  leave  that,  Mr.  Newman,  have  you  any  views  on  state  owner- 
ship as  distinguished  from  municipal  ownership? 

"Mr.  Newman  :     No ;   I  never  thought  of  that  proposition. 

"Mr.  Warren:  Of  course,  that  would  be  a  possibility  with  which  most  of  the  constitu- 
tions would  not  interfere. 

"Mr.  Newman :  There  you  are  separating  the  city  and  state,  and  I  do  not  dream  of  that 
as  a  possibilty. 

"I  do  not  believe  the  people  themselves  want  to  put  street  railways  in  municipal  ownership. 
They  are  dift'erent  from  any  other  kind  of  public  service  corporation,  for  this  reason:  they 
have  an  enormous  payroll — 40% — maybe  50%,  of  their  operating  expenses,  and  maybe  a  great 
deal  more  than  that  the  way  wages  are  going.  It  means  that  motormen  and  conductors,  who 
have  not  had  the  advantages  of  an  education,  who  are  not  carpenters  or  mechanics,  and  who 
have  to  take  this  class  of  work — that  means  not  the  highest  order  of  education,  and  they  are 
prey  for  politicians,  and  that  puts  a  lot  of  strength  into  the  hands  of  politicians.  It  puts 
a  great  big  payroll  in  the  hands  of  the  politicians.  A  water  company,  a  gas  company,  and 
a  lighting  company  do  not  have  the  same  proportion  of  employes. 

"So  I  do  not  believe  in  municipal  ownership. 

"I  would  be  glad  to  get  relief  if  we  had  to  lose  money  and  got  rid  of  some  of  the  trouble. 
Life  is  hardly  worth  living  with  the  proposition  as  it  is  today,  but  I  think  the  cities  them- 
selves do  not  want  municipal  ownership." 

Mr.  Newman's  own  plan  for  the  solution  of  the  problem  is  outlined  at  pages 
557  to  559  of  the  Proceedings,  where  he  says : 

"The  solution,  in  my  judgment,  is  the  service-at-cost  plus  a  return  on  the  investment — an 
ascending  fare,  or  a  descending  fare,  but  a  fair  return  on  the  investment. 

"If  they  choke  off  the  chance  of  the  street  railway  people  and  bankers  from  manipulating 
the  securities  again ;  I  do  not  believe  it  matters  much  what  the  capitalization  of  the  company 


134  Electric  Railway  Problem 

is,  whether  it  is  high  or  low.  That  is  not  the  point.  If  we  got  out  to  make  securities,  they 
could  be  cut  down.  It  can  be  dealt  with  by  the  process  of  law,  but  what  the  people  want  to 
know  is  that  an  unfair  return  is  not  paid  on  the  capital  invested. 

"When  the  public  is  educated  to  the  fact  that  they  are  paying  a  fair  return  on  the  invest- 
ment and  not  a  return  on  watered  securities,  they  are  not  going  to  object  to  an  increase  in 
fares,  no  matter  what  it  is,  even  if  it  should  be  10  cents. 

"Now,  in  this  position,  you  have  to  take  the  public's  point  of  view,  because  you  cannot 
look  at  it  fairly  if  you  just  go  below  the  surface  of  the  street  railway  situation,  and  not 
analyze  the  public  point  of  view. 

"Suppose  we  are  operating  a  factory,  and  we  were  unwise  enough  to  sell  our  product 
at  a  fi.xed  price  for  a  term  of  20  years.  What  would  hajipen  when  the  raw  material  went 
up,  so  that  we  could  not  produce  that  article  at  cost?  We  would  go  into  receivership,  and 
then  bankruptcy. 

"Now,  would  the  purchaser  of  that  material  want  to  take  the  factory  and  run  it,  or  would 
he  say,  'Here,  you  go  on  and  manufacture  your  goods,  and  I  want  to  see  that  you  do  not  make 
an  abnormal  profit  out  of  it.'  I  think  most  business  men  would  say,  "You  had  better  operate 
your  factory;  I  don't  want  to  operate  it,  especially  when  you  are  only  getting  a  meagre 
return  on  your  investment.' 

".\nd  that  is  what  the  public  is  going  to  say  when  they  are  convinced  that  that  is  the 
situation  in  the  street  railway  business.  They  are  fairly  entitled  to  know  that,  after  we  have 
had  the  cream  of  these  franchises,  and  that  when  the  day  of  reverses  passes,  we  are  not  going 
to  continue  to  pay  large  dividends  on  the  basis  of  securities.  They  will  insist  that  we  pay  only 
a  fair  return  on  the  capital  property  value,  and  let  the  securities  readjust  themselves. 

"There  is  another  feature  about  the  financial  plan,  the  securities  plan,  that  1  would  like 
to  sec  the  Commission  adopt,  if  the  Commission  should  favor  the  plan  of  service-at-cost  plus 
a  fair  return  on  the  capital  property  value,  and  that  is  this,  that  there  should  \x  a  condition 
attached  to  that  sort  of  an  arrangement,  by  which  the  securities  would  be  readjusted  so  that 
a  new  .system,  a  financial  set-up  will  tie  established  in  order  to  make  it  possible  for  the  street 
railways  to  go  ahead  and  kee|)  up  with  the  times,  to  take  care  of  this  renewal  and  replacement 
fund,  which  has  not  been  accumulated  by  a  majority  of  the  roads,  but  which  has  been  an 
operating  charge,  just  to  the  same  extent  as  the  niotormen's  and  conductors'  salaries.  It  has 
been  taken  care  of  in  the  past  through  this  ascending  prosperity,  now  blocked,  because  we 
have  reached  the  height  of  the  industry  or  nearly  so,  and  automobiles  have  come  along  and 
have  taken  the  cream  off  the  top.  So  we  are  dealing  today  with  this  problem  of  a  renewal 
and  replacement  which  must  be  inserted  in  the  operating  charge  at  a  fixed  charge.  Now, 
when  you  have  done  that,  you  have  broken  down  your  whole  system  of  finance,  because  there 
is  not  a  banker  who  has  played  the  game  in  New  York  or  elsewhere  who  has  not  adopted  the 
standard  of  judging  a  bond  by  the  ability  of  the  company  to  earn  twice  its  interest  charge. 
When  you  insert  that  renewal  and  replacement  charge,  notwithstanding  all  the  properties  are 
face  to  face  with  that,  and  it  is  a  much  more  material  thing  than  we  have  been  thinking  of 
in  the  past,  you  destroy  its  net  earnings,  and  even  if  you  had  an  open  issue  of  bonds,  you  could 
not  sell  them,  unless  you  had  two  for  one.  and.  of  course.  I  do  not  know  of  one  road  in 
ten  that  can  make  that  sort  of  a  statement  tixlay,  with  a  renewal  and  replacement  fund. 

"Now.  if  you  do  not  put  it  in  operating  expenses,  you  have  to  capitali2e  it,  and  you  are 
not  allowed  to  do  so  by  the  cities  as  an  oiwrating  cxikmisc.  When  you  put  it  into  operating 
expenses,  and  you  want  a  return,  an  interest  mi  the  fair  valuation.  6  cents  fades.  There  is 
nothing  to  it.  and  7  cents,  in  many  instances,  will  fade,  and  will  go  up  to  a  very  much  higher 
standard,  and  there  is  no  hoiw  of  that  higher  standard  unless  we  have  taken  the  public  into  our 
confidence  and  say,  'Wc  have  stopped  the  juggling  of  securities;  we  have  stopped  consolidation 
to  get  out  more  slock  ;  we  have  gotten  down  to  an  honest  system  of  finance,  by  which  the 
public  will  pay  a  return  on  the  investment,  and  nothing  more,  and  what  you  pay  you  get. 
if  you  want  a  low  rate  of  fare,  take  the  scats  out  of  the  cars,  and  let  ever>hody  stand  up; 
but  if  you  pay  enough,  we  will  put  on  Pullman  palace  cars  for  you.  You  shall  be  the  judge  of 
what  you  want,  but  whatever  you  pay  you  get,  and  you  pay  it  only  to  give  us  a  return  on  our 
actual  investment.' " 

On  the  subject  of  puhlic  ^i.irantics  a.s  a  restorative  for  credit.  Mr.  Francis 
H.  Sisson  testified  as  follows,  at  pages  329  and  330  of  the  Proceedings : 

"Commissioner  Sweet:  Do  you  think  a  guaranty  of  five  per  cent  on  bonds  would  be 
sufficiently  attractive  to  investors  to  meet  the  needs  of  the  companies  at  the  present  time? 

"Mr.  Sisson:    Well,  the  guaranty— <io  you  mean  by  that  to  limit  it  to  five  per  cent? 

"Commissioner  ."^wect  :    Yes. 

"Mr    Sisson:     Tn  assure  them  of  five  per  cent? 

"CiimmissionorSwret  ■    To  assure  them  of  five  per  cent,  and  not  more. 

"Mr.  Sis.son  :   Yes.  I  think 

"Commissioner  Swcel :    On  lionds. 

"Mr.  Sisson:  I  think  the  public  guaranteo<l  Imnd  on  a  five  per  cent  oflTering  would  be 
attractive  today. 


I 


How  TO  Restore  Credit  135 

"Commissioner  Sweet:    Do  you  think  such  bonds  could  be  floated  at  the  present  time? 

"Mr.  Sisson ;  It  would  depend  a  good  deal  upon  the  nature  of  the  guaranty,  upon  the 
size  of  the  community  and  the  political  character  of  the  government.  Money  rates  are  higher 
than  that  today.  Five  and  a  half  per  cent  is  the  existing  rate  on  money  today,  and  my  own 
judgment  is  that  money  is  going  higher.  The  demand  for  capital  is  so  great  that  it  seems 
to  me  inevitable  that  it  will  be  forced  up,  and  that  while  a  guaranteed  governmental  obligation, 
like  our  own  United  States  obligation,  can  be  sold  at  better  than  five,  it  would  have  to  be  of  a 
very  sound  character  to  be  attractive  at  five,  but  it  would  be  attractive  on  a  sound  guaranty. 
If  the  City  of  New  York  or  the  State  of  New  York  guaranteed  its  corporations  five  per  cent, 
the  securities  could  be  sold,  and  they   would  be  attractive  to   investors. ^ 

"Commissioner  Sweet :  Do  you  see  anything  inconsistent  with  a  guaranty,  or  what  would 
amount  to  a  guaranty  of  that  kind,  in  the  cost  of  service  plan? 

"Mr.  Sisson :    No. 

"Commissioner  Sweet :     Service-at-cost,  I   think  it   is  called. 

"Mr.  Sisson :  No,  I  do  not.  My  own  theory  is  that  if  we  get  into  the  guaranty  field, 
we  are  encroaching  so  closely  upon  the  field  of  public  ownership  that  sooner  or  later  we  will 
step  over  the  line  into  it,  and  with  an  assurance  of  a  reasonable  earning  power  to  be  dis- 
tributed by  the  owners  of  the  roads  through  fixed  charges  and  labor  charges  and  material 
charges,  in  accordance  with  their  own  necessities  and  judgment,  is  a  much  more  business- 
like way  to  leave  the  situation  than  to  provide  for  fixed  guaranties.  But  perhaps  that  is  not 
possible.     If  it  is  not,  I  would  approve  the  guaranty." 

Mr.  Samuel  R.  Bertron,  of  Bertron,  Griscom  &  Company,  investment  bankers 
of  New  York  and  Philadelphia,  favored  an  immediate  increase  in  fares  to  enable 
the  companies  to  keep  out  of  receiverships,  and  then  a  fair  valuation  of  their 
property  and  a  fair  return  upon  that  valuation.  He  was  not  averse  to  municipal 
ownership  as  an  alternative.  His  testimony  on  these  points,  at  pages  539  and 
540  of  the  Proceedings,  is  : 

"You  are  not  going  to  be  able  to  raise  money  to  operate  these  properties,  unless,  in  the 
public  estimation,  their  credit  is  substantial  and  is  going  to  continue  so.  A  temporary  ad- 
justment is  not  going  to  help,  because  people  are  not  going  to  buy  any  more  securities  of 
street   railways   in   such  a  temporary  expedient. 

"Mr.  Warren:  A  temporary  expedient  might  save  the  companies,  while  the  permanent 
one  was  being  adopted? 

"Mr.  Bertron  :  It  would  be  essential  to  increase  fares  generally,  and  that  should  be  im- 
mediate.    Otherwise,  most  of  the  remaining  ones  would  go  into  the  hands  of  a  receiver. 

"Mr.  Warren:    It  would  be  a  post-mortem,  otherwise? 

"Mr.  Bertron  :  Indeed  so,  but  that  should  be  recognized  as  a  temporary  expedient  pend- 
ing a  valuation  of  the  properties  and  the  granting  of  a  fair  return  on  that  valuation  by  some 
elastic,  easily  adjustable,  automatic  system,  and  that  is  what  I  think  should  be  striven  for. 
You  will  save  many  of  these  companies  from  receiverships,  and  enable  them  to  pay  at  least 
their  bond  interest  by  a  6-cent  fare  at  the  moment.  That  is  not  going  to  be  enough  generally, 
I  fear.     Prices  rise 

"The  Chairman:    What   fare  is  that? 

"Mr.  Bertron:    Six  cents. 

"Then,  the  politicians  have  brought  in  this  question  of  watered  stocks,  bonds,  and  so 
forth.  All  of  that  has  passed.  It  probably  was  done  often  in  the  old  days,  but  everybody 
should  be  satisfied  with  a  fair,  honest  valuation  of  the  property,  and  in  many  states  rules 
have  been  established  for  making  such  a  valuation.  There  is  a  field  that  I  hope  you  can  en- 
lighten the  people  with  reference  to,  and  when  you  have  a  fair  valuation,  let  there  be  definitely 
a  fair  return  on  that  valuation,  and  when  that  is  established  the  credit  of  the  companies  will  be 
reestablished  and  the  service  will  be  able  to  be  maintained. 

"Now.  to  my  mind,  there  is  only  one  alternative— two  alternatives.  The  first  is  the  busi- 
ness going  to  pieces,  and  the  people  not  be  able  to  get  the  service?  That  means  walking.  The 
other  is  municipal  ownership. 

"Now,  personally,  while  I  may  not  be  in  accord  with  many  of  my  friends.  I  am  not  so 
averse  to  municipal  ownership,  as  some  people  are.  of  these  properties. 

"The  objection  to  it  is  that  these  companies  would  be  run  for  political  purposes.  I  do  not 
think  that  that  follows  at  all.  A  plan  can  be  devised  in  each  municipality,  by  which  the  mer- 
chants' associations,  the  banks,  the  chambers  of  commerce  could  cooperate,  and  have  a  business 
board,  with  labor  represented,  and  they  could  handle  this  as  a  great  economical  problem  and 
not  a  political  problem.  , 

"Many  years  ago  water  companies  gradually  became  municipalized.  .\  great  many  people 
looked  upon  tliat  with  a  great  deal  of  hesitancy  and  dread.  It  has  worked  well,  as  a  rule,  and 
I  do  not  think,  as  a  rule,  there  are  any  politics  in  it.  It  has  one  distinct  advantage,  and 
that  is  that  a  municipally  guaranteed  security  will  be  placed  at  a  lower  rate  than  any  other, 


136  Electric  Railway  Problem 

and  therefore  the  money  necessary  to  maintain  these  properties  can  be  secured  on  the  lowest 
possible  basis.- 

"Mr.  Warren:  Mr.  Bertron,  might  not  that  result  be  served,  to  a  certain  extent,  if 
privately  owned  securities  were  guaranteed,  or  substantially  so? 

"Mr.  Bertron:  I  think  (so),  if  the  valuation  were  recognized  by  the  public  service 
commission  or  the  city,  as  the  case  may  be,  and  approved,  as  increased  expenditures  occurred, 
and  a  definite  return  on  that  capital  were  assured  by  the  city  through  an  automatic  plan,  in 
which  the  fares  would  increase  if  the  earnings  were  not  sufficient  to  pay  that,  and  decrease 
if  they  were  too  high,  and  act  speedily — the  great  trouble  is  that  they  do  not  act  for  six 
months  or  a  year,  and  then  the  company  is  busted,  and  to  restore  confidence,  it  has  to  be 
something  that  moves  at  once." 

Mr.  Henry  G.  Bradlee,  of  Stone  &  Webster,  in  general  terms  states  the 
alternative  methods  of  restoring  street  railway  credit,  as  he  sees  them,  at  page 
209  of  the  Proceedings,  as  follows: 

"It  is  not  the  question  of  what  money  is  in  there  so  much  as  it  is  how  are  you  going  to 
get  additional  money  in  order  to  reasonably  serv'e  the  public. 

"There  are  only  two  ways  that  I  know  of :  One  is  to  go  to  municipal  ownership  and  have 
the  city  or  state  rai.se  the  money  on  city  or  state  bonds.  The  other  is  to  establish  some  plan 
under  which  the  investor  will  feel  that  in  the  future  he  may  count  on  a  reasonable  protection 
of  his  invested  capital  and  a  reasonable  insurance  of  an  adequate  return." 

Mr.  Richard  T.  Higgins,  Chairman  of  the  Connecticut  Public  Utilities  Com- 
mission, in  suggesting  remedies,  emphasized  the  importance  of  avoiding  public 
ownership,  but  at  the  same  time  looked  with  favor  upon  the  exemption  of  street 
railway  property  from  taxation.  At  pages  1108  and  1109  of  the  Proceedings, 
he  says : 

"I  think  it  is  univcr.sally  conceded  that  the  situation  which  most  all  of  the  American 
street  railways  are  in  today,  is  exceedingly  serious,  and  unless  some  immediate  and  sub- 
stantial relief  is  afforded,  many  of  the  companies  will  fail,  street  railway  business  will  be 
suspended,  and  the  public  will  suffer  the  loss  of  a  utility  which  affords  a  necessary  means 
of  transportation. 

"It  is  not  so  difficult  to  diagnose  the  ills  as  it  is  to  prescribe  the  remedy.  I  presume 
your  honorable  Commission  has  listened  to  many  suggested  remedies,  and  I  cannot  expect  to 
add  any  new  thought,  but  to  my  mind  the  relief  must  come  primarily  from  the  states  and 
the  municipalities  where  the  different  companies  operate,  and  must  be  governed  somewhat 
by  local  conditions,  but  should  involve  a  material  increase  in  rates,  a  reduction  or  suspension 
of  taxes,  substantial  relief  from  state  and  municipal  obligations  pertaining  to  street  pave- 
ments, bridges,  etc.,  a  lilx.'ral  policy  of  regulation,  and  a  similar  policy  of  public  regulation 
and  taxation  over  competing  transportation  agencies  such  as  public  service  automobiles  or 
jitneys. 

"In  the  solution  I  would  avoid  if  possible  public  or  government  ownership  or  control,  or 
any  policy  which  takes  away  from  the  companies  the  initiative  and  incentive  which  have  been 
the  great  impelling  factors  in  the  wonderful  growth  and  development  of  our  country. 

"Street  railways  afford  the  principal  nudiuni  of  the  industrial  short -haiil  traffu-.  The 
trolley  car  is  the  poor  man's  means  of  transportation,  and  its  only  revenues  are  provided  by 
the  car  riders,  who  ride  as  a  matter  of  public  necessity,  not  as  a  matter  of  personal  pleasure. 
I'ndir  present  conditions  there  is  just  as  much  if  not  more  reason  for  relieving  the  trolley 
companies  from  the  burden  of  public  taxation  as  there  is.  for  example,  to  exempt  from  taxa- 
tion large  private  and  heavily  endowed  colleges  and  other  institutions  of  learning." 

Mr.  Homer  Loring,  Chairman  of  the  Board  of  Trustees  for  the  public  opera- 
tion of  the  Eastern  Massachusetts  Street  Railway  Company,  rather  timidly  sug- 
gested that  the  Mass.-ichusetts  trustee  plan  of  continued  private  ownership  and 
pui)lic  (ii)eration  may  furnish  a  satisfactory  temporar>-  solution.  His  apolog}'  for 
it  is  found  at  pages  1650  and  1651  of  the  Proceedings,  where  he  says: 

"Regarding  the  public  control,  I  believe  that  it  mav  be  a  step  in  between  the  private 
conlrc.l,  as  we  have  had  in  years  gone  bv,  and  public  ownership  which  we  may  have  to  face 
m  the  future. 

•|  think  by  Mate-ap|)ointcd  trustees  it  offers  the  reasonable  certaintv  of  careful  economical 
manaRcment,  particularly  if  removed  from  politics,  and  I  believe  that  the  public  trustees  can, 
in  tmie.  Ret  the  complete  public  confidence  and  I  believe  it  has  a  great  deal  to  favor  it.     Of 


How  TO  Restore  Credit  137 

course  it  has  not  been  of  long  standing,  and  1  appreciate  it,  as  Mr.  Gadsden  said,  that  the 
public  was  verj-  much  irritated  in  Boston  over  the  ten-cent  fares  which  they  did  not  really 
think  possible,  and  there  has  been  an  inclination  to  blame  the  trustee  plan  for  the  ten-cent 
fares.  But  they  are  not  to  blame  in  any  way  e.xccpt  probably  if  it  had  not  been  for  tlie 
trustees,  the  Public  Service  Commission  would  have  held  the  fares  down  and  the  company 
would  have  gone  into  the  hands  of  receivers.  I  think  that  probably  would  have  been  the 
result ;   because  it  had  to  be  done  and  done  very,  very  promptly." 

Further  on,  at  page  1653  of  the  Proceedings,  Mr.  Loring  expresses  his  dis- 
like for  pubHc  ownership  as  a  present  program,  as  follows : 

"I  should  dislike  to  see  public  ownership  tried  at  present.  It  presents  a  great  many 
difficulties.  In  the  first  place,  is  it  going  to  be  state  ownership  or  is  it  going  to  be  municipal 
ownersliip? 

"Our  lines  are  a  tangled  net  work  of  lines,  and  if  the  cities  were  allowed  to  own  it, 
very   serious  complications   would  ensue. 

"I  fully  believe  that  the  present  plan  that  is  being  tried  has  all  the  advantages  of  public 
ownership,  with  the  possible  exception  of  the  fact  of  a  lower  interest  rate  that  might  be  ob- 
tained if  they  were  all  direct  obligations  of  the  state.  Outside  of  that,  however,  I  think  it 
has  the  advantages  of  public  ownership.  The  state  is  justified  in  advancing  money  to  make 
improvements,  and  of  course,  it  does  assure,  if  the  Commission  is  carefully  selected,  absolutely 
non-partisan  management.  I  should  be  very  much  afraid  to  see  the  cities  own  their  lines,  and 
I  should  dislike  to  see  the  state  own  it  at  the  present  time." 

On  the  other  hand,  Mr.  Frederick  J.  McLeod,  at  that  time  Chairman  of  the 
Massachusetts  Public  Service  Commission,  looked  upon  public  ownership  as  the 
probable  ultimate  solution  of  the  problem,  and  was  not  at  all  dismayed  by  the 
prospect.     At  page  1451  of  the  Proceedings,  he  says: 

"It  may  well  be  that  tlie  ultimate  solution  of  the  street  railway  problem  must  be  found 
through  public  ownership.  No  other  method  offers  any  reasonable  prospect  for  the  restora- 
tion of  the  companies'  credit,  which  is  necessary  to  provide  needed  capital.  The  figures  pre- 
senter to  your  Commission,  indicating  the  decline  in  the  street  railway  riding  per  capita,  em- 
phasize the  fact  that,  with  the  growth  of  motor  transportation,  street  railway  service  is  no 
longer  a  public  necessity  to  the  same  degree  as  heretofore.  The  street  railway  is  no  longer 
in  undisputed  possession  of  the  field  of  urban  transportation,  and  the  possibilities  of  profit 
are  correspondingly  curtailed.  While  no  other  agency  of  transportation  yet  devised  can  sup- 
plant the  street  railway  company,  and  the  retention  of  street  railway  service  is  vital  in  public 
interest,  it  is  extremely  doubtful  if  the  street  railway,  under  present  economic  conditions,  can 
he  supported  wholly  by  private  investment ;  as  a  matter  of  abstract  theorv',  private  operation 
may  have  many  advantages  over  public  operation,  but  where  a  public  utility  must  be  retained 
in  the  interest  of  public  service  rather  than  as  a  possible  source  of  profit  and  where  private 
capital  continues  to  occupy  the  field  only  in  the  hope  of  salvaging  the  investment  already 
made,  recourse  must  be  had  to  public  credit  if  adequate  service  is  to  be  retained." 

At  page  1452  of  the  Proceedings,  he  refers  to  public  operation  in  Massa- 
chusetts under  the  trustee  plan  as  follows: 

"Massachusetts,  as  already  pointed  out,  has  already  embarked  upon  the  policy  of  public 
operation  for  about  half  the  street  railway  mileage  of  the  state  through  the  lease  rather  than 
the  purchase  of  street  railway  properties.  While  tliis  experiment  has,  up  to  the  present  time, 
not  proved  in  all  respects  as  successful  as  was  hoped,  there  is,  as  far  as  I  can  judge,  abso- 
lutely no  public  sentiment  whatever  in  favor  of  a  reversion  of  the  properties  to  the  old 
system  and  in  so  far  as  there  is  agitation  for  change,  it  is  directed  towards  the  outright  pur- 
chase of  these  properties." 

Mr.  John  A.  Beeler,  transportation  engineer,  and  formerly  general  manager      , 
of  the  Denver  Tramway  Company,  was  not  averse  to  the  service-at-cost  plan    4 
with  private  ownership  or  to  public  ownership  under  proper  conditions.     His 
contention  was  that  the  electric  railway  problem  is,   in  the  main,  a  matter  of 
financing   and    management.     At   pages    1677   to    1679   of    the    Proceedings,    he 
testifies: 

"The  Chairman:   You  are  familiar  with  the  cost  of  service  plan? 
"Mr.  Beeler:     I  am  more  or  less  familiar  with  the  plan,  yes. 


138  Electric  Railway  Problem 

"The  Chairman:    Do  you  believe  that  affords  a  solution  of  the  street  car  question? 

"Mr.  Beeler:    I  think  as  a  whole  it  is  a  good  plan. 

"The   Chairman:     Does   it   afford  a   solution? 

"Mr.  Beeler:    1  think  it  may. 

"The   Chairman:     Under   what   conditions? 

"Mr.   Beeler:    I  think  it   is  largely  a  question  of  management. 

"The  Chairman :  Has  it  been  tried  out  long  enough  in  this  country  to  warrant  the  asser- 
tion that  it  will  solve  the  street  car  problem? 

"Mr.  Beeler:    No.  1  could  not  say  that  it  has  been.     I  do  not  believe  it  has. 

"I  think  that  the  whole  street  railway  situation,  whether  it  is  municipal  ownership  or 
private  ownership  or  state  ownership,  as  it  seems  to  me,  is  right  now  a  question  of  manage- 
ment and  financing. 

"It  municipal  ownership  will  finance  a  line  and  will  provide  equally  competent  manage- 
ment, then  municipal  ownership  would  be  a  good  thing. 

"On  the  other  hand,  if  pri\-ate  capital  and  private  ownership  can  continue  to  finance 
and  manage  the  line  that  would  be  the  proper  thing. 

"It  seems  to  me  that  it  is  largely  a  question  of  management  and  cooperation  with  the 
public. 

"In  order  for  any  management  to  be  successful,  they  have  got  to  employ  all  of  these  oper- 
ating economies  and  the  principles  of  salesmanship,  and  recognize  the  fact  that  cars  wear 
out  and  that  people  will  not  ride  in  them — that  they  want  a  change.  I  think,  regardless  of 
whether  the  state  owns  it  or  the  municipality  or  the  private  company,  that  these  fundamental 
principles   have   got  to  be   recognized  and   provided    for. 

"The  Chairman :  Have  you  reached  any  conclusion  as  to  whether  municipal  ownership 
will  give  a  greater  guaranty  of  good  service  and  a  larger  facility  to  investment  than  private 
ownership  and  operation? 

"Mr.  Beeler:  I  think  that  is  simply  a  question  of  individual  opinion.  It  might,  under 
certain  circumstances.  Municipal  ownership  or  state  ownership  would  have  this  ad\'antage : 
The  money  for  financing  could  be  obtained  at  a  lower  rate  of  interest,  and  could  be  readily 
obtained.  To  my  mind  that  is  the  only  advantage  that  I  can  see  for  municipal  ownership 
or  state  ownership. 

"Commissioner  Gadsden :  Is  not  that  the  greatest  question  before  the  street  railroads 
today — getting  new  money? 

"Mr.  Beeler:  It  is;  but  I  think  the  greatest  question  before  us  today  is  a  question  of 
policy.  If  they  are  to  continue  to  operate  on  the  same  policy  that  they  have  in  the  past,  if 
they  get  the  new  money,  they  will  be  in  the  same  shape  again  in  a  few  years ;  and  the 
successful  companies  today  are  those  that  have  been  rehabilitated  in  the  past  few  years. 
They  have  had  new  plants,  new  equipment  and  are  operating  successfully,  most  of  those 
companies,  on  low  fares — the  five-cent  fare.  Some  of  those  companies  have  provided  for  this; 
they  have  provided  for  the  new  capital  in  different  ways.  However,  in  whatever  manner 
they  have  provided  for  it,  tliey  are  operating  more  economically  today  than  the  companies 
that  have  not  been  rehabilitated. 

"So  that  it  seems  to  me  that  a  comprehensive  plan  providing  for  rehabilitation  of  the 
properties,  other  than  making  of  repairs  must  be  adopted  before  the  street  railway  industry 
will  be  financially  sound. 

"The  Chairman  :  .Assuming  that  the  public  can  purchase  capital  more  cheaply  than  the 
private  company,  do  you  believe  that  the  difference  is  substantial  enough  to  really  affect  the 
substantial  operation  of  the  industn,? 

"Mr.  Beeler:  Given  the  same  efficient  management,  the  saving  in  interest  would  he 
ven-  substantial.  With  an  average  of  four  dollars  invested  per  dollar  of  business— that  is  the 
trouble  with  the  street  car  business;  it  requires  such  a  high  investment  to  do  business — the 
average  company,  surface  street  car  company,  with  four  dollars  invested  must  provide,  at 
six  per  cent,  2A  cents  out  of  every  dollar  to  pay  its  interest  at  si.x  per  cent.  Now  if  the 
municipalitv  could  borrow  that  at  four  per  rent,  there  would  be  16  cents  against  24  cents,  a 
saving  of  8  cents  on  evePi-  dollar,  which  would  make  a  tremendous  difference  in  the  operating 
ratio,  but  it  would  not  take  very  long  for  an  inefficient  management,  that  was  careless,  or 
that  was  favoring  certain  sections  of  the  city,  to  throw  away  that  eight  cents  on  each  dollar." 

I  have  already  referred  to  Mr.  Roger  W.  Rabsoii's  proposed  remedy — the 
removal  of  all  rate  reslriction.s.  Mr.  daylord  C.  Ciimniiii  proposed  public  partner- 
ship with  a  sliding  scale  of  dividends  afTected  reciprocally  by  increasing  or  de- 
creasing fares.  Mr.  Taft  and  others  proposed  a  zone  system  of  fares.  Lieuten- 
ant Colonel  Charles  \V.  Kutz,  Chairman  of  the  District  of  Columbia  Public 
Utilities  Commission,  advocated  public  ownership  of  the  tracks  and  roadbed 
coupled    with   company   ownership   of    the   equipment.     Mr.    William    C.    Bliss, 


How  TO  Restore  Credit  139 

Chairman  of  the  Rhode  Island  Public  Utilities  Commission,  put  his  solution  of 
the  problem  in  a  few  words,  found  at  page  1 191  of  the  Proceedings : 

"But  the  ultimate  remedy,"  says  he,  "has  got  to  come  from  relief  from  taxation,  the 
rates  at  the  highest  reasonable  point  you  can  put  them,  and  the  rest  in  the  form  of  a  subsidy 
on  the  part  of  the  municipalities  served  in  proportion  to  the  service  rendered." 

Several  witnesses  expressed  the  belief  that  public  ownership  would  be  in- 
efficient and  expensive ;  a  few  used  much  stronger  words ;  one  or  two  even  raised 
the  bogey  of  Bolshevism.  But  no  witness  took  the  position  that  it  would  be 
better  for  the  people  to  walk  than  to  be  transported  by  municipal  street  cars.  The 
general  consensus  of  opinion  was  expressed  by  Mr.  Harold  L.  Stuart,  the  Chicago 
investment  banker,  who  said  with  admirable  simplicity  at  page  195  of  the  Pro- 
ceedings : 

"I  take  it  that  the  street  railway  corporation  is  a  necessity,  and  if  it  is  not  operated  under 
private  ownership,  then  it  must  be  operated  under  public  ownership." 


Chapter  XXIV 
THE    PROS    AND    CONS    OF  PUBLIC   OWNERSHIP 

In  the  preceding  chapter,  in  presenting  the  suggestions  of  various  witnesses 
for  the  restoration  of  credit,  1  necessarily  quoted  a  good  deal  of  discussion  with 
respect  to  the  merits  of  public  ownership.  In  particular,  Mr.  Henry  J.  Pierce 
denounced  it  as  "un-American";  Mr.  J.  K.  Newman  said  it  would  put  too  much 
"strength"  into  the  hands  of  politicians;  Mr.  Samuel  R.  Bertron  said  that  a 
plan  could  be  devised  to  handle  it  as  "a  great  economical  problem  and  not  a 
political  problem,"  and  Mr.  Beeler  pointed  out  that  if  the  management  was 
equally  efficient,  public  ownership  would  have  a  great  advantage  over  private 
ownership  in  the  matter  of  the  cost  of  capital. 

We  must  now  present  more  fully  the  widely  divergent  views  of  the  witnesses 
on  the  subject.  Public  ownership  represents  so  radical  a  change  in  the  status 
of  the  electric  railways,  that  we  need  to  pause  and  look  the  proposition  over 
in  its  fundamental  aspects  before  we  discuss  its  effectiveness  as  a  remedy  for 
the  particular  ills  which  we  are  here  concemcd  with. 

Ex-President  Taft,  in  his  opening  statement  to  the  Commission,  at  page  4 

of  the  Proceedings,  says : 

"I  am  personally  much  against  government  ownership,  for  the  reason  that  I  think  it 
reduces  the  economy  of  operation,  and  therefore  greatly  increases  the  cost  of  something  that 
is  essential  to  the  people." 

And  further  on,  at  page  5  of  the  Proceedings,  we  find  him  saying  this : 

"You  are  met,  of  course,  by  the  statement — and  I  do  not  wish  to  escape  the  force  of  the 
argument — that  these  transportation  facilities  are  in  the  nature  of  roads.  The  public  spends  a 
great  deal  of  money  in  keeping  roads  in  condition,  and  those  who  do  not  have  vehicles  do 
not  use  the  roads.  It  is  contended  that  these  electric  railways  only  fulfill  a  function  of  the 
same  kind,  and  that  therefore  the  imlilic  ought  to  meet  the  deficit  by  taxation;  and  if  it 
does,   it   will  naturally   take  over  the  management, 

"My  feeling  in  respect  to  the  general  loss  that  is  certain  to  be  involved  in  public  operation 
still  makes  mc  hope  for  some  other  solution  than  that  of  government  ownership." 

Mr.  Francis  H.  Sisson  sees  political  and  economic  tragedies  ahead,  if  public 
ownership  of  traii>portation  lines  proves  to  be  inevitable.  He  agrees  with  Mr. 
Bertron  that  municipal  ownership  of  water  supply  has  been  "efficient  and  desir- 
able," but  does  not  draw  from  this  fact  the  same  conclusion,  namely,  that  a  way 
could  be  found  to  make  public  ownership  of  street  railways  efficient,  if  the  busi- 
ness interests  of  the  community,  would  put  their  heads  together  to  that  end. 
Mr.  Sisson  is  willing  that  the  companies  should  be  subject  to  strict  public  control, 
and  he  is  not  (juitc  sure  that  public  ownership,  as  dangerous  as  he  thinks  it  to  be, 
may  not  be  inevitable.  His  testimony  on  these  points  is  found  at  pages  336  to 
3iS  of  the  Proceedings,  as  follows : 

"CommissionerMccker:  Well,  do  you  think  that  the  regulating  btxlv  should  have  decision 
as  to  when  extensions  should  be  made,  when  and  where,  and  when  and  where  new  lines 
should  be  built  ? 


Pros  and  Cons  of  Public  Ownership  141 

"Mr.  Sisson :  I  do,  providing  the  arrangement  is  such  as  to  furnish  the  credit  by  which 
those  extensions  can  be  made.  In  other  words,  I  feel  that  if  the  regulating  bodies  are  going 
to  get  on  top  of  these  utilities,  they  must  get  underneath  them,  too.  If  they  are  going  to  fi.x 
their  earnings,  they  must  also  establish  credit. 

"Commissioner  Meeker:  You  spoke  a  moment  ago  about  the  desirability  of  having  a 
definite  single  authority.  Does  tliat  squint  towards  public  ownership?  Is  it  possible  to  have 
this  public  interest  on  top  and  underneath  pri\-ate  companies  in  the  street  railway  business? 
Is  it  possible  to  work  out  any  scheme  of  cooperation  there,  or  is  it  best  to  give  up  the  attempt 
and  go  back  into  public  ownership? 

"Mr.  Sisson :  Well,  that  is  a  verj'  vital  question.  *  *  *  It  is  my  hope  and  belief 
that  it  would  be  possible  to  work  out  a  plan  of  regulation,  which  does  not  necessarily  imply 
public  ow'nership,  but  I  am  not  entirely  sure  that  it  is.     I  frankly  say  that. 

"Commissioner  Sweet:    You  think  it  ought  to  be  tried  first,  anyway? 

"Mr.  Sisson :  I  think  it  should  be  the  first  attempt,  that  we  ought  to  do  everything  possi- 
ble, before  we  reach  any  conclusion  that  public  ownership  is  inevitable,  because  in  my  mind 
I  believe  that  political  and  economic  tragedies  would  follow  public  ownership  in  this  country; 
that  would  be  very  disastrous. 

"Commissioner  Meeker :  With  minimum  and  maximum  earnings  practically  guaranteed, 
what  better  would  be  private  ownership  under  such  a  scheme  than  public  ownership  and 
operation  ? 

"Mr.  Sisson :  Well,  you  would  avoid  the  chief  objection  to  public  ownership  and  opera- 
tion, which  is  political  ownership  and  operation,  which  inevitably  piles  up  cost  and  reduces 
efficiency,  and  can  show  you  a  long  record  of  inefficient  operation  and  multiplying  costs,  which 
would  have  to  be  borne  by  the  public  and  would  be  disastrous  to  the  public  interests,  as  well 
as  to  the  private  interest  involved. 

"Commissioner  Meeker:    You  are  speaking  of  publicly  owned  and  operated  lines  now? 

"Mr.  Sisson :     Yes. 

"Commissioner  Meeker :    In  what  communities  ? 

"Mr.  Sisson:  Well,  broadly  speaking,  in  eighty-five  or  ninety  per  cent  of  the  communi- 
ties that  have  tried  it.  There  are  some  exceptions,  sir,  but  the  whole  record  of  public 
ownership  and  operation  of  public  utilities  has  been  that  of  multiplying  costs. 

"Commissioner  Meeker:     You  are  speaking  of  public  utilities   in  general  now? 

"Mr.  Sisson :  I  am  speaking  of  public  utilities  in  general  now,  but  it  would  apply  in  equal 
degrees  to  the  street  railways,  and  perhaps  in  a  greater  degree  to  them  than  to  some  others. 

"Commissioner  Meeker:    Why  sliould  it  apply  to  the  street  railways  in  a  greater  degree? 

"Mr.  Sisson :  Because  of  their  close  contact  with  the  public.  Water  power  does  not 
come  in  such  close  contact  in  the  same  way. 

"Commissioner  Meeker :     It  is  easier  to  move  water  than  it  is  to  move  an  electric  car. 

"Mr.  Sisson :   Yes,  and  there  are  not  all  the  causes  of  daily  irritation  and  delay. 

"Commissioner  Meeker :    It  is  nowhere  nearly  as  complicated. 

"Mr.  Sisson :     No. 

"Commissioner  Meeker :    You  were  not  speaking  of  the  experiments  abroad,  were  you  ? 

"Mr.  Sisson :    Well,  I  was.  throughout  the  world. 

"Commissioner  Meeker:    Throughout  the  world? 

"Mr.  Sisson :  Yes.  There  are  some  exceptions  abroad,  but  those  exceptions  are,  for  the 
most  part,  marked  by  reasons  that  make  them  exceptions,  that  are  very  obvious. 

"Commissioner  Meeker:  You  expressed  some  doubt  about  the  winning  out  of  this  co- 
operating scale  between  the  public  and  private  corporations? 

"Mr.  Sisson :  No ;  I  should  not  say  a  doubt — a  mental  reservation.  I  said  I  hoped  and 
believed  it  was  possible,  but  I  was  not  entirely  sure. 

"Commissioner  Sweet :    Let  me  ask  one  question  or  two  there.  Mr.  Meeker. 

"Have  you  found  objection  to  municipal  ownership  of  the  water  supply? 

"Mr.  Sisson:  Not  extensively;  no.  There  have  been  instances  of  objection,  and  in- 
stances of  marked  failure  on  the  part  of  the  municipality,  but,  on  the  whole,  I  think  the 
ownership,  the  municipal  ownership,  of  water  stations  has  been  efficient  and  desirable. 

"Commisioner  Sweet :  In  addition  to  the  points  referred  to,  is  it  not  true  that  the  rela- 
tionship between  public  health  and  the  water  supply  is  so  direct  that  the  city  ought  to  have 
control  of  the  water  supply? 

"Mr.  Sisson:    I  am  inclined  to  think  that  that  is  true;   yes. 

"Commissioner  Sweet :  Is  it  not  also  true  that  the  need  of  water  in  public  parks  and 
cemeteries  and  for  fire  protection  is  a  further  reason  for  municipal  ownership  of  the  water 
supply? 

"Mr.  Sisson :   Yes. 

"Commissioner  Sweet:   And  those  are  arguments  that  would  not  apply  to  street  railways? 

"Mr.  Sisson :    Not  at  all.     It  is  a  different  form  of  service  entirely." 

Mr.  Frederick  B.  DeBerard,  Director  of  Research  for  the  Merchants  Asso- 
ciation of  New  York,  and  a  member  of  the  Public  Utihties  Committee  of  the 


142  Electric  Railway  Problem 

United  States  Chamber  of  Commerce,  was  a  witness  on  behalf  of  the  American 
Electric  Railway  Association.  At  page  876  of  the  Proceedings,  in  response  to 
a  question  by  Mr.  Warren,  he  says: 

"I  have  given  particular  attention  to  the  relative  merits  of  private  and  commercial 
operation  of  all  classes  of  public  utilities,  the  principles  which  govern  them  all  being,  sub- 
stantially identical  and  conclusions  that  may  be  reached  as  to  one  will  apply  with  practically 
equal   force  to  all  the  others." 

Mr.  DeBerard's  conclusions  and  those  of  the  Merchants  Association  were 

embodied  in  two  reports.     The  first  was  issued  by  the  Association  in  November, 

1916,  and  was  entitled : 

"I.     Opposing  Government  Ownership  and  Operation  of  Public  Utilities. 

■'II.     Advocating  E.\clusive  Regulation  of  all  Railroads  by  the  Federal  Government." 

The  other  report  was  dated  January  23,  1919,  and  was  entitled  "Report  of  Special 

Comirtittee  on  Government  Ownership  and  Operation  of  Public  Utilities."    Copies 

of  these  reports  were  filed  by  Air.  DeBerard  with  the  Commission  in  connection 

with  his  testimony.     For  the  purposes  of  this  analysis,  it  is  sufficient  to  quote  a 

few  paragraphs  from  the  report  of  January  23,  1919,  showing  the  conclusions 

of  the  special  committee,  of  which,  it  should  be  observed,  Mr.  Francis  H.  Sisson 

was  a  member.     At  pages  is  and  9  the  report  says : 

"Movements  for  state  or  municipal  ownership  and  operation  of  local  public  utilities 
are  in  progress  in  various  quarters.  These  in  general  contemplate  the  ownership  and  opera- 
tion by  municipalities  of  street  railways,  electric  light  and  power  plants,  gas  plants  and  tele- 
phone plants. 

"Tlius  it  is  proposed  that  private  enten)rises  be  excluded  from  the  fields  of  transportation, 
communication,  light,  heat,  and  power,  and  that  the  functions  belonging  to  those  fields  here- 
after be  performed  by  immediate  governmental  agencies. 

"r^xcept  under  war  conditions  the  sole  plea  that  can  be  advanced  to  justify  the  operation 
by  governments  of  public  utilities  is  that  governments  can  provide  better  service  at  less  cost 
to  the  public  than  can  iirivate  o|)crators — that  is  to  say,  the  assumption  that  government  opera- 
tion is  more  efficient  and  less  costly  than  private  operation. 

"We  do  not  l)clicve  that  this  contention  can  be  sustained.  On  the  contrary  we  contend 
that  the  operations  of  governments  in  the  economic  field — and  particularly  under  American 
conditions — are  generally  characterized  by  inefficient  management  and  excessive  cost ;  so  that 
under  government  operation  the  public  would  get  poorer  service  and  pay  more  for  it  than 
under  private  operation  suitably  regulated  by  public  authority. 

"The  cause  of  inefficient  management  and  excessive  cost  when  governments  undertake 
economic  activities  is  simple.  All  the  activities  of  any  government  are  necessarily  carried  on 
by  political   machinery  and  that   machinery   is  wholly  unsuitcd   to  the  economic   field. 

"The  fields  of  politics  and  economics  are  dissimilar  and  separate.  The  field  of  politics 
(meaning  thereby  the  art  of  government )  is  mainly  the  regulation  of  conduct  and  the  pro- 
tection of  rights.  The  field  of  economics  is  the  prcxluction  and  utilization  of  material  things. 
The  principles,  the  methods  and  the  machinery  of  political  administration  are  wholly  diflferent 
from  tho.se  of  economic  activities  and  not  adapted  nor  adaptable  to  the  latter.  The  differences 
arc  fundamental  and  cannot  Iw  reconciled." 

Again,  at  pages  30  and  31,  the  following  .summary  and  conclusions  are  set 
forth: 

"The  principle  of  political  selection  whose  application  is  inevitable,  produces  an  inferior 
personnel,  lackuig  the  exiK-riince  and  sound  judgment  necessary  to  the  proper  conduct  of 
business  affairs,   with   resulting   inefficiency,   waste  and  excessive  cost. 

"The  financing  of  economic  undertakings  can  seldom  be  proiwrly  provided  for  under  gov- 
ernment control  for  reasons  staled  alKive.  By  reason  of  inferior  management  and  insufficient 
financing,  government  pro|)erties  are  likely  to  be  insufficiently  maintained,  be  subject  to  ex- 
cessive deterioration,  and  generally   fall   short  of  the  standards  essential  to  adequate  service. 

"While  we  are  not  unmindful  of  the  defects  that  not  infrequently  characterize  the  opera- 
tion by  corporations,  of  public  utilities,  we  do  not  believe  that  those  defects  can  be  cured  by 
suhstituting  another  mctlunl  which  in  every  respect  of  efficiency  is  much  below  the  standards 
that  generally  prevail  under  private  management.  In  so  far  as  the  evils  which  are  popularly 
assumed  to  exist  m  pri\-ale  management  arc  found  to  exist  in  fact,  other  remedies  than  the 
substitution  of  methods  aNmnding  in  greater  evils  should  be  found. 


Pros  and  Cons  of  Public  Ownership  143 

"We  believe  that  the  public  can  best  be  served  by  utilizing  the  efficiency,  enterprise  and 
energy  of  private  corporations  for  the  continued  operation  of  public  utilities,  under  such  public 
control  as  shall  protect  the  public  in  its  right  to  efficient  service  and  fair  rates ;  and  at  the 
same  time  assure  to  private  capital  invested  in  public  utilities  a  fair  return  upon  such  capital. 

"We  do  not  find  aiiy  chaiige  of  conditions  resulting  from  the  war  which  warrant  or 
require  the  previous  position  of  the  Association,  in  opposition  to  government  ownership  and 
operation,  to  be  modified. 

"In  our  analysis  of  the  question  we  have  dealt  mainly  with  principles  which  are  of  univer- 
sal application  and  of  continuing  force ;  those  principles  apply  without  qualification  to  all  of 
the  \'aried  classes  of  undertakings  which  it  is  proposed  shall  hereafter  be  operated  by  govern- 
mental bodies,  and  to  all  of  those  undertakings  the  disabilities  we  have  outlined  apply.  The 
controlling  consideration  is  that  political  control,  operating  through  political  methods,  is  de- 
.structive  of  economic  efficiency  and  therefore  such  political  control  should  not  be  applied 
to  undertakings  of  an  essentially  business  nature." 

Notwithstanding  his  opposition  to  public  ownership,  Mr.  DeBerard  was  will- 
ing to  admit  the  essential  character  of  street  railway  service.  His  testimony  on 
this  point  is  found  at  page  877  of  the  Proceedings,  as  follows : 

"Mr.  Warren:  Have  you  given  any  attention  to  the  subject  of  the  importance  of  street 
railways  to  the  prosperity  and   development  and  health  of   communities? 

"Mr.  DeBerard:  The  Merchants  Association  has  given  attention  to  that  subject  but  has 
not  made  it  the  subject  of  specific  study  except  in  so  far  as  it  relates  to  the  industrial  pros- 
perity of  the  city  of  New  York,  and  it  has  examined  into  the  question  to  some  extent  with 
relation  to  other  communities  to  supply  instances  for  use  in  our  study  of  that  subject  in  New 
York.     The  general  situation  developed  as  to  that  is  along  these  lines : 

"That  fully  efficient  local  transportation  is  essential  to  the  welfare  both  social  and  in- 
dustrial of  any  community.  It  is  essential  to  the  social  welfare  of  the  community  that  its 
population  be  not  extremely  congested  but  that  it  be  distributed  over  a  reasonably  wide 
territory ;  for  several  reasons,  both  for  the  sanitary  and  social  well-being  of  the  inhabitants, 
and  likewise  for  the  industrial  prosperity  of  the  business  enterprises  that  are  located  there,  in 
order  that  they  may  be  located  in  the  outskirts  and  at  the  same  time  have  reasonably  cheap 
and   regular  and   efficient   transportation    for  their   working   people   to   reach   their   places   of 

employment. 

******** 

"So  our  general  conclusion  on  that  subject,  although  as  I  have  said  it  has  not  been  the 
subject  of  a  special  report — our  general  conclusion  in  connection  with  our  study  of  general 
conditions  was  that  efficient  and  regular  and  cheap  urban  transportation  is  indispensable  to 
the  welfare  of  any  growing  community." 

Ex-Governor  Eugene  N.  Foss,  of  Massachusetts,  had  appeared  before  the 
Commission  earlier  on  the  same  day  when  Mr.  DeBerard  appeared.  Their  tes- 
timony was  a  good  deal  in  the  nature  of  a  debate  on  the  merits  of  public  owner- 
ship. Governor  Foss  was  for  it,  strongly  and  without  qualification.  He  testified 
as  an  individual,  but  as  one  who  had  long  been  an  extensive  holder  of  street 
railway  securities.     At  page  791  of  the  Proceedings,  he  says : 

"I  have  been  and  am  still  a  large  holder  of  street  railroads  and  quasi-public  corporation 
stock.  I  have  been  a  great  believer  in  quasi-public  corporations.  I  have  been  a  director  in 
many  street  railroad  corporations  in  Massachusetts  and  also  in  New  York,  in  the  two  leadmg 
systems  of  New  York,  the  Brooklyn  Rapid  Transit  and  the  Manhattan  Elevated,  and  I  have 
been  more  or  less  acquainted  with'  this  class  of  investment  and  have  followed  it  for  a  good 
manv  years.  .  ,  . 

"I  have  come  to  the  conclusion,  somewhat  reluctantly  I  admit,  that  public  ownership 
is  the  only  true  solution  of  this  railroad  question,  whether  it  be  the  railroads  or  the  electric 
railways  Of  course,  private  ownership  is  out  of  the  question.  Private  ownership  with 
public  "regulation  has  fallen  down.  There  is  nothing  else  left  in  my  judgment  except  public 
ownership  and  operation,  or  el.se  public  ownership  with  private  operation.  Private  owiership 
and  public  regulation  is  wrong  in  principle.  You  never  can  make  it  work  successfully.  The 
man  who  owns  these  properties  has  got  to  run  them. 

"Now,  I  am  interested  in  this  proposition  primarily  because  it  means  a  better  democracy, 
and  we  have  got  to  democratize  our  transportation  system  in  this  country.  That  is  the 
first  thing  we  have  got  to  do.  And  then  we  have  got  to  democratize  our  industries  to  a 
greater  extent  than  thev  have  been;  otherwise  we  are  going  to  be  in  the  condition  that  they 
are  abroad  in  some  places.  So  I  say  primarily  I  am  for  this  thing  because  it  means  a  better 
democracy." 


144  Electric  Railway  Problem 

Mr.  Foss  comes  strongly  to  the  defense  of  public  initiative  and  efficiency, 
and.  at  page  792  of  the  Proceedings,  cites  the  experience  of  Massachusetts,  as 
follows : 

"Wc  have  had  cases  in  Massachusetts,  for  instance  our  metropolitan  water  system,  if 
you  please,  created  twenty-five  years  ago,  in  which  a  commission,  a  non-partisan  commis- 
sion, appointed  by  the  Governor,  has  spent  forty  millions  of  dollars  on  a  water  system  for 
Boston,  one  of  the  best  in  the  country.  It  gives  us  the  cheapest  water.  That  commission 
paid  off  twenty  millions  of  dollars  indebtedness  today,  and  we  will  have  it  all  paid  off,  and 
there  has  not  been  a  word  of  scandal  about  the  management,  no  graft  or  anything  of  that 
sort.  I  had  no  trouble  when  I  was  Governor  of  Massachusetts  for  three  terms  to  find  the 
best  patriotic  men  in  the  state  to  take  these  government  positions.  It  fell  to  my  lot  to 
rebuild  the  court  of  Massachusetts,  both  branches,  and  I  did  not  have  any  trouble  about 
getting  the  best  men  in  the  state  at  the  very  moderate  salaries  paid  by  the  State  of  Massa- 
chusetts to  its  judiciary,  no  trouble  about  it  at  all. 

"It  is  a  reflection  upon  our  intelligence  and  upon  our  business  capacity.  I  am  not  willing 
to  admit  that  the  Post  Office  is  not  v.ell  handled,  eci-;;on-.ically  and  efficiently  handled.  I 
know  you  can  put  a  package  in  the  mail  in  Boston  and  get  it  here  to  Washington  quicker 
than  you  can  by  express.  I  am  not  going  to  stand  for  that  sort  of  thing.  We  can  do  just 
as  efficient  work  under  government  ownership  as  we  can  do  any  other  way,  no  doubt  about 
it  at  all." 

At  pages  794  and  795,  Mr.  Foss  takes  up  the  question  of  politics  in  street 
railway  management.     He  says: 

''I  know  that  I  could  work  out  a  plan  and  I  could  find  a  Ixxiy  of  men  in  Massachusetts 
or  any  other  state  in  the  Union  honest  and  patriotic  enough  to  conduct  these  street  railroads 
just  as  honestly  and  just  as  fairly  and  just  as  economically  for  the  state  as  they  could  for  the 
Standard  Oil  Company  or  any  other  organization  there  is  in  the  country.  There  is  no 
reason  why  our  young  men  and  boys  should  not  work  for  the  state  and  government  just 
as  efficiently  and  just  as  honestly  as  they  would  for  any  other  corporation.  And  it  is  a  great 
mistake  not  to  admit  it.  I  will  not  admit  for  a  single  moment  but  what  when  we  get  gov- 
ernment ownership  in  this  countr>-  as  we  are  going  to  get  in  my  judgment,  and  we  ought  to 
have  it,  as  applying  to  all  these  railroads,  you  are  going  to  see  marked  and  wonderful  econo- 
mies in  all  respects.  The  public  cannot  get  a  square  deal  through  a  private  corporation, 
even  if  it  is  publicly  regulated.  It  cannot  do  it,  it  is  utterly  impossible.  And  I  do  not  see,  as 
I  say,  any  other  solution. 

"The  people  say,  'Oh,  we  must  keep  these  railroads  out  of  politics.'  Good  heavens, 
have  they  not  been  in  politics?  Are  they  not  in  politics?  They  have  been  in  politics  for 
fifty  years.  What  did  I  find  on  Beacon  Hill  in  Boston?  I  found  out  that  the  greatest 
lobby  of  the  state  was  maintained  by  the  quasi-public  corporations.  The  king  of  the  lobby, 
who  was  employed  by  the  Boston  Elevated  Railroad,  received  a  salar>'  of  $25,000  a  year.  One 
corporation  paid  that  amount  for  one  man,  and  he  had  a  train  of  followers.  .\nd  it  is  the 
quasi-public  corporations  who  have  done  more  than  any  other  force  in  this  countr>-  to  debauch 
legislatures.  They  have  made  legislatures  and  unmade  legislatures  and  unmade  men.  They 
have  created  the  legislatures.  Now  what  we  have  to  do  is  to  take  these  street  railroads  over 
and  keep  them  out  of  politics.  That  is  what  we  have  to  do.  We  have  got  to  take  them  over 
to  keep  them  out.     That  is  the  proposition  as  I  see  it." 

Mr.  DcBerard  closed  his  personal  testimony  at  pages  880  and  881  with  a 
reply  to  Covcrnor  Foss,  insisting  that  politics  would  vitiate  public  management  of 
public  utilities.     He  says: 

"I  do  not  think  that  Governor  Foss'  assumption  that  government  ownership  is  going 
to  effect  a  cure  for  any  evils  whether  real  or  imaginary,  is  correct.  On  the  contrary,  it  is 
going  to  create  a  new  class  of  evils.  Whether  under  government  ownership  or  pri\-ate  owner- 
.ship,  the  operation  of  a  street  railway  is  a  business  undertaking  as  distinguished  from  a 
political  function,  and  whether  under  private  or  govcniment  ownership,  it  must  be  subjected 
to  the  same  niles  that  prevail  in  well  managed  business  undertakings.  It  must  meet  all 
economic  costs  that  arc  involved.  The  public  must  pay  those  economic  costs  in  one  form  or 
another.  So  the  question  ti>  be  considered  is  whether  those  economic  costs  will  be  less  under 
government  ownership  than  they  will  under  private  ownership;  whether  government  owner- 
ship will  produce  cc|ual  or  superior  efficiency ;  whether  it  will  produce  equal  or  superior 
economy.  .-Vnd  the  result  of  my  study  as  to  the  application  of  the  principles  that  govern 
both  cases  is  that  government  ownership  will  inevitably  and  imescapablv  result  in  greatly 
increasing  the  economic  costs  of  operating  the  business  propositions  that  are  under  con- 
sideration. 


Pros  and  Cons  of  Public  Ownership  145 

"The  Cliairman  :  Have  you  set  forth  your  conclusions  and  the  reasons  upon  which  you 
base  them  in  this  pamphlet  of  yours? 

"Mr.  DeBerard :  Yes,  I  have  analyzed  the  question  with  considerable  fullness  there 
and  have  given  such  illustrations  as  are  pertinent  to  the  subject.  There  are  other  illustra- 
tions, however,  which  could  be  adduced  which  will  show  the  uniform  inefficiency  of  govern- 
ment agencies  when  they  undertaUe  to  conduct  economic  undertakings,  by  reason  of  the  fact 
that  the  methods  that  are  inherent  in  political  government  and  whicli  are  perfectly  sound 
when  applied  to  political  government  do  not  apply,  are  not  adapted  and  cannot  he  adapted 
to  the  necessities  of  economic  undertakings.  Waste  and  inefficiency  to  a  high  degree  are 
inseparable  from  government  ownership,  primarily  by  reason  of  the  method  of  selecting  the 
personnel.  And  it  comes  down  to  a  question  of  management,  and  under  the  methods  of 
political  selection  the  personnel  to  which  the  management  is  entrusted  is  not  and  cannot  be 
as  efficient  as  that  of  private  management,  the  reason  being  that  the  motives  that  govern  the 
selection  are  different  in  the  case  of  private  management.  Those  motives  result  in  the  retention 
of  the  highest  capacity,  of  trained  skill,  of  experience,  of  long,  careful  and  constant  contact 
with  the  particular  industrial  problems  that  are  concerned  and  the  bringing  to  bear  upon 
those  of  the  highest  attainable  degree  of  professional  expert  ability;  whereas  in  the  case  of 
government  selections,  other  motives  always  enter  into  the  selection.  I  venture  to  say  that 
Governor  Foss  would  not  apply  to  the  management  of  his  own  private  business  the  method 
of  selection  that  he  applied  to  the  selection  of  the  Public  Ser\'ice  Commission  of  the  State  of 
Massachusetts.  If  he  did  so  apply  it  he  would  not  be  running  a  factory  but  he  would  be 
seeking  a  job." 

And  yet  the  Public  Service  Commission  of  Massachusetts  appointed  by 
Governor  Foss  was  charged,  not  with  the  operation  of  transportation  systems,  but 
with  the  regulation  of  the  private  companies,  which  everybody  but  Mr.  Babson 
regards  as  absolutely  essential  in  case  the  system  of  private  ownership  and  opera- 
tion is  continued.  Mr.  DeBerard  did  not  explain  how  politicians  can  control 
the  private  corporations  any  more  successfully  from  the  public  point  of  view 
than  they  could  operate  the  utilities. 

Interstate  Commerce  Commissioner  Eastman  approached  the  subject  of 
public  ownership  from  a  constructive  point  of  view.  He  looks  upon  it  as  a  policy 
to  be  worked  out.     At  page  2070,  he  says: 

"I  regret  very  much  that  the  discussion  of  the  question  of  public  ownership  has  so 
often  been  enshrouded  in  a  veil  of  prejudice,  prejudice  on  both  sides.  •  ■        j 

"It  seems  to  me  that  too  often  one  side  regards  public  ownership  as  an  unmitigated 
evil  and  forerunner  of  Socialism,  Bolshevism  and  various  other  evil  things  that  may  hap- 
pen, and  on  the  other  side  it  is  regarded  as  a  cure-all,  or  panacea  for  all  the  ills  of  humanity. 
Between  two  opposing  points  of  view  of  that  sort,  of  course,  ve  can  have  no  sane  dis- 
cussion of  the  question,  .  u  j  ■     tu-, 

"It  seems  to  me  that  in  the  present  instance  the  question  ought  to  be  approached  m  this 
way  Here  is  an  industrv  which  is  essential  and  vital  to  the  development  and  Krowth  ot 
the  communitv.  It  is  performing  a  public  function  which  has  got  to  be  performed  Now, 
if  the  industry  has  ceased  to  be  a  field  for  private  investment,  obviously  the  only  alternative 
that  vou  have  is  some  form  of  public  ownership;  and  instead  of  denouncing  that  possible 
remedv  and  dismissing  it  as  the  breeder  of  all  sorts  of  evils,  you  ought  instead,  to  attempt  to 
analyze  the  dangers  which  may  possibly  inhere  in  it,  and  attempt  to  find  some  remedy   tor 

those  dangers.  ...  ^    .         ,  .-         t  !..»:«,. 

"I  am  bv  no  means  convinced  that  it  is  impossible  to  find  such  remedies.  T  am  stating 
that  mildly.  '  I  am  of  the  opinion  that  they  can  be  found,  and  I  am  of  that  opinion  because 
of  this  saving  factor :  That  street  railway  service  is  so  important  to  every-  element  in  the 
community,  not  onlv  to  the  general  public  but  also  to  the  business  -nterests,  it  is  essential 
that  it  should  be  operated  efficientlv  and  economically,  even  more  essential  to  the  community 
at  large  than  it  is  to  the  owners  of  securities  in  the  private  corporations,  because  they  can 
often  get  their  return  by  increasing  rates  rather  than  by  efficient  and  economical  operation. 

Further  on,  at  page  2071,  Mr.  Eastman  points  out  some  of  the  possible 
methods  of  overcoming  the  alleged  difficulties  of  public  operation.     He  says : 

"Public  ownership  does  not  necessarily  mean  public  operation  if  you  do  not  want  to 
have  public  operation.  Personally  I  do  not  fear  it,  but  if  you  have  public  o;^;"««h;P  '' 
is  entirely  within  your  power  to  say  that  you  will  de  egate  your  management  »<?  «^^'"  ^ro^P'^ 
of  citizens  who  are  not  under  the  control  of  politics.  You  may  say  that  the  'panagement 
shall  be  in  the  hands  of  chambers  of  commerce  or  improvement  associations  or  labor  unions 


146  Electric  Railway  Problem 

or  various  other  representatives  of  the  communit>-.  There  are  all  sorts  of  possibilities,  in 
other  words,  which  ought  to  be  considered,  and  given  constructive  thought,  which  bear  upon 
the  possibility  of  avoiding  the  dangers  which  are  lielieved  to  be  inherent  in  some  form  of 
public  operation."' 

Mr.  Grenville  S.  MacFarland,  of  Boston,  who,  as  the  transportation  adviser 
of  Mr.  William  R.  Hearst  and  the  Boston  American,  participated  prominently 
in  the  conferences  that  preceded  the  adoption  of  the  Boston  Elevated  Railway 
plan  of  public  operation  on  a  service-at-cost  basis,  gave  the  Conmiission  his 
views  of  the  street  railway  problem.     At  page  1342  of  the  Proceedings,  he  says: 

"It  seems  to  me  that  this  problem  involves  fundamentals,  and  not  details,  and  that  it  is 
going  to  be  solved  by  the  social  and  political  prejudices  that  are  involved  in  it  rather  than  by 
a  scrutiny  of  the  history  of  the  companies,  and  of  the  financial  transactions  behind  the  com- 
panies, except  so  far  as  a  consideration  of  the  history  of  those  transactions  has  already 
given  us  points  of  view. 

"I  think  that  it  resolves  itself  into  two  fundamental  and  divergent  plans  of  relief:  one  the 
so-called  cost  of  service,  with  government  relief  immediately  by  extension  of  credit  and  in- 
directly by  increase  of  fares;  and  the  other  by  practically  the  same  methods  temporarily,  but 
with  a  fundamental  change  in  operation  and  in  the  character  of  ownership;  that  is,  public 
ownership  and  operation." 

A  little  farther  on,  at  pages  1342  and  1343  of  the  Proceedings,  he  indicates 
that  in  his  opinion  public  ownership,  even  with  some  economic  waste,  would  be 
better  than  the  continuation  of  private  control.     He  says: 

"Now,  Professor  Fisher  gave  us  an  educated  guess  as  to  what  the  condition  of  prices, 
what  the  price  level  in  this  country  w-as  to  be  in  the  next  few  years,  at  least  during  the  period 
beyond  which  this  discussion  will  not  relate ;  and  he  said  that  the  prices  will  not  go  down. 
That  means,  of  course,  that  there  is  not  any  remedy  which  the  railroads  can  perceive  which 
will  help  them  that  does  not  involve  an  increase  in  their  revenue.  I  think  that  is  to  be  ac- 
cepted as  a  fundamental  proiKDsition.  They  have  got  to  have  an  increase  in  their  revenue 
in  some  way.  The  question  is  whether  they  are  to  have  it  under  the  old  private  management, 
and  with  what  I  personally  believe  to  be  its  vcr>-.  very  serious  evils,  evils  that  are  not  only 
serious  economically   and   financially,   but   still   more   serious  politically. 

"Personally  I  would  rather  see  the  community  suffer  some  loss,  some  economic  loss,  on 
the  assumption  that  the  opponents  of  public  ownership  and  operation  are  right,  that  public 
operation  would  involve  some  economic  waste,  some  inefficiency.  I  would  rather  see  that 
loss  occur  than  to  see  continued  the  old  practices  of  the  public  utilities  under  private  manage- 
ment, which  I  think  are  inherent  in  the  situation,  as  they  are  based  upon  human  nature  in  its 
operation  upon  the  relations  of  men  performing  a  public  function  for  private  profit. 

"I  do  not  think  there  is  an  example  in  the  world,  from  the  most  ancient  records  in  the 
Old  World  and  in  the  ancient  times,  down  to  the  present  day  that  does  not  show  an  abuse 
which  indicates  the  inherent  difficulty  in  attempting  to  make  a  private  property  out  of  a 
necessary  public  function." 

Mayor  James  Couzens.  of  Detroit,  took  the  view  that  local  transportation 
is  primarily  a  social  problem.  This  idea  is  quite  fully  developed  at  pages  1137 
and  113S  of  the  Proceedings,  where  he  says: 

"During  the  last  street  car  strike  the  great  pressure  that  was  brought  to  bear  upon  the 
local  administration  to  settle  the  strike  on  some  terms  was  by  the  men  who  never  use  the 
cars  at  all.  So  you  sec  that  they  were  not  interested  in  the  starting  of  the  cars  from  the 
standpoint  of  their  personal  convenience,  but  purely  from  the  standpoint  of  their  business. 
Every  one  of  these  men  used  motor  cars  and  had  absolutely  no  use  for  the  street  cars  as  a 
pcrsiitial  service,  but  simply  to  bring  the  customers  to  their  stores,  or  to  take  their  workmen 
to  the  shops.  I  l)olieve  luiless  this  question  is  solved  on  the  social  basis,  the  time  will  arrive 
when  it  will  Ix-  the  duty  of  the  m.-inufacturer  to  go  and  get  his  help  and  send  it  home,  because 
help  cannot  continue  to  put  up  with  the  congestion  and  the  embarrassment  and  the  inconven- 
ience that  they  now  have  to  put  up  with  in  urban  transportation  so  far  as  it  is  applied  to 
Detroit. 

"Now.  men  will  say,  and  1  think  properly  say,  if  the  men  who  exertetl  such  a  great 
effort  at  the  last  strike  to  have  it  settled,  if  they  display  such  a  great  interest  in  urban  trans- 
portation when  they  do  not  use  the  service  themselves,  the  men  will  recognize,  and  I  believe 
you  will  recognize  that  it  is,  therefore,  a  social  problem  in  which  these  men  are  most  widely 
interested  who  have  nothing  to  do  with  riding  on  the  cars  themselves. 


Pros  and  Cons  of  Public  Ownership  147 

"So  that  that  brings  up  the  question  as  to  whether  or  not  the  upkeep  and  maintenance 
of  a  transportation  system  should  at  all  times  be  borne  entirely  by  the  car  rider. 

"I  am  convinced  that  up  to  a  certain  point  the  car  rider  should  pav  for  the  service;  but 
beyond  a  reasonable  point  the  community  benefiting  by  it  should  make  up  any  deficit. 

"I  believe  there  are  many  ways  that  these  burdens  above  cost  of  the  fares  might  be  borne 
m  part,  probably,  by  the  suggestion  ofTcred  by  Mr.  Ingram  as  to  the  lines  being  paid  for  by  the 
property  directly  benefited,  if  it  is  in  newly  developed  territon,'.  But  if  it  is  for  the  service 
of  the  manufacturer  and  the  merchant  downtown,  or  the  big  office  building,  then,  it  seems  to 
me  that  they  should  bear  a  part  of  the  burden  to  get  their  employes  to  and  from  their  place 
of  living  in  a  comfortable  and  decent  manner. 

"We  have  long  passed  the  point  where  our  individual  health  is  a  question  of  our  own 
concern.  The  public  has  recognized  all  over,  now,  that  your  health  and  my  health  is  a 
matter  of  public  concern;  and  whether  we  ever  have  diseases  or  not,  we  pay  to  reduce  the 
death  rate.  We  pay  to  collect  the  garbage,  we  pay  to  protect  the  health  of  the  community, 
whether  we  have  incinerators  to  burn  our  own  garbage,  or  not.  And  it  is  as  much  a  com- 
munity problem  to  carry  citizens  in  a  comfortable  and  decent  manner  to  and  from  the  places 
they  want  to  go  or  have  to  go  as  it  is  to  collect  our  garbage  or  clean  our  streets  or  furnish, 
our  schools  or  preserve  our  health;  and  if  that  is  recognized,  which  I  believe  it  will  be  soon, 
if  it  has  not  reached  that  point  yet,  we  will  then  recognize  that  is  a  service  which  the  com- 
munity must   furnish   for  itself. 

"I  venture  to  predict  here  that  there  will  be  no  other  solution  of  the  urban  transportation 
problem  until  it  is  put  into  the  hands  of  the  municipality  itself,  by  purchase  and  operation." 

Further  on,  Mr.  Couzens  discusses  the  problem  with  Commissioner  .Sweet 
from  the  standpoint  of  human  nature,  the  selfishness  of  politicians  and  the  com- 
pelling power  of  contact.  At  pages  1154  and  1155  of  the  Proceedings,  we  find 
the  following: 

"Commissioner  Sweet :  I  am  working  on  the  theory  that  human  nature  is  pretty  nearly 
the  same  the  world  over,  and  was  away  back  in  the  time  of  Christ  as  it  is  today. 

"Mr.  Couzens:    And  there  has  been  no  improvement? 

"Commissioner  Sweet :  Yes,  there  have  been  improvements,  but  at  the  same  time  there 
are  a  great  many  selfish  politicians  who,  when  there  is  a  conflict  between  their  interests  and 
the  interests  of  the  public  will  decide  every  time  for  themselves,  is  not  that  true? 

"Mr.  Couzens:  Yes,  but  when  you  consider  that  these  employes  of  the  transportation 
companies  come  in  contact  with  the  citizens  three  hundred  and  fifty  to  four  hundred  million 
times  a  year,  do  you  suppose  the  citizenship — and  we  now  have  women  and  girls  voting, 
which  will  make  it  more  incumbent  upon  us  to  give  a  more  decent  administration  than  ever 
before — don't  you  think  they  are  going  to  demand  that  they  have  that  kind  of  men  in  office? 
If  they  get  bad  service  from  the  employes  of  the  [niblic  service  company,  who  come  in 
contact  with  them  three  hundred  and  fifty  or  four  hundred  million  times  a  year,  which  is  the 
number  of  people  we  carry  in  Detroit,  don't  you  believe  they  arc  going  to  require  a  better 
type  of  officer,  don't  you  believe  they  will  take  a  greater  interest  in  their  municipal  officials? 
I  may  use  an  analagous  case.  You  in  your  own  home  do  not  care  who  collects  the  garbage 
or  brings  the  ice  or  the  groceries  but  you  are  very  much  interested  in  who  waits  on  your  table 
or  who  the  nurse  is  that  takes  care  of  your  child.  There  is  a  personal  contact  there  that  is 
absolutelv  necessarv  in  my  judgment  for  proper  municipal  ownership  and  operation  or  proper 
municipal  governrnent,  aiid  we  do  not  get  it  because  of  the  few  employes  you  refer  to  in 
the  water  works,  who  do  not  come  in  contact  with  the  citizen.  Every  morning  he  gets  up 
and  turns  on  the  water  and  the  water  runs  and  his  bath  runs  and  the  faucet  runs  and  he  does 
not  care  anvthing  about  who  is  keeping  the  water  there.  Even,-  day  the  sewage  is  carried 
awav,  he  does  not  care  anvthing  about  who  the  officials  arc  that  provide  all  these  facilities. 
Every  night  he  goes  on  the'  street  the  lights  are  lit,  he  does  not  care  who  turns  the  lights  on, 
thev 'are  lit.  Municipal  government  mav  be  wrong  in  some  places,  but  there  is  a  lot  that  is 
good,  because  there  is  a  lot  of  it  thev  do  not  ever  think  about.  The  thing  you  make  the  fuss 
about  all  the  time  is  that  which  vou  come  in  contact  with  all  the  time,  and  the  thing  you  come 
in  contact  with  all  the  time  will  be  the  kind  of  street  car  service  you  get,  the  kind  of  employes 
vou  have,  whether  thev  are  polite  and  gentlemanly  or  insolent.  That  will  lie  the  determining 
factor  in  the  control  you  will  get,  and  you  will  never  get  that  until  the  employes  come  in 
contact  with  the  citizens." 

In  my  own  testimony  before  the  Commission,  at  pages  1233  and  12.^4,  I  dis- 
cuss the  fundamental  question  between  private  and  public  ownership  and  opera- 
tion as  follows: 

"As  to  whether  the  street  railwav  business  is  to  be  conducted  through  public  or  private 
agencies,   I   have   reached   the  conclusion   that   there   is   no   ultimate   solution   of   the   problem 


148  Electric  Railwav  Problem 

unless  we  frankly  undertake  the  local  transportation  function  as  a  public  function  and  perform 
it  through  public  agencies. 

"Local  transportation,  in  the  first  place,  as  I  have  said,  is  essentially  a  part  of  the  city 
plan.  It  is  a  public  function.  The  street  railways  cannot  exist  except  through  the  possession 
and  use  of  special  franchises  in  the  public  streets.  Convenient  and  cheap  transit  has  come 
to  be  an  essential  for  the  public  convenience  in  large  urban  communities. 

"The  necessity  for  public  control  has  been  recognized  to  an  increasing  extent,  until  now 
the  street  railway  companies  could  not  possibly  be  jicrmittcd  the  freedom  of  initiative  requisite 
to  successful  private  business  enterprises.  Public  regulation  of  service,  maintenance,  wages 
and  other  operating  expenses  is  more  difficult  and  more  expensive  where  undertaken  indirectly 
than  where  done  directly.  There  is  an  irreconcilable  conflict  between  the  interests  of  the 
public  and  those  of  any  private  company  operating  a  street  railway  system  for  profit.  The 
result  is  distrust,  hatred,  poisoning  of  the  political  atmosphere  in  cities.  Instinctively  the 
American  people  see  that  private  operation  of  a  public  function  for  profit  tends  to  be  cor- 
ruptive. The  public  will  not  stand  lor  the  new  privileges  and  exemptions  that  under  present 
conditions  would  be  necessan,-  to  enable  the  street  railways  as  a  private  business  to  prosper 
and  expand  to  meet  the  growing  pul)lic  needs.  Chaos  has  been  introduced  into  the  field  of 
regulation  by  this  conflict  of  policy  between  the  state  commissions  and  the  local  authorities, 
to  which  I  have  already  called  attention,  and  regulation  has  in  large  measure  broken  down. 
The  condition  of  the  companies,  the  condition  of  the  industry  at  the  time  may  be  cited  as 
Exhibit  A  in  the  proof  tliereof.  Of  cour.se,  that  does  not  prove — that  is  an  assertion;  it 
docs  not  prove  that  public  regulation  could  not  be  perfected  and  overcome  mistakes  that 
have  been  made  and  the  limitations  that  .have  been  made  and  \ie  more  successful  in  the  future 
than  it  has  tx!en  in  the  past.  I  think  the  difficulties  are  fundamental  and  that  it  is  the  hardest 
way  and  that  we  arc  Ixjund  to  come  to  the  other  conclusion  l)Clore  we  reach  any  solution. 

"The  cost  of  new  capital  under  private  ownership  under  existing  conditions  is  practically 
prohibitive.  Let  us  go  back  to  what  we  were  discussing  a  while  ago.  Take  companies  that 
are  overcapitalized  and  take  companies  that,  being  overcapitalized  and  not  being  able  to  earn 
a  fair  return,  by  that  veri,-  reason  demand  a  higher  rate  of  return,  8  per  cent  In'ing  demanded 
now.  The  higher  the  rate  of  return,  that  is,  the  more  the  risk,  the  worse  oflf  the  company  is; 
the  greater  the  risk,  the  higher  the  rate  of  return,  the  higher  the  cost  of  capital,  .^nd  if  we 
were  to  allow,  even  after  a  substantial  compromise,  the  companies'  claims  at  the  present  time 
as  to  valuation,  and  then  allow  them  8  per  cent  return  upon  it.  we  would  be  paying  for  our 
capital  charges  for  the  street  railway  service  I  think  at  least  double  what  capital  would  cost 
under  public  ownership  an<l  operation  on  a  conservative  capital  value  to  start  with.  Of  course, 
if  a  city  in  taking  over  the  companies  should  take  them  over  at  a  price  which  bankrupted 
them,  the  cost  of  capital  for  the  city  would  continue  to  be  excessive,  although  the  cost  of  addi- 
tional capital  would  not  Ik'  great. 

".So  far  as  T  can  see.  really  conser\'ative  financial  policies  under  private  ownership  are 
now  impracticable.  .Ml  schemes  of  private  ownership  and  operation  break  down  because 
they  are  inconsistent  with  the  degree  of  public  control  that  is  made  necessary  by  the  nature 
of  the  business." 


Chapter  XXV 
PUBLIC  COOPERATION  AND  A  NEW  DEAL  REQUIRED 

The  problem  presented  by  the  present  condition  of  the  electric  railways,  and 
particularly  by  the  failure  of  their  credit,  suggests  the  need  of  temporary  emer- 
gency measures  and  of  a  permanent  plan  to  prevent  the  recurrence  of  the  trouble. 
It  is  like  the  world  problem  of  1917:  first,  a  couple  of  millions  of  American 
soldiers  in  France,  and  second,  a  League  of  Nations  to  prevent  our  having  to 
send  them  again.  The  danger  is  that  the  difficulty  of  agreeing  upon  an  ultimate 
solution  of  the  street  railway  problem  and  lack  of  proper  public  initiative  will 
cause  the  adoption  of  mere  temporary  expedients  without  any  definite  steps  being 
taken  toward  the  adoption  of  a  permanent  plan,  and  that  the  temporary  expedi- 
ents adopted  may  be  such  as  to  make  the  final  solution  of  the  problem  increasingly 
difiicult. 

Neither  a  temporary  nor  a  permanent  solution  can  be  properly  worked  out 
until  clear  answers  have  been  found  to  certain  fundamental,  underlying  questions. 
In  my  own  testimony,  at  page  1221  of  the  Proceedings,  I  outlined  these  ques- 
tions as  follows: 

"The  first  is  as  to  the  character  of  the  investment  in  street  railways.  Shall  it  be  spec- 
ulative or  non-speculative?  That  means,  shall  it  be  a  secured  investment  or  an  investment 
in  which  the  investors  take  risks. 

"Second,  shall  the  business  be  conducted  primarily  for  profit,  or  shall  it  be  conducted 
primarily  for  service?  I  do  not  mean,  in  asking  that  question,  that  the  two  can  be  entirely 
separated.  I  mean  that  the  question  of  policy  to  be  determined  is  as  to  whether  at  any  given 
time,  in  any  given  crisis,  the  motive  of  service  or  the  motive  of  profit  shall  be  the  pre- 
dominating one,  and  determine  the  policy. 

"Third,  shall  continued  service  be  guaranteed,  and  shall  industrial  disputes  in  the  transit 
business  be  settled  without  strikes? 

"Fourth,  shall  the  business  be  carried  on  through  public  agencies  or  through  private 
agencies  ?" 

With  respect  to  the  first  of  these  questions,  it  hardly  needs  to  be  emphasized, 
in  view  of  the  testimony  already  cited  and  in  view  of  the  general  conditions  of 
which  we  may  take  "judicial  notice,"  that  heretofore  the  electric  railway  industry 
as  a  whole  has  been  on  a  speculative  basis,  and  that  only  in  isolated  spots  where 
service-at-cost  contracts,  public  guaranties  or  public  ownership  have  been  brought 
about,  have  street  railway  investments  become  in  any  considerable  measure  non- 
speculative.  It  follows  that  the  answer  to  this  first  question  may  be  a  con- 
demnation of  the  entire  past  status  of  the  street  railway  industry.  In  fact  the 
answers  given  to  the  question  by  General  Tripp,  Mr.  Harlow  C.  Clark  and  other 
witnesses  for  the  electric  railways  are  such  a  condemnation.  So  is  mine,  which 
I  give  at  page  1229  of  the  Proceedings,  as  follows : 

"In  my  opinion  the  investment  should  be  non-speculative.  In  order  to  make  it  non- 
speculative,   certain   things   are   necessary:     First,   the  amount    of    the   investment   must    be 

149 


150  Electric  Railway  Problem 

determined,   fixed.     Second,  the  rate  of   return  to  be  allowed  upon  the   investment   must   be 

fixed. 

******** 

"Some  scheme  must  be  provided  for  flexibility  in  revenues,  to  enable  the  investment  to 
receive  its  return  at  all  times.  Means  must  be  provided  to  secure  the  permanent  integrity 
of  the  investment  itself.  That  requires  the  physical  upkeep  of  the  property,  so  that  the  basis 
of  the  investment  shall  not  disappear.  It  requires  the  protection  of  the  investment  from 
ruinous  comi)etition.  It  requires  that  the  investment  shall  have  the  right  to  continue  in  service 
until  it  is  taken  care  of,  until  the  investors  are  paid.  As  a  matter  of  additional  safety  it 
involves,  I  think,  the  desirability  of  amortization  of  the  capital  account,  at  least  in  part,  so 
as  to  keep  the  capital  account  at  all  times  well  within  the  present  physical  value  of  the  visible 
property." 

In  an  address  before  the  Conference  of  American  Mayors  on  Public  Policies 
as  to  Municipal  Utilities,  held  in  Philadelphia  in  November,  1914,  before  the 
electric  railways  had  begun  to  feel  the  strain  of  war  prices,  and  before  they  had 
started  their  "drive"  for  higher  fares,  except  in  Massachusetts,  I  propounded 
this  question : 

"What  shall  lie  the  recognized  character  of  public  utility  investments?  Shall  they  be 
regarded  as  speculative  and  held  at  the  risk  of  the  owners,  or  shall  they  be  regarded  as  invest- 
ments in  aid  of  public  credit  and  be  given  the  same  security  as  investments  in  municipal 
bonds?  If  new  investments  are  to  be  regarded  as  non-speculative,  shall  the  cities  make 
good  all  past  losses  as  well  as  assume  all  future  risks?" 

And,  in  the  same  address,  published  as  a  part  of  the  proceedings  of  the 
conference  in  a  special  volume  of  the  Annals  of  the  American  Academy  of 
Political  and  Social  Science,'  I  gave  the  following  answer,  which  seems  just  as 
appropriate  now  as  it  was  in  November,  1914: 

"Public  utility  investments  should  be  placed  upon  a  non-speculative  basis,  and  their 
security  should  approximate  that  of  municipal  bonds. 

"In  the  establishment  of  the  non-six.'culative  character  of  these  investments,  cities 
should  not  undertake  to  make  good  past  losses,  unless  they  are  compelled  to  do  so  by  franchise 
contracts. 

"So  far  as  future  investments  in  the  standard  utilities  are  concerned,  the  cities  should 
assume  the  risks  of  loss  due  to  unforeseen  causes,  and  should  substantially  guarantee  the 
integrity  of  all  investments  made  at  the  request  or  with  the  appro\-al  of  public  authority. 

"Public  utility  invcslments  in  the  past,  with  some  exceptions,  have  been  highly  speculative. 
There  has  been  a  continual  buzz  of  promoters  around  city  councils  and  state  legislatures  for 
the  grant  of  special  franchises  and  charters  for  public  utilities.  In  most  cases  the  sole 
purpose  of  these  promoters  has  been  either  to  sell  the  franchise  or  charter  outright,  or  to 
construct  the  utility,  heavily  overcapitalize  it  and  then  sell  its  securities  for  a  much  larger 
sum  than  the  amount  actually  invested. 

"Public  utilities  arc  not  always  gold  mines.  A  great  deal  of  money  has  been  lost  in 
premature  investments,  and  a  great  deal  more  has  gone  to  the  scrap  heap  w^ith  changes  in 
the  arts.  Kxpcrience  shows  that  the  public  suffers  along  with  the  investors  when  utilities 
find  themsclvrs  'hard  up.'  Without  money  to  make  adequate  extensions  and  improvements. 
or  even  to  keep  their  plants  in  proper  repair,  public  utilities  cannot  render  the  service  which 
is  projicrly  demanded  of  them. 

"Public  utility  service,  as  an  essential  public  function,  ought  not  to  be  dependent  upon 
a  throw  of  the  dice  by  the  manipulators  ot  stocks  and  bonds.  It  ought  not  to  furnish  an 
opportunity  for  any  man  or  set  of  men  to  'get  rich."  It  ought  to  funiish  to  multitudes  of 
people  of  comparatively  small  means  a  safe  and  conservative  investment  for  their  .savings. 
I  am  strongly  of  the  conviction  that  it  is  disgraceful  to  a  city  to  have  its  public  service  cor- 
porations in  receivers'  hands— almost  as  disgraceful  as  it  would  be  for  the  city  to  default  on 
its  own  Ixinds. 

"The  elimination  of  the  speculator  and  the  stock-jobber  from  the  utility  field  and  the 
establishment  of  utility  investments  upon  a  safe,  conservative,  non-speculative  basis,  is  to 
my  nnnd  a  fundamental  coiidilinn  precedent  to  go.xI  service,  permanentlv  low  rates  and 
adequate  public  control.  If  capital  is  made  secure  and  is  gnaraiiletd  a  steady  return,  it 
dem.-inds  nothing  more  than  the  ordinan,-  interest  rate.  Under  these  circumstances,  we  should 
not  have  to  pay  premiums  to  reward  capital  for  a  risk  undertaken  in  emlarking  upon  public 
utility  enterprises  There  would  be  no  risk.  The  onlv  special  reward  offered  would 
naturally   go  to  the  men  who  actually  operate  the  property;    for  when  security  and  a   sure 


Public  Cooperation  Essential  151 

return  have  overcome  the  characteristic  timidity  of  money,  we  have  then  only  to  seek  a  means 
for  enlisting  the  motive  of  men  for  efficiency  and  economy  in  the  operation  of  the  plant. 
This  cannot  be  done  by  lavishing  unasked  rewards  upon  capital  as  such.'' 

The  second  fundamental  question  deals  with  the  controlling  motive — shall  it 
be  profit,  or  shall  it  be  service.  The  answer  to  this  question  also  may  involve 
a  radical  condemnation  of  the  past  status  of  the  electric  railway  industry,  though 
here  there  is  more  confusion  and  conflict  of  opinion.  Many  witnesses  for  the 
electric  railways  point  to  the  history  of  the  industry  and  maintain  that  it  shows  a 
continuous  record  of  improvements  in  service  even  at  the  expense  of  profit,  and 
they  all  agree  that  the  warrant  for  their  appeal  to  the  Federal  government  for 
help  or  to  the  state  and  local  governments  for  relief  from  the  obligations  of 
rate  contracts  lies  in  the  supreme  importance  of  service.  Yet  they  necessarily 
assume  that  investors  in  public  utilities  are  not  primarily  philanthropists,  and 
that  they  must  be  "attracted"  by  the  rewards  offered  for  capital.  Of  course, 
service  is  the  inducement  held  out,  first  by  the  promoters,  and  later  on  by  the 
companies  themselves,  as  the  price  offered  the  public  for  the  opportunity  to 
exploit  the  general  transportation  need.  The  relative  position  of  "service"  and 
"profits"  as  actuating  motives  of  the  companies  in  the  development  of  the  electric 
railways  was  brought  out  in  the  testimony  of  General  Tripp,  where  he  was  dis- 
cussing the  proper  treatment  of  superseded  property.  Commissioner  Sweet  and 
Commissioner  Meeker  had  brought  up  the  illustration  of  a  country  merchant  who 
started  in  business  with  a  small  frame  building,  which  as  he  prospered  was  super- 
seded by  a  fine  brick  structure,  and  that  by  a  granite  building,  and  that  ultimately 
by  a  marble  building.  The  question  was  whether  according  to  General  Tripp's 
theory  of  valuation,  the  superseded  buildings  would  still  be  included  in  the 
capital  account  recognized  as  the  basis  for  return  upon  the  investment.  An 
extended  colloquy  took  place  in  which  four  of  the  commissioners  and  General 
Tripp  joined.  The  discussion  of  the  motives  that  actuated  the  companies  in 
developing  their  property  was  incidental  to  the  discussion  of  an  important  prob- 
lem of  valuation,  but  it  was  no  less  illuminating  on  that  account.  General  Tripp's 
testimony  with  the  questions  and  comments  of  the  commissioners,  w^ill  be  found 
at  pages  178  to  180  of  the  Proceedings,  as  follows: 

"Commissioner  Meeker:     It  is  merely  the  marble  building  that  is  getting  the  return? 

"Gen  Tripp:  Yes.  In  other  words,  a  properly  managed  company  when  it  comes  to 
renew  its  bonded  obligations  which  are  falling  due  only  issues  sufficient  new-  bonds  to  take 
care  of  its  then  requirements.  Its  then  requirements  reflect,  if  its  books  have  been  kept 
properlv,  the  effect  of  depreciation  charges  and  charging  ofl  this  obsolete  property. 

"Commissioner  Gadsden:  Can  I  ask  a  question  right  there,  because  I  think  there  is 
probably  a  liule  misapprehension  about  it.  You  are  discussing  this  on  the  basis  of  a  com- 
pany whose  income  has  been  sufficient  to  set  up  these  reserves? 

"Gen.  Tripp :     Yes. 

"Commissioner  Gadsden:     That  is  true,  is  it  not? 

"Gen.  Tripp :     Yes.  ...  ,    ,      •    ,     .      i         »i. 

"Commissioner  Gadsden :  As  a  matter  of  fact  m  the  history  of  the  industry  have  these 
■companies  set  up  these  reserves  to  do  that?  ,  ,       ,  ,  j  .u.. 

"Gen  Tripp-  Some  have  and  some  have  not  and  those  that  have  not  are  today  on  me 
verge  of  bankruptcy  and  you  will  have  no  difficulty  in  dealing  with  those. 

"Commissioner  Beall :  Let  me  ask  a  question  which  I  think  will  clarify  it  Is  not  the 
general  fact  this :  Take  in  New  York,  for  instance,  where  the  r..ads  have  changed  trom 
cable  to  electricity.  They  did  not  do  it  because  the  cable  was  no  longer  able  to  take  care 
of  the  traffic  or  because  it  was  absolutely  obsolete,  because  it  was  so  old  it  was  worn  out. 
They  thought  they  had  a  better  method,  a  more  economical  method  to  the  pubhc,  cheaper 
service  and  better  service  and  more  carrying  capacity 


152  Electric  Railway  Problem 

"Gen.  Tripp:     Yes. 

"Commissioner  lieall :  They  made  those  changes  from  the  cable  roads  and  did  the  same 
thing  in  Seattle  and  numerous  other  cities,  when  those  cable  roads  still  had  a  life  of  a  good 
many  years. 

"Gen.  Tripp :     Yes. 

"Commissioner  Beall :  Some  of  them  had  only  run  for  a  few  years.  If  they  had  run 
for  twenty  years  they  could  not  have  built  up  enough  reserve  to  charge  it  off  at  once.  The 
method  generally  pursued  1  understand  was  this,  they  did  not  charge  them  off  in  one  fell 
swoop,  but  amortized  it  over  a  number  of  years.  For  instance,  if  the  cliange  cost  three 
million  dollars  and  they  lost  three  million  dollars  for  the  junk  in  the  old  cable,  they  amortized 
that  over  twenty  or  thirty  years,  so  much  a  year.  Now  the  fares  proved  insufficient  from 
year  to  year  on  account  of  the  depreciated  purchasing  power  of  the  nickel  and  they  were  not 
able  to  carry  through  that  amortization  and  the  result  today  is  that  the  companies  in  the 
great  cities  are  carrying  a  big  investment  which  they  have  not  been  able  to  amortize  and 
wipe  out  and  that  came  about  through  their  desire  to  give  better  service  to  the  public  and 
they  junked  some  things  that  were  only  five  years  old.    Is  not  that  true  in  a  great  many  cases? 

"Gen.  Tripp  :     \\  ell 

"Commissioner  Bcall :  Let  me  follow  that  up.  I  do  not  understand  you  to  say,  do  I, 
that  until  they  have  had  an  opportunity  to  properly  take  care  of  that  amortization  of  past 
investment  that  they  junked  in  order  to  give  better  service — until  they  are  able  to  get  that 
out  of  the  way,  ought  not  they  be  allowed  to  earn  on  it? 

"Gen.   Tripp :     Certainly. 

"Commissioner  Beall :     I  do  not  think  that  was  clear,   from  your  statement. 

"General  Tripp  :  But  generally  speaking,  my  method  of  valuing  securities  would  result 
in  that  very  thing. 

"Commissioner  Beall :  I  think  it  would,  but  I  do  not  think  the  Commission  quite  got 
that  point,  that  nearly  all  these  companies  in  the  big  cities  are  still  carrying  a  great  big 
investment  which  represents  things  which  they  junked  which  still  had  a  long  useful  life 
before  them,  in  order  to  give  better  service  to  the  public. 

"Commissioner  Sweet :  There  is  just  one  question.  You  do  not  mean  to  say.  General, 
that  the  change  from  the  cable  to  electricity  was  done  solely  to  render  better  service  to  the 
public,  do  you  ? 

"Gen.  Tripp :     Not  at  all. 

"Commissioner  Sweet :  Was  not  the  element  of  greater  economy  and  greater  profit  to 
the  companies  a  large  element? 

"Gen.  Tripp :     Oh,  yes,  the  larger  element,  of  course. 

"Commissioner  Bcall  :  It  was  a  combination  of  both,  they  were  able  to  give  better  and 
faster  service  and  carr>'  more  people. 

"Commissioner   Sweet :     Yes. 

"Commissioner  Meeker:  Then  in  answer  to  my  qucstidn.  the  companies  are  in  some 
instances  carrying  stock  issues  or  t)ond  issues  that  represent  the  obsolete  brick  building.  They 
have  not  yet  had  time  to  amortize  them? 

"Gen.  Tripp:  I  am  glad  you  asked  that  question,  because  I  had  almost  forgotten  to  add 
to  my  reply  to  Commissioner  Reall — all  those  companies  that  have  come  under  my  observation, 
that  have  changed  from  cable  to  eleotricity  have  been  through  the  hands  of  a  receiver  and 
the  whole  thing  has  tx:en  wiped  out." 

It  is  clear  that  profits  and  service  can  travel  along  the  road  together  as 
boon  companions  as  long  as  "everjthing  is  lovely  and  the  goose  hangs  high."  but 
when  it  is  time  for  another  feast  and  there  is  nothing  left  but  a  goose  wing  and 
a  few  feathers  there  is  sure  to  be  a  disagreement.  In  other  words,  financial  dis- 
tress brings  out  the  fundamental  antagonism  between  the  profit  motive  and  the 
service  motive  and  compels  a  "showdown"  as  to  which  comes  first.  My  own 
reason  for  giving  service  the  precedence  is  set  forth  as  follows,  at  pages  1230  and 
1231  of  the  Proceedings: 

"I  think  the  business  should  be  conducted  for  service  and  not  profit;  that  is,  that  the 
service  should  be  the  pri<loininant  motive,  the  controlling  motive  at  all  times;  and  the  reason 
for  that  is  that  I  Ik-IIcvc  the  service  is  an  essential  public  service,  so  vital  to  our  municipalities 
that  we  c-iimot  afford  to  permit  the  public  policy  with  respect  to  transportation  to  be  determined 
by  the  exigencies  of  nrofit. 

"TransiK>rtation  facilities,  in  the  first  place,  .should  be  developed  and  operated  as  a  unit 
for  every  urban  community.  It  is  a  part  of  the  city  plan.  R.xtcnsions  should  be  built.  I  think, 
as  delerminid  by  public  authority.  That  is  a  part  of  the  city  plan.  Kates  should  Ix'  fixed  with 
an  eye  to  Ihcir  effect  on  url>aii  development.     Take  New  York,   for  example.     Here  we  have 


Public  Cooperation  Essential  153 

the  5-cent  fare,  under  the  subway  contract,  which  has  htcn  subsidized  by  the  city,  practically, 
to  the  extent  of  two  or  three  hundred  million  dollars.  The  city,  whether  rightly  or  mistakenly, 
had  the  idea  that  the  enormous  congestion  in  Manhattan  could  be  in  part  relieved  by  building 
a  transit  system  out  in  every  direction,  and  providing  a  low  uniform  fare  for  everybody, 
taking  people  out  into  the  suburbs,  if  the  city,  as  a  part  of  its  plan  of  development,  determines 
that  that  is  a  good  policy  to  follow,  that  the  tiat  unilorni  fare  and  the  low  tare  has  a  beneficial 
effect  upon  city  development,  those  considerations  should.  1  tliink,  control  in  fixing  the  fare. 
Of  course,  everything  is  subject  to  human  limitations,  and  when  1  say  that  service  should 
control,  and  that  profits  should  stand  aside,  I  mean  that  service  should  control,  being  modified 
by  the  necessity,  where  the  necessity  exists,  of  making  the  service  pay ;  but  that  the  city 
should  consider  that  making  up  deficits  out  of  taxes,  if  necessao'.  is  more  important  than 
making  the  business  self-sustaining,  if  the  rates  that  would  make  it  self-sustaining  have  a 
deleterious  effect  upon  municipal  development." 

Further  on,  at  page  1232  of  the  Proceedings,  I  say : 

"If  the  maximum  service,  if  it  is  not  wasteful,  cannot  be  made  self-sustaining,  it  should 
be  subsidized,  and  excess  earnings  should  be  put  back  into  the  business.  Special  taxes  should 
be  removed  when  you  have  this  scheme  in  operation." 

The  third  fundamental  question  has  to  do  with  continuity  of  service.  It 
involves  the  whole  matter  of  labor  relations.  Here  again  the  answer  to  the 
question  propounded  may  involve  the  indictment  of  the  past  policies  and  status 
of  the  electric  railway  industry.  The  companies  fully  realize  and  stoutly  main- 
tain that  wages  cannot  be  increased  indefinitely  by  public  authority  unless  pari 
passu  revenues  are  increased  by  public  authority  to  provide  for  the  wage  increases. 
They  also  recognize  that  wages  cannot  be  increased  indefinitely  without  increasing 
the  cost  of  service  to  a  point  where  it  may  be  impossible  to  make  it  self-sustain- 
ing under  any  rate  schedule  that  might  be  adopted.  The  public  realizes,  on  the 
other  hand,  that  if  it  withdraws  from  participation  in  wage  controversies  and 
refuses  to  assume  any  responsibility  for  their  financial  results,  the  whole  problem 
will  be  thrown  back  upon  the  companies  and  the  men,  to  be  settled  according  to 
the  old  rules  of  warfare.  Bankruptcy  will  fight  starvation,  and  stan'ation  will 
fight  bankruptcy,  and  while  the  ugly  scrimmage  is  going  on,  the  people  will  walk, 
business  will  be  more  or  less  paralyzed  and  in  certain  contingencies  the  very 
foundations  of  social  order  and  freedom  of  life  will  be  disturbed.  Under  these 
conditions  street  railway  investments  will  become  more  speculative  than  ever, 
and  the  condition  of  street  railway  credit  will  be  more  precarious  than  it  was 
before  the  war. 

My  own  answer  to  this  question  with  respect  to  continuity  of  service  is 
found  at  pages  1232  and  1233  of  the  Proceedings,  where  I  say: 

"As  to  continuity  of  service,  I  believe  that  continuity  of  service  should  be  assured,  and 
that  the  street  railway  strike  should  be  made  unnecessary  and  outlawed. 

"I  think  that  the  employes  should  be  encouraged  to  organize  for  their  mutual  benefit  and 
as  a  means  for  securing  cooperation  in  discipline  and  management,  and  to  provide  an  agency 
for  presenting  their  grievances  in  an  authoritative  way,  and  securing  full  publicity  and  prompt 
attention  to  them. 

******** 

"I  think  responsibility  for  fixing  the  wages,  hours  and  conditions  of  labor  should  be 
assumed  as  a  public  function  to  be  performed  through  an  appropriate  public  agency.  That 
is  not  going  into  much  detail,  but  we  have  got  to  the  point  where  we  cannot  leave  the  de- 
termination of  wages,  hours  and  conditions  of  labor  to  the  private  companies  without  public 
control.  There  are  too  many  things  involved.  The  welfare  of  the  community — even,  at  times, 
the  very  stability  of  our  institutions— may  depend  upon  the  keeping  of  order  and  the  main- 
tenance of  public  utility  services,  transportation  services. 

"We  certainly  have  reached  the  point  where  we  cannot  leave  disputes  as  to  wages,  and 
hours  and  conditions  of  labor,  to  be  fought  out  between  the  private  employer  and  the  men, 


^ 


154  Electric  Railway  Problem 

without  the  public,  that  has  the  primary  and  ultimate  interest,  being  responsible  for  the  final 
settlement  of  the  dispute. 

"My  third  statement  in  this  connection :  I  want  to  say  frankly  that  I  believe  that  the 
strike,  as  a  concerted  effort  to  interrupt  service  in  local  transportation,  should  be  prohibited 
and  effectively  penalized.  I  put  that  last  because  I  do  not  believe  that  such  action  should  be 
taken  except  after  the  basis  for  it  has  been  laid  by  providing  adequate  means  for  the  prompt 
and  effective  settlement  of  disputes  with  justice  to  the  employes  through  other  measures  than 
the  strike.  But  I  cannot  see  how  we  can  possibly  tolerate  the  continuance  of  the  'right  to 
strike,"  by  that  meaning  the  right  to  engage  in  a  concerted  effort  to  stop  service  on  a  public 
utility   street  railway  system. 

"That,  of  course,  is  a  verv-  difficult  problem  to  work  out  in  its  details,  but  it  is  a  vital  one." 

The  answers  which  I  have  given  to  these  three  fundamental  questions  re- 
lating to  (1)  the  speculative  or  non-speculative  character  of  the  investment; 
(2)  the  predominance  of  profit  or  service  as  the  controlling  motive  in  electric 
railway  construction  and  operation,  and  (3)  the  adoption  of  measures  to  in.sure 
continuity  of  service  lead  inevitably,  in  my  opinion,  to  the  answer  that  I  have 
already  given  to  the  fourth  question,  namely,  whether  local  transportation  shall 
be  provided   through   private   or  through   public   agencies. 

Regardless  of  the  ultimate  political  and  economic  theories  supporting  private 
or  public  ownership  and  operation,  there  was  general  agreement  among  the  wit- 
nesses before  the  Commission  that  cooperation  between  the  electric  railways  and 
the  public  is  essential  to  the  successful  performance  of  the  transportation  function 
by  private  companies,  and  that  as  a  rule  such  cooperation  has  not  been  forth- 
coming in  the  past.  Some  blame  the  companies  for  the  failure;  some  blame 
the  public;  and  some  blame  the  inherent  inconsistency  involved  in  the  perform- 
ance of  a  public  function  through  private  agencies  organized  for  profit.  Ex- 
President  Taft  thinks  that  the  public  has  more  than  paid  off  its  score  against 
the  companies.     At  page  4  of  the  Proceedings,  he  says: 

"Then  there  has  been,  growing  out  of  corruption,  the  watering  of  stock  and  the  dealing 
with  councils  and  the  feeling  of  hostility  on  the  part  of  the  people  against  the  companies, 
the  development  of  a  condition  so  that  whatever  ad\-antages  the  companies  may  have  secured 
by  sinister  means  earlier  have  been  more  than  offset  by  the  injustices  that  the  people  have 
done,  or  that  their  representatives  have  done  growing  out  of  that  past  histor)-,  to  these 
enterprises.'' 

Mr.  Francis  H.  Sisson  took  much  the  saine  view  of  the  situation,  as  will 
be  seen  from  the  following  question  and  answer  found  at  page  327  of  the  Pro- 
ceedings : 

"Commissioner  Sweet:  The  present  attitude  of  the  public  upon  this  subject  is  a  sort  of 
inheritance,   is   it   not? 

"Mr.  Sisson:  Yes;  it  is  in  part  justified,  and  in  part  blind,  unreasoning  ignorance  of 
self-intorest.  It  is  justified  in  a  measure,  by  some  b.id  practices — bad  financial  practices  and 
operating  practices  in  the  past,  that  have  aroused  resentment,  and  proper  resentment,  but  from 
which  the  public  has  reacted  to  a  point  of  antagonism  that  is  just  as  unfair  and  unwarranted 
and  unjustified  as  the  actions  which  they  themselves  have  criticized." 

Mr.  Morris  T..  Cooke,  in  testimony  already  quoted,  gives  it  as  his  impression 
that  the  difTcrcnccs  between  the  public  and  the  private  interests  involved  in  the 
electric  railway  business  have  become  irreconcilable. 

That  the  companies  do  not  enjoy  the  full  confidence  and  cooperation  of  their 
own  employes  is  clearly  shown  by  the  character  of  the  Brief  filed  with  the 
Commission  on  behalf  of  the  Amalgamated  Association,  and  also  by  the  testimony 
of  many  witnesses.  Dr.  Thomas  Conway,  Professor  of  Finance  in  the  Univer- 
sity of  Pennsylvania,  testified  for  the  Electric  Railway  Association.     He  expressed 


Public  Cooperation  Essential  155 

great  financial  alarm  about  the  labor  situation,  but  confessed  that  he  had  not 
been  able  to  think  out  a  practical  solution  of  the  problem.  At  page  950  of  the 
Proceedings,  he  said : 

"You  have  got  to  the  point  where  labor  must  feel  that  they  are  not  dealing  with  an  alien 
enemy,  and  that  is  their  attitude  with  most  companies.  They  have  no  interest  in  common 
with  the  company.     They  feel  that  everything  they  get  is  the  fair  spoils  of  war," 

In  his  statement  to  the  Commission  introductory  to  the  presentation  of  the 
claims  of  the  electric  railway  industry,  Mr.  John  H.  Pardee,  at  that  time  Presi- 
dent of  the  American  Electric  Railway  Association,  expressed  in  unmistakable 
tenns  his  conviction  that  old  things  must  pass  away  and  all  things  become  new 
in  the  matter  of  the  public  relations  of  the  electric  railway  industry.  At  pages 
64  and  65  of  the  Proceedings,  he  says: 

"In  my  opinion,  and  I  am  confident  that  in  this  opinion  I  will  be  supported  by  the  in- 
dustry, there  are  two  major  phases  of  the  situation  which  we  now  face.  The  first  concerns 
the  absolutely  uneconomic  and  unsatisfactorj-  basis  upon  which  the  relations  between  the 
electric  railways  and  the  public  have  rested  since  the  enterprise  was  inaugurated;  and  by  this 
I  mean  that  there  has  never  been  a  proper  conception  either  on  the  part  of  the  owners  of 
these  properties  or  on  the  part  of  the  public  as  to  the  factors  which  should  govern  the  service 
to  be  rendered  or  the  fares  to  be  charged  by  electric  railways.  This  is  a  situation  which  has 
existed  during  the  entire  life  of  the  industry  and  is  responsible  for  much  of  the  misunder- 
standing between  the  companies  and  the  public.  It  existed  before  the  war,  is  entirely  uncon- 
nected with  the  changes  wrought  by  the  war,  but  is  one  of  the  fundamental  reasons  why  the 
war  has  helped  to  bring  disaster  upon  us. 

"The  second  phase  was  the  direct  result  of  the  war.  It  first  developed  immediately  after 
the  declaration  of  war  in  1914,  and  was  vastly  accentuated  by  the  entrance  of  the  United 
States  into  the  war  in  1917.  The  national  war  program,  to  which  we,  as  railway  men,  all 
subscribed,  and  to  the  fulfillment  of  which  we  lent  our  very  best  endeavors,  involved  the 
electric  railways  and  other  public  utilities  to  an  extent  immeasurably  greater  than  that  in 
which  any  other  national  industry  was  involved.  The  Govemment  took  control  of  our  labor, 
it  raised  the  wages  of  our  employes  in  many  cases  as  much  as  100  per  cent ;  it  took  command 
of  our  fuel  supply,  and  fixed  the  prices  which  we  were  compelled  to  pay  for  coal ;  it  fixed  the 
price  of  every  commodity  that  entered  in  the  maintenance  and  operation  of  electric  railways; 
in  a  vast  number  of  cases,  it  prescribed  the  service  which  we  were  to  perform,  and  called 
upon  us  companies  for  construction  involving  many  millions  of  dollars.  In  fact,  there  was 
not  a  phase  of  electric  railway  operation  in  which  the  Government  did  not  interfere,  with  the 
result  that  the  cost  of  operating  our  roads  was  verj-  greatly  and  materially  increased.  This 
it  did  to  add  to  our  burdens — to  assist  us  in  bearing  these  burdens  and  to  meet  these  obligations, 
it  did  nothing. 

"We  are  not  here  to  claim  that  this  action  of  the  Government  was  not  entirely  necessary 
and  entirely  proper,  or  that  it  exclusively  affected  our  industry,  but  we  do  say  that  its  effect 
upon  the  railways  of  the  countn,'  was  the  more  pronounced  and  the  more  disastrous  because 
alone  of  all  the  industries  affected,  the  public  utilities  were  unable  to  apply  the  obvious  remedy, 
an  increase,  on  their  own  volition,  in  the  price  of  their  product  to  meet  the  increase  in  its 
cost  thus  forced  upon  them. 


"We  believe  that  our  problem,  in  the  solution  of  which  we  claim  your  assistance,  is  a 
problem  of  readjusting  an  essential  industry  to  conditions  that  have  materially  changed,  first, 
because  of  the  natural  development  of  the  business  and  the  changing  civic  and  social  life 
of  the  communities,  and  second,  because  the  great  war  has  wrought  a  great  change  in  national 
concepts  of  industrial  and  social  relations. 

"As  I  see  it  the  elements  that  go  to  make  up  these  changed  conditions  as  they  directly 
affprt  electric  railways  are : 

"First,  the  higher  price  level  upon  which  not  only  the  United  States  but  the  entire  world 
has  entered,  which  seems  hound  to  obtain  for  an  indefinite  period  of  years. 

"Second,  the  conditions  surrounding  the  employment  of  labor,  which  is  a  larger  part  of 
the  cost  of  operation  of  electric  railways  than  it  is  of  any  other  industry  with  which  I  am 
acquainted.  In  this  connection  I  believe  that  it  must  be  evident  to  any  unbiased  and  un- 
prejudiced student  of  present-day  conditions  that  labor  is  demanding  and  w-ill  receive  a  greater 
share  in  the  wealth  that  it  produces  than  ever  before  in  the  history  of  the  world.  Every- 
where industry  is  adjusting  itself  to  meet  these  demands,  and  no  lasting  solution  of  the  rail- 


156  Electric  Railway  Problem 

way  problem  can  be  reached  unless  this  industry  is  put  in  a  financial  position  where  it  can 
render  the  same  meed  of  justice  to  its  employes  as  is  expected  from  industrj'  generally. 

"Third,  the  introduction  of  a  new  competitive  factor,  in  the  automobile,  not  only  the 
so-called  'jitney,'  but  more  especially  the  priN-ately  owned  automobile  and  the  motor  truck. 

"Fourth,  the  enlarged  functions  of  street  railway  systems,  which  with  the  growth  of  the 
communities  they  serve  have  ceased  to  be  private  enterprises,  with  the  sole  aim  of  adding 
to  the  comfort  and  convenience  of  the  public,  and  have  become  absolutely  essential  to  the 
community  growth,  development,  health  and  welfare,  *  •  *  »  with  the  result  that  it  is  no 
longer  possible  to  consider  either  service  or  rates  from  the  standpoint  of  business  principle 
alone." 

On  everj-  hand,  we  find  expressions  of  opinion  to  the  effect  that  the  electric 

railway  industry  cannot  go  on  on  its  old  basis;  if  its  credit  is  to  be  restored,  an 

entirely  new  deal  is  necessary,  and  new  relations  with  tlie  public  and  with   its 

employes  must  be  established. 


Chapter  XXVI 
INCREASE  IN   MARGIN  AVAILABLE   FOR  CAPITAL 

Mr.  James  W.  Welsh,  statistician  for  the  American  Electric  Railway  Asso- 
ciation, introduced  Chart  C-103  and  a  table  of  figures  showing  the  financial  trend 
of  street  railway  operations  as  shown  by  the  United  States  Census  reports  for 
1902,  1907,  1912  and  1917,  and  by  estimates  for  1918  based  upon  returns  from 
the  345  company  members  of  the  Association.  These  figures  indicate  that  the 
amount  of  net  income  of  all  the  electric  railways  of  the  country  available  for 
dividends  and  surplus  amounted  to  $40,340,286  in  1907;  $68,139,889  in  1912; 
$56,450,930  in  1917;  and  only  $20,183,414  in  1918.  The  combined  income  ac- 
count of  the  street  railways  of  New  York  City  for  the  year  ended  June  30,  1919, 
showed  a  deficiency  of  $5,583,819  after  payment  of  operating  expenses,  taxes, 
interest,  rents,  and  other  compulsory  deductions  from  income.  This  result  was 
$10,858,855  worse  than  the  result  for  the  preceding  year.  Nevertheless,  the 
amount  available  for  return  on  investment  in  the  form  of  interest,  rentals  and 
other  compulsory  deductions  from  income  was  $30,583,649  on  the  New  York 
City  lines  for  the  year  ended  June  30,  1919.  These  figures  prove  nothing  as  to 
what  the  real  financial  condition  of  the  railways  is  on  the  basis  of  a  sound  capital- 
ization, but  they  do  indicate  that  the  margin  between  the  operatirrg  companies 
and  bankruptcy  is  diminishing  where  it  has  not  already  disappeared.  The  figures 
indicate  that,  if  the  companies'  existing  securities  are  to  be  maintained  and  their 
existing  managements  protected,  the  revenues  will  have  to  be  increased  so  as  to 
reestablish  and  maintain  a  surplus  over  operating  expenses,  taxes  and  fixed 
charges.  The  sharp  advances  in  operating  ratios,  to  which  I  have  referred  in  an 
earlier  chapter  of  this  report,  have  the  same  general  significance. 

The  first  remedy  for  the  credit  situation  proposed  by  the  electric  railway 
companies  is  an  increase  in  their  net  earning  power.  They  propose  that  some- 
thing be  done  to  keep  the  expense  curve  and  the  revenue  curve  from  coming  so 
close  together.  Either  revenues  must  be  forced  up  or  expenses  forced  down. 
Without  a  reorganization  of  their  financial  structures,  the  difference  between 
revenues  and  expenses  must  be  kept  at  least  large  enough  to  pay  all  fixed  charges, 
and  if  the  electric  railways  are  to  have  credit  suflficient  to  attract  new  capital, 
there  must  be  an  additional  "margin  of  safety"  to  give  reasonable  assurance 
that  fixed  charges  will  be  earned  in  lean  years  as  well  as  fat  ones. 

Mr.  Halford  Erickson,  formerly  for  many  years  a  prominent  member  of  the 
Wisconsin  Railroad  Commission,  and  now  a  member  of  the  consulting  public 
utility  appraisal  firm,  Hagenah  &  Erickson,  appeared  before  the  Commission 
for  the  Electric  Railway  Association  to  discuss,  among  other  things,  this  matter 
of  the  net  earning  power  necessary  for  the  restoration  and  preservation  of  street 

157 


158  Electric  Railway  Problem 

railway  credit.  Mr.  Erickson  testified  that  he  had  made  a  study  of  the  cost  of 
capital  on  about  35  leading  street  railway  systems.  He  found  that  from  1910 
to  1915  the  net  earnings  fell  about  33  per  cent.  In  1915  the  cost  per  passenger 
per  ride,  without  anything  for  depreciation  or  return  on  investment  was  3.6  cents 
on  these  roads.  An  8  per  cent  return  on  the  value  of  the  property  figured  out  2.5 
cents  additional,  making  the  total  average  cost  per  ride  on  this  basis  6.1  cents. 
Mr.  Erickson  found  that  in  1918  this  total  cost  had  increased  to  7.3  cents,  and 
stated  that  in  1919  the  cost  would  be  still  higher.  The  average  fare  collected 
by  these  roads  in  1915  was  about  5  cents,  and  in  1919  "slightly  more  than  5  cents, 
not  a  great  deal  more,  but  slightly  more."  His  testimony  on  this  point  appears 
at  pages  969,  973  and  974  of  the  Proceedings.  At  page  973,  he  describes  the 
general  course  of  street  railway  credit  as  follows : 

"The  financial  situation  of  the  street  railways  during  the  past  twenty-five  years  has  varied 
from  doubtful  up  to  fair  and  down  apain  to  doubtful   or  bad. 

"During  the  first  part  of  this  transition  period  much  property  had  to  be  destroyed  or 
discarded  and  replaced  by  new  and  different  equipment.  The  investment  grew  faster  than 
the  earnings.  All  this  tended  to  keep  investors  away,  .\bout  1900  this  had  changed  somewhat 
and  for  some  years  the  earnings  grew  somewhat  faster  than  the  investment.  This  had  a 
strong  tendency  to  draw  capital  into  the  street  railway  field.  Many  of  the  underlying  bonds 
even  advanced   into  the  investment  class. 

"About  1910.  however,  the  condition  again  began  to  change  in  the  opposite  direction. 
Since  about  that  time  the  investment  and  the  operating  expenses  have  increased  faster 
than  the  earnings.  .\t  the  outbreak  of  the  war  most  roads  were  earning  less  than  it  was 
necessary  to  earn  to  attract  all  the  new  capital  that  was  needed." 

At  pages  975  and  976  of  the  Proceedings,  Mr.  Erickson  summarizes  the 
conditions  upon  which  capital  can  be  had  or  securities  sold,  as   follows : 

"The  property  and  earnings  behind  the  investment  must  be  sufficient  to  afford  the 
necessary  protection  against  risks,  and  to  also  constitute  adequate  compensation  for  the  use 
of  capital  employed,  and  for  the  work  and  responsibilities  assumed  by  the  employer  and 
investor. 

"Investments  in  bonds,  in  order  to  be  safe,  must  have  behind  them  much  more  property 
than  their  par  value,  and  much  greater  net  earnings  than  the  interest  charges  on  the  bonds. 

"Stocks,  in  order  to  Ix-  fairly  safe  or  to  come  in  the  investment  class,  must  have  behind 
them  at  least  as  much  property  as  their  par  value,  and  much  greater  net  earnings  than  the 
ordinary  6  per  cent  or  7  per  cent  dividends  that  may  be  paid  thereon. 

"Without  such  margins  of  safety  as  these  the  securities  are  speculative  rather  than 
investment  propositions. 

"The  fact  that  investment  securities  must  be  protected  by  more  property  then  their  par 
value  and  by  much  greater  net  earnings  than  the  ordinary  interest  and  dividend  charges  shows : 

"1.  That  the  cost  of  capital  is  represented  by  the  amount  of  the  net  earnings  that  are  re- 
quired in  order  that  the  securities  thus  representing  the  capital  may  sell  on  the  ordinary 
investment  or   income  basis,  and 

"Z.  That  the  rales  charged  by  a  utility  for  the  service  it  furnishes  must  in  the  long  run 
Ix?  high  enough  to  yii  Id  such  net  earnings. 

"The  investment  conditions  in  these  respects,  which  prevailed  for  several  years  prior  to 
the  war,  may  lie   further  summarized  as  follows : 

"Investors,  in  order  to  purchase  S'/j  per  cent  to  6%  per  cent  Ixinds  at  par  required  among 
other  things : 

"1.  That  such  Ixmds  should  not  amount  to  more  than  alKiut  two-thirds  of  the  value  of 
the  assets  behind  them. 

"2  Thai  the  net  earnings  of  the  issuing  company  should  amount  to  not  less  than  twice 
as  much  as  the  interest  charges  on  such  bonds. 

"3.  That  the  past  record  and  future  prosi>ects  of  the  utility  should  l>e  good  or  at  least 
very  fair. 

"4.  That  in  taking  the  securities  on  such  income  liases  as  those  given,  the  investors  would 
not  assume  the  cost  of  such  discounts,  commissions,  and  other  .selling  and  issuing  expenses 
as  had  to  bo  met  when  Ihe  securities  were  first  put  on  the  market. 

"Such  bonds  as  these  represent  for  the  most  part  the  class  of  investment  Ixjnds  which 
were  available  for  new  capital  at  the  time. 


Margin  for  Capital  159 

"The  comparatively  few  available  underlying  issues  which  were  better  protected  than 
this  were  selling  at  somewhat  higher  prices  and  lower  yields. 

"The  many  junior  issues  bearing  the  same  rates  of  interest  but  which  were  less  well 
protected  than  this  were  selling  at  lower  prices,  and  higher  yields  or  often  much  below  par. 

"Investors  in  order  to  purchase  6  per  cent  to  7  per  cent  stocks  at  about  par  at  that  time 
required : 

"1.  That  the  par  value  of  such  stocks  should  not  amount  to  more,  or  as  much  as,  the 
amount  by  which  the  value  of  the  assets  exceeded  the  par  value  of  the  bonds  which  come 
ahead  of  such  stocks. 

"2.  That  the  net  earnings  of  the  company  which  were  available  for  returns  or  dividends 
on  such  stocks  should  amount  to  from  more  than  half  again  to  fully  twice  as  much  as  the 
regular  dividends. 

"3.  That  in  addition  to  this  the  amount  by  which  the  net  earnings  for  the  stock  exceeded 
the  regular  dividends  be  used  for  strengthening  the  equities  behind  the  stock  and  for  occasional 
extra  dividends  thereon. 

"4.     That  the  future  prospects  of  the  company  appear  to  be  good  or  at  least  fair. 

"In  taking  the  stock  on  these  bases  the  investor  did  not  assume  the  cost  of  discounts, 
commissions  or  other  selling  expenses. 

"Less  well  protected  stocks  than  this  bearing  the  same  rates  of  dividends  sold  at  lower 
prices  and  higher  yields  or  below  par.  Better  protected  stocks  with  similar  dividend  rates 
sold  at  higher  prices  and  lower  yields,  or  sometimes  above  par." 

After  describing  in  some  detail  the  terms  on  which  the  various  classes  of 
securities  issued  by  the  roads  included  in  his  study  were  sold  during  the  pre- 
war period,  he  continued  at  page  978  of  the  Proceedings : 

"All  of  these  facts  clearly  show  that  for  several  years  up  to  the  earlier  years  of  the  war 
the  utilities,  as  has  been  stated,  could  not  obtain  all  the  capital  they  needed  on  normal  terms 
and  conditions  unless  the  net  earnings  for  returns  on  the  investment  amounted  to  at  least 
8  per  cent  on  the  fair  value  of  the  plant  and  the  business. 

"These  facts  show  further  that  during  the  same  years  the  net  earnings  for  returns  did 
not  on  the  average  amount  to  much  more  than  about  half  of  this  or  to  only  about  4  per  cent. 

"It  is  further  disclosed  that  the  unsatisfactory  conditions  in  which  the  street  railways 
found  themselves  at  the  beginning  of  the  w-ar  have  steadily  grown  worse  since  then.  During 
the  past  two  years  they  have  earned  but  little  more  than  enough  to  cover  the  operating 
expenses." 

All  this  emphasizes  the  need  of  net  earning  power  as  a  support  for  credit. 
Many  of  the  witnesses  for  the  companies  recognized  tlie  importance  of  a  valua- 
tion of  the  properties  and  of  the  ultimate  security  for  '.he  investment  which  may 
be  brought  about  through  a  service-at-cost  contract,  but  were  of  the  opinion 
that  the  thing  urgently  needed  without  delay  is  more  net  income. 

It  cannot  be  doubted  that  in  many  cases  greater  revenues  or  smaller  expenses 
are  needed  to  save  the  companies.  Whether  saving  the  companies  is  a  condition 
of  saving  the  industry  is  not  so  clear.  Where  it  is  shown  that  the  margin  left 
after  payment  of  operating  expenses  and  taxes  is  insufficient  to  meet  the  cost 
of  capital  on  a  really  conservative  basis — such  a  basis  as  we  find  in  Cleveland, 
for  example — then,  of  course,  the  margin  must  be  increased.  And  then  the 
question  is:     Greater  revenues  or  smaller  expenses,  which  shall  it  be? 


A 


Chapter    XXVII 
DOUBLE  PURPOSE  OF  UNIT  FARE  INCREASES 

Most  of  the  witnesses  for  the  electric  railways  did  not  hesitate  to  vote  for 
larger  revenues  and  to  propose  fare  increases  as  the  only  feasible  method  of 
getting  them  promptly.  Moreover,  they  were  pretty  well  agreed  that  immediate 
fare  increases  should  take  the  form  of  an  increase  in  unit  fares.  While  many 
favored  the  zone  system,  they  thought  that  zoning  in  any  particular  case  requires 
study,  and  that  the  emergency  confronting  the  electric  railways  would  not  per- 
mit of  the  delay  which  such  a  study  would  necessitate.  A  policy  calling  for  an 
increase  in  fares  above  five  cents  was  favored  for  two  reasons.  In  the  first  place, 
the  change,  particularly  if  effected  by  state  commissions  through  the  abrogation 
of  municipal  franchise  limitations,  would  enable  the  industry  to  break  away 
from  the  old  rule  of  a  fi.xed  fare  based  upon  contract.  This  would  get  the 
electric  railways  out  of  the  rut  in  which  they  have  been  nuniing  from  the  be- 
ginning and  would  open  the  way  for  a  flexible  fare  adjustable  to  fluctuations  in 
the  cost  of  service.  This  change  would  be,  in  every  sense,  a  momentous  one 
for  the  industry.  It  would  break  the  five-cent  habit ;  it  would  break  the  five-cent 
contracts;  in  most  cases  it  would  break  the  power  of  the  municipalities  to  impose 
binding  limitations  upon  rates  as  a  condition  of  franchise  grants.  In  the  second 
place,  it  would  bring  in  the  additional  reveinies  immediately  needed  for  the  relief 
of  the  companies'  financial  distress. 

As  a  matter  of  fact,  the  abrogation  of  the  five-cent  fare  and  of  the  contracts 
on  which  it  was  based  was  already,  in  large  measure,  an  accomplished  fact  when 
the  Commission's  hearings  were  begim.  The  American  Electric  Railway  Asso- 
ciation filed  with  the  Commission  a  tabulation  revised  to  August  9,  1919,  entitled 
"A  Summ.iry  of  the  Cities  in  which  Fares  have  been  Increased,  showing  Name 
of  City,  Population,  Company  Operating,  Date  of  Increase,  Present  and  Former 
Fare."  In  February.  1920.  the  Illinois  Committee  on  Public  Utility  Information 
issued  a  special  bulletin  entitled  '"( )tTicial  ."Statistics  of  Nation's  Electric  Railway 
Fare  Situation,"  and  the  ".\era"  for  February.  1920.  contains  a  review  of  fare 
increases  by  Mr.  Harlow  C.  Clark  showing  "conditions  in  all  cities  having  a 
population  of  more  than  23.0(X)  as  they  now  exist."  These  three  statements 
show  that  only  a  comparatively  few  cities  still  retain  the  five-cent  fare.'  The 
most  important  of  these  are  New  York,  Philadeli)hia.  Detroit.  Cleveland.  Rnflfalo, 
San  Francisco,  I.os  .Angeles,  Minneapolis,  St.  Paul,  Indianapolis.  Rochester, 
Louisville.  Columbus,  C\.,  Dayton.  Richmond,  Va.,  Dallas,  Houston,  Fort  Worth. 
Nashville.  New  Mcdiord,  Dcs  Moines,  Yonkers.  Oklahoma  City.  Duluth.  .\kron. 
Jacksonville.  Fort  W.ayne  and  Kvansville.  l-'ven  in  many  of  these,  fares  have 
been  increased  during  the  past  two  years  by  the  abolition  of  low  fare  tickets  and 
in  one  or  two  cases  by  the  establishment  of  a  charge  for  transfers. 

IrW) 


Purposes  of  Fare  Increases  161 

The  Special  Bulletin  of  the  Illinois  "Committee"  enumerates  424  cities  with 
an  aggregate  estimated  population  of  24,675,579  where  the  unit  fare  has  been 
increased  to  more  than  five  cents.     These  cities  are  classified  as  follows : 

Aggregate 

Present  Fare                                    Number  of  Cities  Population 

Ten    cents    59  3,076,251 

Nine   cents    1  64,720 

Eight  cents  21  4,122.322 

Seven  cents,  with  one  cent  charge  for  transfer 26  1,742,586 

Seven  cents  in  central  zone  and  five-cent  zones  outside  1  56,503 

Seven-cent   zones    3  1 57.387 

Seven    cents    118  5,105,273 

Six-cent  zones,  with  two  cents  transfer  charge 10  485,810 

Six    cents    for    two    zones,    with    two    cents    per    zone 

thereafter    13  685,041 

Six  cents  for  each  of  two  zones 4  245,175 

Six  cents  (with  two  cents  transfer  charge  in  some  cases)  158  8,934,511 

Total    424  24,675,579 

The  cities  where  the  10-cent  fare  prevails  include  Boston,  Fall  River,  Lowell, 
Cambridge,  Lynn,  Lawrence  and  other  cities  in  eastern  Massachusetts,  Pittsburgh 
and  a  number  of  smaller  cities  in  Pennsylvania,  and  a  few  cities  in  other  states. 
The  9-cent  fare  is  in  Portland,  Maine,  where  a  zone  system  is  in  use.  For  a 
ride  not  exceeding  three  zones,  the  cash  fare  is  nine  cents,  but  the  ticket  fare 
seven  cents  and  about  95  per  cent  of  the  passengers  use  tickets.  The  8-cent  fare 
prevails  in  St.  Louis  and  Kansas  City,  Missouri;  on  the  elevated  lines  of  Chicago; 
in  Youngstown,  Ohio ;  in  Manchester,  New  Hampshire ;  in  Wilkes-Barre,  Penn- 
sylvania, and  in  a  number  of  smaller  cities  in  difterent  parts  of  the  country.  The 
7-cent  fare,  with  a  charge  of  one  cent  for  an  initial  transfer,  applies  over  the 
entire  Public  Service  Railway  system  in  New  Jersey,  serving  Newark,  Jersey 
City,  Paterson,  Camden,  Elizabeth,  Hoboken,  Passaic,  Bayonne  and  all  the  other 
principal  cities  of  the  state  except  Atlantic  City  and  Trenton.  Holyoke,  Massa- 
chusetts, has  a  7-cent  central  zone  and  5-cent  zones  outside,  and  Springfield  and 
two  other  places  in  Massachusetts  have  straight  7-cent  zones.  Seven  cents  with- 
out a  transfer  charge  is  the  unit  fare  in  Baltimore,  Milwaukee,  Cincinnati,  Omaha, 
Scranton,  Tacoma,  Reading,  Wilmington  (Delaware),  St.  Joseph  (Missouri), 
Erie  and  more  than  one  hundred  other  cities  scattered  throughout  the  country. 
In  Washington,  D.  C,  where  two  street  railway  systems  operate,  the  fare  is 
seven  cents  on  each  system  with  a  2-cent  charge  for  inter-company  transfers.  In 
New  Haven,  Bridgeport,  Hartford,  Waterbury  and  most  of  the  other  cities  of 
Connecticut,  a  zone  system  is  in  effect  in  which  the  minimum  fare  is  six  cents 
for  a  ride  through  two  zones,  with  an  additional  charge  of  two  cents  per  zone 
outside  the  city  limits.  Worcester,  Massachusets,  has  two  zones  in  each  of  which 
a  6-cent  fare  is  charged.  The  same  system  applies  to  three  smaller  Massachu- 
setts cities.  The  straight  6-cent  fare  is  in  vogue  on  the  surface  lines  of  Chicago, 
and  in  New  Orleans,  Portland  (Oregon),  Denver,  Oakland,  Atlanta,  Birming- 
ham, Spokane,  Syracuse,  Memphis,  Grand  Rapids  (Michigan).  Salt  Lake  City, 
Schenectady,  Albany,  Utica,  and  a  great  many  other  cities  in  all  parts  of  the 
country.  In  Toledo,  Norfolk  and  a  few  other  places  the  6-cent  fare  is  accom- 
panied by  a  transfer  charge  of  two  cents.- 


162  Electric  Railway  Problem 

The  statistics  contained  in  the  Special  Bulletin  were  not  accurate  in  every 
respect.  For  example,  Buffalo  was  listed  among  the  7-cent  fare  cities  in  spite 
of  the  fact  that  it  still  had  the  5-cent  fare.  Undoubtedly,  the  explanation  of  this 
error  lies  in  the  fact  that  the  Public  Service  Commission  for  the  Second  District 
of  New  York,  some  time  previously,  had  authorized  the  International  Railway 
Company  in  Buffalo  to  charge  a  7-cent  fare,  but  the  company  had  thus  far  pre- 
ferred to  slick  to  five  cents.  Also,  Kansas  City,  Kansas,  is  listed  among  the 
6-cent  fare  cities,  although  it  now  has  an  8-cent  fare.  Wilmington,  Delaware,  is 
included  in  both  the  7-cent  fare  list  and  the  6-cent  fare  list. 

In  its  introductory  summary  the  Bulletin  states  that  the  total  population  of 
the  cities  affected  by  fare  increases  is  31,217,837.  It  will  be  noted  that  this  figure 
is  6,542,258  in  excess  of  the  figure  given  above  for  the  aggregate  population  of 
cities  where  the  unit  fare  is  more  than  five  cents.  This  discrepancy  is  more  than 
accounted  for  by  the  population  of  New  York  City,  Cleveland  and  certain  other 
places  where  a  charge  is  made  for  transfers,  and  by  the  population  of  Detroit, 
Indianapolis,  Richmond  (Virginia),  Dayton,  New  Bedford.  Des  Moines  and  a 
considerable  number  of  other  cities  where  reduced  rates  have  been  abolished  and 
a  straight  5-cent  fare  is  now  being  charged.  The  Special  Bulletin  does  not 
explain  the  basis  for  its  estimates  of  population  and  does  not  give  the  detailed 
figures  for  the  different  cities.  It  is  impossible,  therefore,  to  check  the  statistics 
in  such  a  way  as  to  eliminate  all  discrepancies.  The  Bulletin  may  contain  many 
errors  in  addition  to  those  which  I  have  pointed  out.  but  probably  its  statements 
of  fact  are  sufficiently  accurate  for  the  purpose  for  which  they  are  here  quoted, 
namely,  to  show  in  general  the  extent  to  which  the  5-cent  fare  has  been  aban- 
doned on  street  railway  lines  throughout  the  country. 

In  his  article  in  the  February,  1920,  "Acra."  Mr.  Harlow  C.  Qark  says: 

"Increased  fares  in  one  form  or  another  arc  now  effective  in  all  but  56  of  the  273  cities 
in  the  United  States  havinR  a  population  of  25,0(K)  or  more.  The  cash  fare  in  196  of  them  is 
more  than  five  cents,  in  118  of  them  more  than  six  cents,  in  64  of  them  mort  than  seven  cents, 
and  in  34  of  them  more  than  eight  cents. 

"In  all  hut  15  of  the  68  cities,  with  more  than  100,00(1  population,  the  cash  rate  is  more 
than  five  cents ;  in  40  of  the  62  cities  between  .SO.CKKI  and  100.0(tO.  it  is  more  than  five  cents, 
and  ill  103  of  the  142  cities  having  less  than  50.000  it  is  more  than  five  cents. 

"In  Colorado.  Connecticut,  Delaware,  the  District  of  Columbia,  Illinois.  Maine.  Mary- 
land. Massachusetts,  Missouri,  New  Hampshire,  New  Jersey,  North  Carolina.  Oregon,  South 
Carolina,  Rhode  Island  and  \'ir(;inia,  the  fares  in  evcr\-  city  of  mi>re  than  25,000  have  been 
increased.  In  Michigan  and  Pennsylvania,  the  fares  in  all  but  one  city  have  been  increased, 
while  of  New  York's  22  cities  having  more  than  25,000,  but  two  remain  without  some  form  of 
increase." 

It  will  be  noted  that,  according  to  Mr.  Clark's  statement,  only  two  of  the 
twenty-two  cities  in  the  State  of  New  York  "remain  without  some  form  of  in- 
crease." Later  in  his  article  he  explains  that  New  York  City  is  counted  as  one 
of  the  cities  having  an  increase  although  no  increase  in  the  base  fare  has  been 
granted.  His  reason  for  including  it  appears  to  be  that  a  transfer  charge  has 
been  established  by  the  Public  Service  Commission  at  certain  points  in  the  Bor- 
oughs of  Manhattan  and  Brooklyn.  Mr.  Clark  states  that  "in  150  of  the  217 
cities  in  which  fares  have  been  increased,  the  increase  has  been  the  result  of  the 
action  of  state  commissions,  in  44  of  municipal  authorities,  in  two  of  courts  and 
in  21  of  automatic  regulation  under  service-at-cost  plans."     He  also  says: 


Purposes  of  Fare  Increases  163 

"In  connection  with  the  rates  of  fare  now  prevailing  in  American  cities,  it  must  be 
remembered  that  all  of  these  roads  are  operating  upon  a  starvation  basis.  The  cost  of  the 
service  as  reflected  in  fares  now  in  effect,  and  the  application  for  increases  which  are  pending, 
represent  in  rnany  cases  sen-ice  and  facilities  reduced  to  the  minimum.  New  capital  is  not 
available  and  improvements  and  extensions  are  awaiting  the  restored  credit  of  the  companies. 
*  »  *  *  One  of  the  reasons  for  the  high  rate  of  fare  in  Boston  is  that  a  large  sum  has 
been   spent   in   rehabilitation. 

"This  question  of  rehabilitation  has  a  marked  bearing  upon  the  entire  fare  situation. 
Deferred  maintenance  is  piling  up  on  most  of  these  properties.  The  longer  it  is  delayed,  the 
greater  the  cost  when  it  is  finally  undertaken,  and  the  higher  the  cost  of  operation  during 
the  period  in  which  track,  equipment  and  overhead  are  neglected.  -\  small  increase  of  fare 
made  immediately  at  the  time  that  it  is  needed  is  worth  more  than  a  large  increase  that  comes 
after  a  long  delay." 

Mr.  Clark  in  his  article  also  compares  his  statistics  of  fare  increases  with 
those  published  in  the  "Aera"  for  April,  1919.  In  his  opinion  these  statistics  "indi- 
cate that  the  process  of  readjusting  street  railway  revenue  to  the  situation  caused 
by  the  depreciated  dollar  is  proceeding  all  over  the  country,  and  that  the  six-cent 
car  fare  is  fast  following  into  oblivion  the  five-cent  fare  as  insufficient  to  meet 
the  still  rising  costs  of  operation."  He  states  that  in  April,  1919,  the  cash  fare 
in  156  cities  was  more  than  five  cents,  while  today  it  is  more  than  five  cents  in 
196  cities;  that  in  April,  1919,  it  was  more  than  six  cents  in  53  cities,  while  today 
it  is  more  than  six  cents  in  118  cities;  that  in  April,  1919,  it  was  more  than 
seven  cents  in  24  cities,  while  today  it  is  more  than  seven  cents  in  64  cities ;  that 
in  April,  1919,  it  was  more  than  eight  cents  in  13  cities,  while  today  it  is  more 
than  eight  cents  in  34  cities.  It  must  be  remembered  that  Mr.  Clark's  statistics 
relate  only  to  the  273  cities  of  the  country  having  an  estimated  population  of 
25,000  or  more,  while  the  cities  listed  in  the  Special  Bulletin  of  the  Illinois  Com- 
mittee on  Public  Utility  Information  include  siualler  places.  Mr.  Clark  states 
that  "Cleveland,  operating  under  a  service-at-cost  plan.  Chicago  and  Galveston 
operating  under  what  are  practically  service-at-cost  plans  are  the  only  cities  in 
which  fares  have  been  reduced  from  the  top  limits  put  into  effect  during  the 
war,"  but  a  little  further  on  in  his  article  he  calls  attention  to  the  fact  that  the 
fare  in  Scranton  was  reduced  in  1919  from  eight  cents  to  seven  cents;  and  still 
further  on,  in  his  special  paragraph  relating  to  Scranton,  it  appears  that  the  re- 
duction of  fare  effective  in  1919  was  not  from  eight  cents  to  a  straight  seven-cent 
fare  but  to  seven  cents  cash  fare  and  tickets  at  the  rate  of  4  for  25  cents. 

Mr.  Clark's  statement  that  the  Chicago  lines  are  being  operated  under  what 
is  practically  a  service-at-cost  plan  is  quite  inaccurate,  as  the  Chicago  settlement 
ordinances  of  1907  did  not  incorporate  the  fundamental  principle  of  service-at- 
cost,  and,  furthermore,  at  the  present  time  the  fares  are  fixed  by  the  state  public 
utilities  commission. 

It  is  worth  while,  however,  to  observe  the  effect  of  the  genuine  service-at-cost 
plans  upon  rates  where  the  fixed  S-cent  fare  has  been  abrogated  and  the  cost  of 
service  is  levied  against  the  car  rider.  This  is  important  because  it  is  only  under 
service-at-cost  arrangements  that  the  electric  railway  companies  get  the  full  bene- 
fit of  the  abrogation  of  the  fixed  5-cent  fare,  and  enjoy  a  measurable  assurance 
that  fare  increases  will  in  fact  give  them  the  immediate  increase  in  revenue  which 
they  desire  and  reestablish  their  credit.  In  Cleveland  the  fare  advanced  in 
August,  1918,  to  five  cents  cash  with  a  1-cent  charge  for  a  transfer.     This  was 


164  Electric  Railway  Problem 

the  maximum  fare  reached  during  the  war  period.  There  have  since  been  two 
decreases.  The  first  was  eflfective  July  7,  1919,  when,  in  addition  to  the  5-cent 
cash  fare,  tickets  were  put  on  sale  at  the  rate  of  11  for  50  cents.  The  second 
decrease  was  effective  in  December,  1919,  when  the  ticket  rate  was  reduced  to 
6  for  25  cents.  In  Massachusetts,  on  the  Boston  Elevated  system  and  the  old 
Bay  State  lines,  fares  have  gone  up  to  ten  cents  under  the  service-at-cost  statutes, 
and  this  accounts  for  28  of  the  i7  ten-cent  fare  cities  listed  in  the  Illinois  Com- 
mittee's Special  Bulletin.  In  Cincinnati,  where  a  service-at-cost  plan  has  been 
operating  since  October  1,  1918,  the  fare  went  up  from  a  straight  five  cents  prior 
to  January  1,  1919.  through  several  gradations  until  it  reached  a  straight  seven 
cents  in  October,  1919.  In  Youngstown.  Ohio,  another  service-at-cost  city,  the 
fare  prior  to  January,  1919,  was  five  cents  with  6  tickets  for  25  cents  and  25 
tickets  for  $1.00.  It  went  up  through  several  gradations  until  January-,  1920, 
when  it  reached  eight  cents  cash,  with  7  tickets  for  50  cents  and  a  one-cent  transfer 
charge.  So  far  as  I  know  these  are  the  only  cities  in  the  United  States  where 
the  service-at-cost  plan  has  been  in  effect  to  the  extent  of  permitting  an  auto- 
matic readjustment  of  fares  up  to  the  full  cost  of  service  under  war  conditions. 
Cleveland  had  a  low  maximum  fare  limitation,  but  under  the  stress  of  war  ex- 
penses this  maximum  was  raised  to  six  cents  and  the  cost  of  service  has  never 
gone  as  high  as  that.  In  1917,  Dallas  adopted  a  modified  service-at-cost  franchise 
with  a  five-cent  minimum  fare,  and  thus  far.  although  the  Dallas  Railway  Com- 
pany has  not  earned  the  full  rate  of  return  upon  the  recognized  value  of  its 
property  since  the  new  franchise  went  into  effect,  the  maximum  fare  limit  has 
not  been  raised.' 

It  is  obvious  from  the  statistics  of  fare  increases  which  I  have  cited  that 
the  electric  railways  of  the  countn,'  have  made  a  great  deal  of  headway  against 
the  old  five-cent  fare  limitation.  \\'hilc  their  struggle  is  still  going  on  in  New 
York  City  and  certain  other  communities,  a  sufficient  amount  of  actual  experience 
with  fare  increases  has  been  accumulated  in  various  parts  of  the  country  to  fur- 
nish some  basis  for  an  analysis  of  the  effect  of  fare  increases  u]ion  the  financial 
well-being  of  the  companies.  From  Mr.  Harlow  C.  Clark's  statement  in  his 
review  of  the  fare  situation  in  the  February  "Aera,"  it  can  hardly  be  said  that 
electric  railway  companies  generally  have  as  yet  achieved  a  restoration  of  their 
credit  either  through  fare  increases  or  otherwise. 


Chapter  XXVIII 
EFFECT  OF  FARE  INCREASES  UPON  TRAFFIC  AND  REVENUES 

The  fundamental  conflict  of  interests  between  the  electric  railway  companies 
as  purveyors  of  local  transportation  and  the  general  urban  public  as  consumers 
of  transportation  service  has  been  accentuated  by  the  financial  straits  in  which 
the  companies  have  found  themselves  during  the  war  period.  Like  a  snag  in  the 
river  brought  to  light  by  low  water,  the  underlying  cause  of  the  antagonism  has 
been  revealed,  not  created,  by  the  extraordinary  conditions  of  the  present  time. 

Until  the  present  period  of  street  railway  demoralization  set  in,  the  philosophy 
of  street  railroading  held  that  a  company's  prospects  of  prosperity  are  in  direct 
ratio  to  the  prospective  increase  in  its  traffic ;  but  since  the  companies  began  to 
be  hard  hit  by  war  conditions,  and  since  the  shrinkage  of  their  net  incomes  under 
the  fixed  rates  of  fare  prescribed  by  statute,  contract  or  custom  has  resulted  in 
the  destruction  of  their  borrowing  power,  they  have  felt  so  depressed  financially 
that  they  have  almost  lost  interest  in  traffic  increases.  What  they  are  now  in- 
terested in  is  the  net  income — how  big  are  the  figures,  and  are  they  black  or 
are  they  red? 

In  April,  1919,  I  was  in  a  New  England  city  one  day  and  took  occasion  to 
visit  the  offices  of  the  local  street  railway  company  to  inquire  into  the  new  zone 
system  of  fares  which  it  had  installed  a  few  weeks  before.  I  wanted  to  ascertain 
what  the  efifect  of  recent  fare  increases  upon  the  amoimt  of  street  railway  traffic 
had  been,  but  I  was  told  by  the  manager  that  since  the  installation  of  the  zoning 
plan  the  companv  no  longer  counted  its  passengers.  "Of  what  use  would  the 
traffic  figures  be?"  he  asked.  "What  we  are  concerned  about  is  the  revenue.  If 
an  increase  of  fare  or  a  change  in  the  method  of  fare  collection  brings  in  more 
money,  that  is  all  we  care  to  know."  In  making  this  statement  the  street  railway 
manager  did  not  show  any  spirit  of  arrogance  or  any  contempt  for  the  public 
welfare.  He  merely  thought  that  it  would  be  difficult  or  inconvenient  to  keep 
track  of  the  number  of  revenue  passengers  under  the  new  system  of  fare  collec- 
tion installed  on  his  lines,  and  he  had  become  so  accustomed  to  the  point  of  view 
that  the  one  thing  necessary  is  to  save  the  street  railway  companies  from  bank- 
ruptcy that,  apparently  without  much  consideration,  he  dismissed  as  of  little  or 
no  importance  any  figures  the  only  purpose  of  which  would  be  to  show  the  amount 
of  service  rendered  or  the  extent  of  the  public  use  of  the  transportation  lines.  So 
long  as  an  increase  in  revenue  had  been  realized,  he  had  no  curiosity  as  to  the 
number  of  riders  who  were  supplying  that  revenue.  The  street  railway  com- 
panies are  interested  in  results,  and  to  them  at  the  present  time  results  are  mea- 
sured in  terms  of  gross  revenue  and  net  income.  The  public  is  also  interested  in 
results,  but  its  test  question  is :     "How  much  service  is   rendered — how   many 

165 


166  Electric  Railway  Problem 

people  actually  find  it  convenient  to  use  the  street  cars,  and  under  what  conditions 
are  they  permitted  to  use  them?" 

Passenger  fares  are  the  primary  and  almost  the  exclusive  source  of  revenue 
of  urban  electric  railways.  All  parties  agree  that  the  full  cost  of  an  essential 
service  such  as  local  transportation  must  be  paid  by  or  on  behalf  of  those  who 
use  it,  if  the  service  is  to  be  continued.  While  private  ownership  and  operation 
lasts,  the  companies,  especially  in  their  present  mood,  are  not  much  concerned  as 
to  hoiv  this  cost  is  paid  so  long  as  it  is  paid  in  some  way  or  other. 

The  most  obvious  method  of  increasing  revenues  where  the  cost  of  produc- 
tion has  increased  is  to  increase  the  price  of  the  product.  In  the  absence  of 
restrictions  limiting  the  price,  this  course  is  the  easiest  one  to  follow,  especially 
in  a  business  where  the  service  rendered  is  an  essential  one  and  in  a  large  measure 
free  from  competition.  The  street  railway  man's  instinct,  when  the  cost  of 
materials  and  the  rate  of  wages  went  up,  was  to  increase  the  fare  to  meet  the 
increased  costs  of  operation.  In  attempting  to  follow  this  instinct,  he  ran  head-on 
into  obstacles  which  differentiated  his  business  from  every  other  kind  of  busi- 
ness, much  to  his  discomfiture.  It  made  him  "sore"  to  see  his  business  ground 
between  the  upper  and  the  nether  millstones,  when  other  lines  of  business,  which 
in  the  past  had  been  regarded  as  much  less  favored  than  street  railroading,  were 
free  to  adjust  themselves  to  war  conditions  and  to  share  in  the  extraordinary 
profits  resulting  from  the  era  of  high  prices  and  intense  industrial  activity.  Since 
the  crisis  came  on,  the  street  railway  men  have  been  busy  trying  to  show  that 
their  business  should  be  treated  like  any  other,  and  that  in  fact  it  is  being 
discriminated  against  through  the  restrictions  of  public  regulation.  Their  pro- 
gram of  relief  has  been  focussed  in  an  effort  to  throw  off  the  restrictions  here- 
tofore imposed  upon  the  electric  railways  because  of  their  character  as  public 
utilities  and  because  of  the  special  privileges  they  enjoy  in  the  use  of  the  public 
streets. 

It  cannot  be  denied  that  we  have  reached  a  crisis  in  the  relations  between 
urban  comnumities  and  the  street  railway  companies,  and  that  policies  adopted 
now  to  relieve  the  financial  emergency  in  which  the  companies  find  themselves 
will  have  a  fundanjental  and  far-reaching  effect  upon  the  future  of  those  relations. 
The  full  cost  of  service,  no  matter  how  great  it  is,  must  be  paid,  or  the  service 
will  have  to  be  discontinued.  To  the  extent  that  the  increased  expenses  due  to 
the  present  era  of  high  prices  cannot  be  offset  by  operating  economies  or  by  the 
elimination  of  non-essential  service,  it  is  quite  natural  to  turn  to  the  car-riders 
for  increased  revenues.  From  the  point  of  view  of  ultimate  public  policy  the 
question  to  be  answered  in  this  connection  is:  "H'ill  an  increase  in  fares  result 
in  such  a  tliminutioii  of  the  nsefiiliiess  of  th^  electric  raihcays  as  to  deprive  them 
of  their  essential  character  as  a  public  utility  dcsiijneil  to  render  cheap  and 
general  transportation  sen-ice  for  urban  com'enience?"  This  is  the  question 
from  the  public  point  of  view.  I'roni  the  point  of  view  of  the  transportation 
companies  themselves  it  may  also  be  urged  that,  although  their  chief  and  almost 
their  only  interest  at  the  present  moment  is  in  securing  additional  net  income, 
nevertheless  their  ultimate  financial  welfare  is  dependent  upon  the  continuation 
of  the  old  [xilicy  of  increasing  tr.iftic,  as  there  is  gre.it  danger  that  the  electric 


Effects  of  Fare  Increases  167 

railway  business  will  not  be  able  to  sustain  itself  in  the  future  at  any  rate  of 
fare  unless  it  continues  to  be  the  chief  agency  of  local  transportation. 

It  is  obvious  that  public  bodies  in  exercising  their  jurisdiction  over  street 
railway  companies  in  the  present  emergency  of  the  local  transportation  industry 
ought  not  to  take  a  short-sighted  view,  and  ought  not  to  permit  the  adoption 
of  policies  with  respect  to  fares  and  service  that  will  result  immediately  in  serious 
injury  to  the  public,  and  that  may  result  ultimately  in  fundamental  and  final 
disaster  to  the  electric  railways  as  a  business.  With  these  points  in  view  it  seemed 
to  me  that  an  essential  part  of  the  Commission's  inquiry  would  be  to  find  out  as 
nearly  as  possible  the  definite  effects  of  fare  increases  upon  both  traffic  and 
revenues.  This  is  not  an  easy  task.  During  the  war  period  there  have  been 
great  shiftings  and  adjustments  of  population  and  industry,  with  the  result  that 
street  railway  conditions  have  been  unsettled.  The  removal  of  great  numbers 
of  young  men  from  every  urban  community  of  the  country  for  military  training 
and  service  could  not  but  have  a  marked  eft'ect  upon  street  railway  traffic  in  the 
communities  from  which  they  were  drawn.  On  the  other  hand,  traffic  was  stimu- 
lated in  certain  communities  by  unwonted  industrial  activity  in  connection  with 
ship-building  and  the  manufacture  of  munitions;  also,  by  the  proximity  of  army 
training  camps.  During  the  last  three  or  four  months  of  1918  traffic  conditions 
were  seriously  affected  throughout  the  country,  though  in  varying  degrees,  by  the 
unprecedented  epidemic  of  Spanish  influenza.  Also,  fare  increases  were  put 
into  effect  at  different  times  in  different  communities  and  without  much  relation 
to  statistical  convenience.  In  many  communities  fares  have  been  increased  several 
times  at  irregular  intervals.  In  some  cases  the  system  of  charging  for  street 
railway  service  and  the  methods  of  collecting  fares  have  been  radically  changed 
so  that  the  significance  of  the  traffic  figures  for  comparative  purposes  is  destroyed, 
or  the  count  of  revenue  passengers  has  been  lost  entirely. 

The  testimony  at  the  hearings  before  the  Commission  with  respect  to  the 
effect  of  fare  increases  on  traffic  and  revenues  was  conflicting.  Many  of  the 
witnesses  were  clearly  of  the  opinion  that  fare  increases  should  be  granted,  be- 
lieving that  such  increases  would  result  in  a  substantial  and  permanent  increase 
of  revenues.  While  admitting  that  fare  increases  often  cause  an  immediate  fall- 
ing off  of  traffic,  they  were  of  the  opinion  that  this  traffic  would  gradually  come 
back  after  the  people  become  reconciled  to  the  higher  rates  of  fare.  Others 
expressed  the  opinion  that  fares  on  certain  systems  had  already  been  increased 
to  or  beyond  the  point  where  they  produce  the  maximum  revenue,  and  that  any 
further  increases  might  result  in  actual  loss  to  the  companies.  Others  thought 
that  fare  increases  generally  are  of  little  or  no  benefit  to  the  companies,  and  it 
was  even  suggested  that  in  the  long  run  such  increases  may  only  make  more 
certain  the  financial  ruin  that  has  been  threatening  the  street  railway  industry 
during  the  present  crisis.  Still  others,  viewing  the  problem  more  from  the 
point  of  view  of  the  general  public  welfare,  pointed  out  the  deleterious  effects 
upon  the  community  of  higher  fares  and  diminished  use  of  local  transportation 
facilities.  It  was  the  opinion  of  a  number  that  the  old  rates  of  fare  could  be 
increased  moderately,  say  from  five  cents  to  six  cents,  or  possibly  to  seven  cents, 
without  having  any  serious  permanent  effect  upon  the  riding  habit,  and,  therefore, 


168  Electric  Railway  Pkoblem 

without  materially  curtailing  the  usefulness  of  the  street  railways  to  the  com- 
munity. 

It  will  be  useful  to  review  the  testimony  of  a  number  of  important  witnesses 
on  these  points.  At  the  very  first  public  hearing  given  by  the  Commission, 
Ex-President  Taft,  speaking  from  his  acquaintance  with  the  electric  railway  in- 
dustry recently  acquired  through  his  service  as  one  of  the  joint-chairmen  of  the 
National  War  Labor  Board,  described  the  unhappy  condition  of  the  electric 
railways  and  their  need  for  additional  revenue,  and  advocated  an  increase  in 
street  railway  fares  as  a  necessary  remedy.  But  he  clearly  recognized  the  limi- 
tations of  this  remedy,  as  shown  by  the  following  statement  taken  from  page  5 
of  the  Proceedings: 

"If  you  keep  the  fares  at  5  cents,  where  they  always  have  been — and  even  in  some 
cities  they  have  been  3  cents  and  4  cents;  in  Detroit,  notably,  and  in  Oeveland — if  you  keep 
it  there,  the  red  lialance  is  as  inevitable  as  the  rising  of  the  sun  tomorrow  morning.  It  is 
inescapable.  Then  you  are  confronted  with  the  limitation  that  if  you  raise  the  rate  of  fare 
you  are  likely  to  reduce  the  revenues  by  a  falling  off  in  your  patronage.  I  think  perhaps  the 
advancing  to  6  cents  docs  not  do  that,  and  in  some  cases  the  advance  to  7  cents ;  but  anything 
beyond  that  is  certain  to  reduce  revenues  by  a  loss  of  business." 

General  Tripp,  on  behalf  of  the  Committee  of  One  Hundred,  of  the  American 
Electric  Railway  Association,  especially  stressed  the  importance  of  getting  away 
from  an  inflexible  fare  limitation ;  yet  he  did  not  think  that  a  mere  raising  of 
fares  would  solve  the  problem,  as  will  be  seen  from  the  following  testimony  found 
at  page  153  of  the  Proceedings: 

"Mr.  Warren:    And  any  remedy  ought  to  involve  the  elimination  of  the  fixed  maximum? 

"Gen.  Tripp:  No  other  solutioix,  in  my  opinion,  would  he  adequate,  even  if  cities  should 
remit  all  taxes,  and  relieve  the  street  railway  companies  of  the  burdens  of  paving,  and  all 
charges  of  that  character.  It  would  not  affect  the  real  situation.  In  the  first  place,  the 
amount  involved  is  not  sufficient  to  make  up  the  difference,  and.  in  the  next  place,  it  is 
attacking  the  symptoms.  Even  permission  to  increase  the  fare  on  the  basis  of  the  present 
relationship  is  entirely  inadequate.  That  does  not  solve  the  problem.  The  problem  is  one 
which  rc(|uires  a  sound  basis  upon  which  to  rest,  but  which  permits  of  difTcrent  solutions  in 
different  localities.  Some  communities  may  require  a  street  railway  service  that  the  population 
in  itself  would  not  warrant,  and  perhaps  it  would  be  impossible  to  as.scss  a  fare  high  enough 
to  produce  sufficient  net.  In  those  particular  localities,  if  they  desire  such  service,  the  remedy 
is  through  taxation  to  support  it,  or  some  other  methods.  Zone  .systems  may  be  desirable  in 
some  cases ;  and  so,  I  think,  the  basis  must  be  fixed  upon  which  these  various  solutions  may 
rest. 

"Mr.  Warren :  So  it  is  not  only  a  matter  of  possibly  higher  fares,  but  a  matter  of 
relations  between  the  company  and  the  car-riding  public  that  it  serves? 

"Gen.  Tripp :     I  think  a  new  scheme  of  relationship  must  first  be  devised." 

Mr.  Henry  G.  Bradlee,  President  of  the  Stone  &  Webster  Corporation,  ex- 
pressed a  more  sanguine  view  of  the  results  of  fare  increases,  as  will  appear  from 
his  statement  at  pages  216  and  217  of  the  Proceedings,  from  which  I  quote  as 
follows : 

"I  believe  that  the  increase  in  fare  in  the  urban  systems,  even  in  the  small  cities,  will 
bring  al>out  a  solution  of  the  problem,  and  I  believe  that  even  though  the  first  effect  of  that 
increase  in  fare  is  to  cut  do\ni  earnings  so  that  there  is  no  immediate  increase  in  gross,  I 
believe  the  ultimate  effect  will  l>e  to  work  out  the  situation. 

"As  a  inattcr  of  fact,  in  such  of  the  small  cities  as  I  have  had  experience,  and  as  I  have 
seen  of  other  properties,  the  increase  in  receipts  when  the  fare  is  changed  from  .">  to  6  cents 
is  about  one-half  of  the  ihcorctical  increase.  In  other  words,  from  .S  to  6  cents  is  20%  increase, 
and  you  actually  get  about  If^'r  increase.  It  d(K-s  not  apply  to  all  cases,  but  in  general  it  nins 
about  that  way.  Then  gradually  the  falling  off  in  riding  returns:  people  get  a  little  tired  of 
walking  or  else  the  growth  of  the  city  brings  new  riders  into  the  community,  and  after  a 
time  the  riding  is  right  where  it  was  before  with  the  full  increase  of  20%." 


Effects  of  Fare  Increases  169 

In  his  letter  addressed  to  Chairman  Elmquist,  under  date  of  October  1,  1919, 
Mr.  Bradlee  commented  upon  the  statistics  submitted  by  him  to  show  the  growth 
of  traffic  and  revenues  on  the  street  railway  lines  operated  by  Stone  and  Webster, 
and  gave  utterance  to  the  following  conclusions : 

"Take  this  group  of  properties  of  ours ;  they  are  on  the  average  doing  more  business 
per  mile  of  track,  more  business  per  car  mile  and  more  business  per  capita  than  they  were 
10  years  ago.  The  public  needs  the  service,  demands  it  in  greater  volume  than  ever  before; 
is  calling  on  us  constantly  for  extensions  of  track  and  increased  operation  of  cars  and  with 
all  these  conditions  which  in  ordinary  times  would  make  for  abnormal  prosperity  the  com- 
panies are  without  credit  and  are  unable  to  borrow  money  or  sell  securities  to  reasonably 
meet  the  public  demand.  The  one  sole  trouble  is  increased  costs  of  labor  and  material  and 
inability  to  promptly  readjust  the  rate  of  fare.  With  an  increased  rate  of  fare  commensurate 
with  the  increased  cost  of  labor  and  materials,  the  entire  situation  would  in  my  judgment  be 
cured.  I  recognize  fully  the  fact  that  riding  will  decrease  temporarily  with  an  increased  rate 
of  fare,  but  I  have  been  studying  the  effect  of  fare  increases  for  several  years  and  during 
the  past  year  have  followed  the  results  of  such  increases  very  closely.  The  more  information 
I  obtain  the  more  strongly  am  I  satisfied  that  the  decrease  in  riding  is  a  purely  temporary 
effect  which  will  last  only  for  a  limited  period  in  most  cases.  There  are  a  few  street  railways, 
usually  suburban  or  interurban  lines,  which  have  been  built  in  territory  having  insufficient 
population  to  support  the  service.  Such  roads  should  have  never  been  built  and  the  diffi- 
culties cannot  be  cured  through  an  increase  in  fare  but  these  represent  only  a  very  limited 
number  of  cases  out  of  the  total.  In  most  cases  there  would  appear  to  be  a  constantly  in- 
creasing demand  for  street  railway  ser%'ice  and  the  only  thing  needed  to  enable  the  roads  to 
meet  this  demand  is  an  increased  fare  commensurate  with  increased  cost  of  labor  and 
materials." 

Mr.  Francis  H.  Sisson,  Vice-President  of  the  Guaranty  Trust  Company 
of  New  York,  expressed  his  faith  in  fare  increases  as  revenue  producers  in  the 
following  testimony  at  pages  350  and  351  of  the  Proceedings: 

"Mr.  Warren :  You  said  that  undoubtedly  in  some  cases  an  increase  of  rate  involved  a 
loss  of  traffic.  Did  you  mean  by  that  to  imply  that  in  some  cases  an  increase  in  rate  involved 
such  a  loss  of  traffic  as  to  yield  no  increase  in  revenue? 

"Mr.  Sisson:  There  have  been  such  instances,  but  I  do  not  believe  that  would  be  true 
generally. 

"Mr.  Warren:     They  are  very  exceptional,  are  they  not? 

"Mr.  Sisson :     They  are  very  exceptional,  yes,  sir. 

"Mr.  Warren:  In  other  words,  has  not  this  been  the  usual  situation,  that  when  the 
increased  rate  first  went  into  effect  there  would  be  some  loss  of  traffic,  meaning  by  that 
counting   the  number  of  pasengers? 

"Mr.  Sisson :     Yes. 

"Mr.  Warren:  But  there  was  almost  in  every  case  an  immediate  and  substantial  increase 
in  revenue? 

"Mr.  Sisson :    Yes." 

Mr.  C.  L.  S.  Tingley,  Vice-President  of  the  American  Railways  Company, 
after  enumerating  the  company's  eleven  traction  properties  located  in  Pennsyl- 
vania, New  Jersey,  Delaware,  Virginia,  Ohio  and  Illinois,  said  at  page  365  of 
the  Proceedings : 

"We  have  increased  rates  on  practically  all  of  those  companies.  The  increases  and  the 
effect  have  been  materiallv  controlled  by  the  industrial  conditions.  In  communities  which 
had  a  large  war  business,  and  where  there  had  been  a  great  influx  of  population,  the  increases 
did  not  have  to  be  so  much,  and  the  effect  was  greater  than  it  was  in  other  communities." 

Mr.  Henry  L.  Doherty,  speaking  from  his  experience  with  the  Toledo  Rail- 
way and  Light  Company,  the  Manhattan  and  Queens  Traction  Corporation,  and 
eight  or  ten  smaller  street  railway  properties,  expressed  confidence  that  fare  in- 
creases will  generally  produce  increased  revenue.  The  following  is  taken  from 
his  testimony  at  pages  403  and  404  of  the  Proceedings: 

"Mr.  Doherty:  A  raise  of  fare  eventually  results  always  in  a  raise  in  revenue,  but  if  I 
were  trying  to  state  the  effect  of  it,  I  would  prefer  to  make  a   fundamental  analysis  of  it 


170 


Electric  Railway  Problem 


432 
anfl 
433 


rather  than  to  take  the  specific  figures  from  some  certain  town  and  assume  that  that  would 
apply  elsewhere.  Now  you  can  divide  your  riding  into  two  classes,  necessity  riding  and 
non-necessity  riding.  If  you  are  in  a  city  where  practically  all  your  riding  is  necessity 
riding,  where  the  rider  has  to  ride,  of  course  a  raise  in  fares  will  not  bring  any  greatly 
diminished  amount  of  riding.  But  if  you  are  in  a  city  where  the  distances  are  short  it  will 
bring  a  diminished  amount  of  riding,  at  least  for  the  time  being,  and  I  think  that  depends 
largely  on  the  temper  of  the  people  towards  the  road,  whether  they  believe  the  rate  is  justified 
or  not.  What  I  e.xpect  to  see  is  this,  that  a  raise  in  rates  will  always  cause  momentarily  a 
falling  oflf  in  the  number  of  passengers,  but  eventually  I  believe,  except  in  the  smaller  cities, 
the  same  number  of  people  will  ride. 

"Mr.  Warren  :  .And  even  immediately  on  the  change  there  is  some  increase  in  revenue, 
is  there  not,  unless  it  is  an  exceptional  case? 

"Mr.  Doherty :  Unless  it  is  an  exceptional  case  there  is  immediately  an  increase  in 
revenue. 

"Mr.  Warren:  So  that  it  is  a  real  means  of  relief  to  the  companies  needing  additional 
revenue  ? 

"Mr.  Doherty :     Yes,  sir." 

Mr.  Lucius  S.  Storrs,  President  of  the  Connecticut  Company,  was  more 
doubtful  of  the  saving  power  of  fare  increases  for  the  street  railway  companies, 
as  shown  by  the  following  extracts  from  his  testimony  (pages  432  and  433,  448 
and  449,  451  and  461  of  the  Proceedings) : 

"Mr.  Storrs  :  In  Connecticut  we  are  on  a  six-cent  basis,  having  been  taking  six 
cents  since  October.  1917.  The  first  twelve  months  period  after  that  was  the  time 
during  which  we  were  in  war  and  all  industries  throughout  Connecticut  were  most 
intensely  engaged  in  the  production  of  the  essentials  of  war.  With  the  taking  out 
of  the  population,  the  younger  men  for  serious  war  duties  on  this  side  and  also 
abroad  and  also  the  young  women  for  loyal  work,  who  did  not  need  the  income,  to 
relieve  men  for  other  more  serious  places  in  the  industries  and  offices,  the  result  was 
a  very  great  dropping  oflF  in  the  use  of  the  electric  railway  car.  The  additional  carr\-- 
ing  of  operatives  to  and  from  the  plants  in  which  they  were  engaged  did  not  nearly 
compensate  for  the  loss  of  riding  during  the  normal  hours  of  the  day  and  during 
the  pleasure  riding  hours  of  the  day,  the  evening.  The  result  was  that  for  the 
first  year  after  the  installation  of  the  si.x-cent  fare  our  revenue  was  practically 
identical,  that  is  there  was  an  increase  of  .9  of  one  per  cent  in  the  gross  revenue. 
That  could  not  of  course  t)e  entirely  attributed  to  the  incrca.se  in  the  rate  of  fare 
and  it  would  Ix;  impossible  to  determine  what  portion  of  that  loss  in  passenger 
riding  should  tx;  attributed  to  the  increase  of  rate  of  fare." 

"Mr.  Warren:  So.  from  your  experience  have  you  any  doubt  about  the  efficacy 
of  ratts  to  priHluce  an  incrca.se  in  revenue? 

"Mr.  Storrs:  1  have  a  very  grave  doubt  as  to  any  ability  on  the  part  of  the 
utility  to  estimate  within  any  kind  of  reason  what  the  result  of  an  increase  in  rate 
might  be  upon  the  gross  revenue.  .\nd  of  course,  there  is  a  point  with  the  increase 
above  six  cents  at  which  you  will  have  a  declining  gross  revenue.  An  increase  to 
seven,  eight  or  ten  cents  would  result  in  a  declining  gross. 

"Mr.  Warren:     On  .some  lines. 

"Mr.  Storrs:     Oi\  some  lii\es,  at  least.     There  is  a  very  great  uncertainty." 

"Commissioner  Sweet  :  Now.  the  question  that  I  would  like  to  have  you  answer, 
if  you  foci  disposed  to  do  so,  and  can,  is  to  tell  the  Cominission  what  temporarj' 
measures,  in  your  judgment,  ought  to  be  adopted,  pending  a  general  readjustment 
in  regard  to  the  whole  subject. 

"Mr.  Storrs:  Without  any  question,  relief  from  the  imposts  that  are  made  upon 
the  public  utility,  the  rceulation  of  competition  to  the  point  that  we  know  what  that 
compi-tilion  may  amount  to,  the  granting  of  the  right  to  discontinue,  either  tempo- 
rarily or  for  a  long  time,  the  essentially  unprofitable  lines,  the  giving  to  the  utilities 
by  the  public  of  a  subsidy  to  enable  them  to  continue  operation  of  those  unprofitable 
lines,  thereby  hridgiiiR  over  the  i>criod  of  reconstruction,  and  a  recognition,  always, 
of  course,  going  with  that,  by  the  public  of  the  essential  need  of  the  change,  and  a 
willingness  to  pay  the  increased  rates  of  fare — an  increased  rate  of  return,  relief 
from  imposts,  regulation  of  competition,  and  the  privilege  of  discontinuing  service 
that  is  so  unprofitable  as  to  be  really  a  non-essential   service. 

"Commissioner  Sweet:  If  1  understand  you  correctly,  the  mere  increasing  of 
rates  at  the  present  time  would  not  lie  even  a  temporary  remedy. 

"Mr.  Storrs:     In  my  npinion.  no. 

"Commissioner  Sweet:  In  that  respect,  you  differ  from  some  other  witnesses 
who  have  appeared  In-fore  this  Commission. 


Pnge 
433 


Pnnp."! 
44!) 
nnil 
449 


Effects  of  Fare  Increases  171 

"Mr.  Storrs :  VV'ell,  the  effect  of  an  increase  in  rates  in  various  communities 
is  different.  It  differs  all  over  the  country.  It  so  happens  that  in  parts  of  Con- 
necticut, doubtless  by  reason  of  the  fact  that  the  distances  are  so  relatively  short, 
there  is  a  greater  falling  off  in  traffic  than  there  would  be  at  other  points  where 
the  ride  is,  of  necessity,  longer  and  the  need  for  the  service  more  acute;  but  that 
has  been  our  experience  in  parts  at  least  of  the  New  England  territory." 
Pa?e  "Commissioner  Sweet :     Now,  suppose  further  increases  were  made,  would  that 

451       materially  increase  the  gross  income  of  the  company? 

"Mr.  Storrs:  I  had  felt  in  our  company  that  it  would  not  have  a  material  effect 
upon  our  gross  revenue. 

"Commissioner  Sweet :  That  is  because  your  distances  are  not  as  great,  and 
you  think  the  people  would  walk  or  find  some  other  means  of  transportation? 

"Mr.  Storrs :  Yes.  You  see.  the  perfected  highway  has  been  developed  to  a 
very  great  degree  throughout  that  portion  of  New  England. 

"Commissioner  Sweet :  It  is  your  thought  that  any  further  increase  of  rates 
would  stimulate  and  bring  about  a  greater  use  of  the  jitneys? 

"Mr.   Storrs  :     Yes  ;  decidedly." 

"Commissioner   Gadsden :      Does   not  your  own  experience  in   Connecticut  tend 
^'fif^     to  prove  the  fact  that  if  you  will  stick  out  long  enough  you  are  going  to  get  the 
money  ? 

"Mr.  Storrs :     That  is  true. 

"Commissioner  Gadsden :  You  put  in  a  6-cent  fare,  and  for  a  year  you  could 
get  no  result,  but  at  the  end  of  eighteen  months  you  got  14%.  Now\  don't  you  think 
that  that  is  true,  as  a  general  proposition,  if  we  stay  by  the  fare? 

"Mr.  Storrs :     That  may  be  true. 

"Commissioner  Gadsden :     That  we  will  sell  the  transportation  at  a  higher  price. 

"Mr.  Storrs :     That  is  probably  true. 

"Commissioner  Gadsden:     It  has  been  true  in  connection  with   your  property? 

"Mr.  Storrs :     It  has  been  true  in  our  property,  certainly." 

Mr.  Storrs'  testimony  before  the  Commission  was  given  in  July,  1919.  In 
a  letter  dated  December  6.  1919,  transmitting  to  the  Commission  detailed  informa- 
tion as  to  the  traffic  and  revenues  of  the  Connecticut  Company  during  the  period 
of  fare  increases,  he  said: 

"The  reason  for  the  lack  of  effective  result  upon  gross  revenues  of  an  increase  in  rate 
of  fare  is  due  not  at  all  to  the  fact  of  the  increase  in  the  rate,  but  to  the  fact  that  it  was 
established  during  the  period  in  which  every  industrj-  in  Connecticut  was  working  to  the 
very  maximum  of  utility  of  the  individual  employe  in  turning  out  the  essentials  of  war. 

"Ev^ry  man  was  engaged  in  some  useful  occupation  and  most  of  them  working  in  overtime 
employment,  the  result  being  that  they  were  so  tired  that  there  was  none  of  the  usual  pleasure 
riding  from  which  this  company  obtains  great  revenues  during  the  summer  months  serving, 
as  we  do,  the  entire  shore  communities  of  Connecticut. 

"Every  woman  was  engaged  in  occupation,  those  who  had  a  sufficient  income  to  relieve 
them  from  the  necessity  feeling  it  their  duty  to  take  employment  which  could  release  men 
to  more  essential  needs.  Of  course,  the  fact  that  the  great  number  of  the  young  men  went 
into  war  service,  mostly  on  the  battle  front,  took  away  the  incentive  for  pleasure  ridmg  and 
due  to  this  one  fact  alone  the  revenue  did  not  show  any  increase." 

Mr.  J.  K.  Newman,  of  New  Orleans,  was  quite  certain  that  time   would 

justify  fare  increases.     This  is  shown  by  his  testimony  at  pages  560  and  561 

of  the  Proceedings,  which  is  as  follows: 

"Now  about  the  increased  fare,  when  we  get  it.  The  mathematical  percentage  of  a 
6-cent  fare  is  20  per  cent.  It  is  practically  impossible  to  say  from  the  past  experience  what 
that  is  vielding  because  when  vou  get  vour  receipts,  showing  as  Mr.  Bertron  has  said  in  some 
cases  30  per  cent  increase  and  in  other  cases  only  5  per  cent  increase,  that  is  mixed  up  with 
the  prosperity  or  the  lack  of  prosperity  in  a  given  community.  In  New  Orleans,  where 
we  are  getting  about  30  per  cent  increase  with  a  20  per  cent  increase  in  fare,  it  is  very  largely 
due  to  an  enormous  prosperity  brought  on  bv  war  conditions  and  it  is  very  hard  to  say  which 
is  which.  Rut  if  you  can  just  get  the  public  mind  convinced  that  they  are  getting  a  square 
deal  now,  that  there  will  be  no  more  pyramiding  of  securities  and  no  more  compounding  and 
excessive  flotations  and  excessive  profits  to  the  bankers,  and  convince  them  that  they  arc 
paying  only  for  what  they  get  plus  return  on  invested  capital,  I  think  there  wil  be  no  phjec- 
tion  at  all  to  the  increased  fare  nor  will  that  mean  eventually  a  material  reduction  in  the 
riding.  So  I  do  look  for  considerable  relief  from  the  increased  fare  and  I  believe  it  will 
measure  up  very  closely  as  time  goes  on  to  the  mathematical  proportion. 


172  Electric  Railway  Problem 

Mr.  James  D.  Mortimer,  President  of  the  North  American  Company,  struck 
a  somewhat  different  note  and  pointed  out  the  dangers  to  the  electric  railway 
business  inherent  in  a  shrinkage  of  traffic.  His  point  of  view  may  be  seen  from 
the  following  quotation  from  his  testimony  at  page  809  of  the  Proceedings: 

"Any  business  that  is  of  a  shrinking  nature,  where  the  volume  of  its  market  is  decreasing, 
is  necessarily  not  attractive  to  private  investors,  and  the  changes  in  fare  agreements  that 
have  been  generally  made  throughout  the  United  States  have,  of  course,  produced  a  very 
great  reaction  upon  the  riding  habit. 

"There  has  been,  in  every  case,  after  the  lapse  of  a  short  period  of  time,  an  increase  in 
revenues  as  the  result  of  an  increase  in  flat  rates  of  fare.  That  is  true.  The  increase  has  not 
in  all  cases  been  equal  to  the  estimated  increase  resulting  from  the  application  of  the  new 
fare  to  the  previous  number  of  passengers. 

".Ml  important  industrial  centers  are  growing  at  a  rapid  rate.  The  riding  habit  ought  to 
increase  likewise  at  a  rapid  rate,  but  the  increase  in  riding  habit  has  been  somewhat  influenced 
by  the  increases  in  the  flat  rate  of  fare. 

"Now,  what  the  railway  business  needs  is  more  business  rather  than  less.  If  you  liken 
the  railway  business  to  a  manufacturing  institution,  with  a  relatively  large  overhead,  the 
analysis  of  the  manufacturer  would  be  along  the  following  lines:  I  have  a  large  overhead. 
That  overhead,  distributed  over  my  present  volume  of  output,  is  too  high  per  unit  to  permit 
me  to  sell  in  competition  with  other  commodities  of  like  use. 

"The  electric  railway  operator  is  faced  with  the  proposal  of  increasing  his  selling  price 
so  high  that  competition  from  walking  becomes  most  severe.  Tlie  principal  competitor  of 
the  electric  railway  business  is  walking.  The  number  of  cars  to  be  operated  by  an  electric 
railway  in  any  given  time  should,  in  point  of  fact,  be  determined  more  nearly  by  the  move- 
ment of  people  that  are  on  the  street,  rather  than  by  the  number  of  people  that  are  on  the 
cars.'' 

Further  on,  however,  at  page  816,  in  answer  to  questions  by  Commissioner 
Sweet,  Mr.  Mortimer  expressed  the  opinion  that  increases  in  rates  are  necessary 
and  that  they  will  produce  increased  revenues : 

"Commissioner  Sweet :  I  do  not  know  whether  you  have  expressed  the  opinion  that  your 
maximum  revenue  would  be  reached  by  an  increase  of  fare;  in  other  words,  whether  the 
patronage  would  fall  off  as  your  fares  advanced,  so  that  you  could  not  get  much  more  revenue 
than  you  arc  getting  now. 

"Mr.  Mortimer:  I  feel  almost  sure  that  almost  any  change  in  rate  of  fare  upward 
would  increasic  revenues.     I  am  confident  of  that. 

"Commissioner  Sweet:     The  falling  off  in  riders  would  not  equalize  the  gain  in  fare? 

"Mr.  Mortimer:     No;  I  am  ven,'  sure  of  that. 

"Commissioner  Sweet :  You  think  the  increase  in  fares  would  be,  at  present,  at  least, 
very  helpful  to  the  companies  throughout  the  country? 

"Mr.  Mortimer:     There  can  be  no  doubt  about  it." 

Dr.  Tiiomas  Conway,  who  has  made  a  considerable  study  of  the  effect  of 
fare  increases  on  traffic  and  revenues,  described  the  results  obtained  on  the  Public 
Service  Railway  system,  and  on  the  lines  of  the  Connecticut  Company,  and  ex- 
pressed grave  doubts  as  to  the  ultimate  success  of  the  policy  of  fare  increases 
in  meeting  the  additional  labor  costs  which,  in  his  opinion,  are  sure  to  come  in 
the  immediate  future  as  a  result  of  the  top-notch  awards  made  during  the  summer 
of  1919  on  some  of  the  lines.     .\t  page  952  of  the  Proceedings,  he  savs: 

"These  10-cent  fares  are_to  my  mind  the  serious  question.  We  have  heretofore  talked 
in  terms  of  6-cent  fares  and  7-cent  fares.  an<l  latterly  8-ccnt  fares,  but  these  new  wages  mean 
10-cent    fares   if  you  arc  going  to  stick   to  the  straight  cash    fare. 

"Now  a  6-C(nt  fare  was  a  comparalivelv  easy  matter,  tint  when  you  get  to  10-cent  fares, 
you  are  getting  into  deep  water,  and  if  the  large  cities  must  charge  10  cents,  the  rate  of  fare 
in  the  small  towns  is  Ixiund  to  lie  one  which  is  practically  prohibitive.  In  fact,  the  whole 
matter,  1  am  afraid,  would  iKTomr  impracticable  on  the  basis  of  getting  the  full  cost  of 
operation,  under  present  conditions,  out  of  the  car  rider." 


Effects  of  Fare  Increases  173 

Further  on,  Doctor  Conway  referred  to  the  effects  of  jitney  competition  in 
connection  with  fare  increases  in  New  Jersey  and  Connecticut,  and  at  page  959 
of  the  Proceedings  described  the  situation  in  Bridgeport,  with  respect  to  which  I 
have  already  quoted  from  Mr.  Storrs.     The  witness  says: 

"In  the  City  of  Bridgeport,  you  have  the  most  hopeless  condition  I  have  ever  seen  with 
reference  to  the  jitneys.  The  jitneys,  in  Bridgeport,  in  April  of  this  year,  when  we  made  a 
ver>-  careful  check  of  the  matter,  were  handling  just  a  little  under  two-thirds  of  the  total 
people  riding,  either  on  trolleys  or  jitneys,  in  the  city.  They  have  a  6-ccnt  fare  there.  The 
jitneys  are  charging  5  cents.  With  the  jitneys,  you  have  a  large  amount  of  short -distance 
travel   in  the  city. 

"The  figures  on  Waterburj-,  Hartford  and  New  Haven,  where  the  average  journey  is 
greater,  show  a  much  more  healthy  condition ;  but  my  point  is  that,  with  a  one-cent  differential 
throwing  more  than  half  of  the  total  business  of  the  city  to  the  jitneys,  it  is  idle  to  talk 
about  7,  8.  9,  or  10-cent  fares.  It  is  just  an  exercise  in  arithmetic.  You  might  as  well  close 
up  shop  and  stop  operating,  and  let  the  jitneys  haul  all  the  business." 

Still  further  on,  at  pages  960  and  961  of  the  Proceedings,  he  continues : 

"The  point  I  want  to  make  is  this :  You  have  various  factors  that  have  to  be  considered, 
which  I  want  to  lay  before  you  as  controlling  elements,  I  think,  in  helping  to  work  out  a 
solution  of   this   question. 

"In  the  first  place,  there  is  a  large  amount  of  the  street  railway  business  which  is  what 
I  call  convenience  riding.  It  is  not  necessity  riding.  I  refer  to  the  man  whose  journey  is 
less  than  a  mile.  He  can  w-alk,  and  he  will  walk,  when  you  get  to  a  certain  point  with  your 
fare. 

"In  some  cities,  taking  the  country  as  a  whole,  I  think  you  now  get  better  results  from 
the  6  cents  than  you  did  two  years  ago.  People  are  used  to  it ;  they  expect  it,  and  they  think 
it  is  fair.  There  is  not  any  of  that  spite  walking,  as  I  sometimes  call  it — walking  to  spite 
the  company.  Six  cents  does  not  mean  as  much.  Men  will  pay  6,  7,  8,  9,  or  10  cents  for 
cigars  and  everything  else,  and  they  are  used  to  it. 

"The  City  of  Schenectady,  for  example,  showed  a  theoretical  increase  of  20%  when 
they  put  the  6-cent  fare  in,  while  some  cities  very  similar  to  that,  in  New  York  State,  did 
not  show  anything  like  that  when  they  put  the  6-cent  fare  in.  But  I  am  not  talking,  in  most 
cases,  for  the  immediate  future,  about  6-cent  fares.  They  are  almost  as  out  of  date  as  S-cent 
fares  are.  The  thought  that  I  want  to  leave  in  your  minds  is  what  is  going  to  be  the  effect 
of  the  10-cent  fares  and  the  9-cent  fares.  That  is  where  the  fare  equation  is  being  carried  by 
this  labor  development  that  is  here  and  ahead  of  us.  What  is  that  going  to  do  with  the 
companies  in  the  little  towns,  where  everj-body  lives  within  15  minutes  of  his  work,  and 
walking  is  easy,  and  what  is  going  to  be  the  effect  of  it  on  the  amount  of  riding  in  the  big 
cities  ? 

"I  have  some  interesing  figures,  which  I  got  just  before  I  left  Philadelphia,  from  Boston, 
concerning  the  effect  of  various  raises  there.  Their  lines,  in  the  first  few  days  of  10-cent 
fares,  showed  approximately  60%  increase  over  the  5-cent  revenue.  Eight-cent  fares,  which 
were  in  effect  in  December.  1918.  to  June,  1919,  showed  from  36  to  46%  increase  over  the 
S-cent  revenues.  The  7-cent  averages  ran  from — well,  I  will  leave  out  October,  when  they 
had  the  influenza  epidemic — from   12  to  21%   increase  over  the  S-cent   fares. 

"Now,  Boston,  from  my  knowledge  of  the  property,  and  from  general  knowledge  of 
other  cities,  ou.ght  to  show  much  better  results  with  these  high  fares  than  any  city  I  know 
of,  because  of  the  fact  that  there  is  very  little  riding  in  the  shopping  district  of  Boston,  the 
cars  are  all  run  underground,  a  large  part  of  the  surface  tracks  are  pulled  up  in  the  center 
of  town,  and  yet  there  they  do  not  get  a  theoretical  increase. 

"Mr.  \\"arren  :     There  is  no  jitney  competition  there? 

"Mr.  Conway:  There  is  no  jitney  competition  there.  The  long  distance  riders  are  flock- 
ing to  the  railroad  trains,  to  a  point  where  they  are  embarrassing  the  railroads,  taking  ad- 
vantage of  the  commutation  rates,  and  a  great  deal  of  walking  has  developed. 

"Now.  these  are  facts  which  we  cannot  ignore.  The  increase  in  fares  drives  a  con- 
tinually larger  number  of  people  away,  and  I  think  it  would  be  unfortunate  if  the  impression 
grew  up  in  your  minds  that  it  is  a  matter  of  an  arithmetical  average,  that  by  dividing  the 
operating  expenses  by  the  number  of  people  and  getting  a  result,  and  saying  that  all  you  have 
to  do  is  to  put  the  fare  up  to  that  level,  you  solve  the  problem.  It  is  ven,-  far  from  being 
that,  with  the  high  costs  of  the  immediate  future,  as  I  see  it. 

"Now.  on  the  other  hand,  if  I  am  correct  in  my  belief  that  the  companies  should  be 
allowed  to  quickly  readjust  their  fares  to  take  care  of  these  increasing  expenses,  the  halter 
should  be  taken  off.  and  thev  should  he  told  to  go  ahead  and  tr>'  to  work  this  out.  put  in  any 
change  in  rates,  and  allow  the  commissions  to  revise  and  correct  any  inequalities  later  on. 

"I  do  not  mean  to  infer  that  the  companies  should  not  increase  their  rates  by  increasing 


174  Electric  Railway  Problem 

the  flat  unit  of  fare.  There  are  only  two  ways  to  get  this.  One  is  a  flat  increase  in  the  unit 
of  fare,  and  the  other  is  some  sort  of  a  zone  system. 

"Now,  speaking  generally,  if  you  are  to  face  that  emergency,  you  will  have  to  have  a 
simple  remedy,  and  a  simple  remedy  is  to  increase  your  flat  unit  of  fare,  and  that,  I  think,  is 
what  the  industo'  will  have  to  do. 

"Now.  whether  tliat  will  solve  the  question  is  a  far  more  serious  matter.  Whether  10-cent 
fares,  with  loss  of  riding  that  it  occasions,  is  the  answer,  is,  in  my  opinion,  a  far  less  settled 
question,  but  this  much  I  am  certain  about :  A  zone  system,  applied  under  conditions  of  heavy 
urban  traffic,  such  as  you  have  in  our  large  cities,  is  in  this  country  still  in  an  experimental 
stage." 

The  Cumberland  County  Power  &  Light  Company,  of  Portland,  Maine, 
has  put  into  effect  a  zone  fare  system  with  a  minimum  charge  of  nine  cents,  if 
paid  in  cash  for  any  ride  up  to  three  zones,  and  a  ticket  tare  of  seven  cents.  The 
fare  for  each  additional  zone  is  three  cents  if  paid  in  cash  or  2V^  cents  by 
ticket.  Mr.  A.  H.  Ford,  Vice-President  and  General  Manager  of  the  company, 
testified  that  all  but  about  five  per  cent  of  the  riders  provide  themselves  with 
tickets.  He  described  the  methods  used  by  the  company  in  putting  its  claim 
for  increased  fares  before  the  public,  and  stated  that  the  company  had  secured 
a  good  degree  of  cooperation  in  putting  the  higher  rates  into  effect.  However, 
he  was  not  by  any  means  sure  that  the  company  was  out  of  the  woods  yet,  as 
will  appear  from  the  following  testimony  found  at  page  362  of  the  Proceedings: 

"Commissioner  Sweet :     And  you   feel  that  you  have  solved  the  problem,  or  don't  you  ? 

"Mr.  Ford:  I  would  not  like  to  say  that.  I  hope  we  have.  I  believe  that  we  have 
gotten  a  rate  that  the  people  are  going  to  support,  and  that  gradually  we  shall  work  out 
of  our  difficulties.  It  is  going  to  take  time,  but  I  believe  that  a  rate  can  be  put  to  such  a 
point  that  you  will  spoil  your  whole  proposition  and  raise  it  too  high." 

The  ideas  expressed  by  Mr.  Mortimer  in  the  first  extract  from  his  testimony 
quoted  above  were  closely  seconded  by  Ciiairnian  \\'.  D.  ?>.  .\incy,  of  the  Penn- 
sylvania Public  Service  Commission,  who  laid  special  emphasis  on  the  fact  that 
the  electric  railways  have  something  to  sell,  namely,  car  rides.  His  views  are 
set  forth  at  pages  1397  and  1398  of  the  Proceedings,  in  the  following  statement : 

"In  two  recent  addresses  I  have  discussed  at  some  length  the  influence  of  the  rate  of  fare 
on  the  riding  habit  and  have  sought  to  emphasize  the  fact  that  the  street  railway  companies 
might  profit  by  the  merchant's  experience  and  methods.  Having  car  rides  to  sell,  why  should 
not  the  companies  adopt  adequate  methods  for  selling  the  rides?  •  ♦  •  •  Increased  rates  have 
in  many  instances  been  followed  by  a  flattened  curve  in  the  number  of  car  riders.  It  has 
been  pointed  out,  of  cour.sc,  that  that  flattenini;  of  the  ciir\f  has  at  times  Ix-en  caused  by  un- 
usual conditions,  for  instance,  the  winter  of  1917-18,  the  draft  and  by  the  later  epidemic,  and 
undoubti-dly  these  had  very  material  influence  upon  the  riding  habit  at  particular  times. 

".\nd  it  lias  also  been  noted  that  the  jitney  and  priN-ate  automobile  have  taken  away  a 
considerable  number  of  patrons.  Nevertheless  there  remains  a  verj'  appreciable  number  who 
have  been  influenced  by  the  rate  of  fare,  and  of  course,  no  business  house  would  be  content 
to  lose  such  a  large  percentage  of  its  customers  without  making  a  stupendous  effort  to  retain 
them.  Many  of  tliese  lost  patrons  would  not  be  casual  ones  but  permanent  ones.  Is  it  worthy 
of  suggestion  to  the  railways  that  in  some  localities  monthly  commutation  tickets  at  a  lower 
rate  might  be  established,  as  the  railways  have  done? 

"This  matter  must  l>e  measure<l  not  only  in  the  terms  of  the  revenue  of  the  company 
but  by  the  potential  good  will  that  is  reflected  in  local  political  sentiment  and  otherwise.  I 
look  iipon  the  loss  of  car  riders  as  being  a  serious  menace  to  the  well-being  of  any  company, 
and  it  is  not  an  answer  which  should  satisfy  the  companies  that  increased  fares  give  them  a 
revenue  sufficient  to  meet  tlieir  needs  if  if  has  to  he  secured  from  selected  patrons  at  the  loss 
and  consequent  cost  of  a  considerable   number  of  their   former  patrons." 

Mr.  John  A.  Beeler,  consulting  transportation  engineer,  and  formerly  for 
many  years  in  charge  of  the  Denver  Tramway  system,  expressed  the  opinion 
that  economics  should  be  tried  first,  and  then,  if  an  increase  of  fare  proved  to 
be  necessary,  it  should  take  such  a  form  as  not  to  drive  away  traffic,  especially 


Effects  of  Fare  Increases  175 

the  profitable  short-haul  riders.     His  position  was  set  forth  at  page  167.i  of  the 
Proceedings,  in  the  following  manner : 

"If  after  everything  has  been  done  to  increase  business,  effect  operating  economies,  and 
lower  taxes  to  a  normal  basis  a  deficit  still  remains  after  providing  for  the  necessary  and 
proper  fixed  charges,  a  raise  in  the  rates  of  fare  should  be  granted.  There  are  a  number  of 
ways  to  do  this,  as  follows : 

(1)  A  charge  for  transfers; 

(2)  An  increase  in  the  ffat  rate; 

(o)     Zone  fares,  or  fares  based  on  distance. 

"A  one-cent  charge  for  transfers  will  usually  yield  from  three  to  five  per  cent  additional 
revenue,  .^n  increase  in  the  flat  rate  of  fare  can  scarcely  be  called  a  success  as  yet.  An 
increase  of  one  cent  usually  leads  to  two  or  three,  and  as  the  flat  rate  goes  up  the  number  of 
riders  decreases  correspondingly.  A  number  of  cities  have  gone  to  ten  cents  with  disappoint- 
ing results  financially.  High  fares  encourage  walking,  and  the  short-haul  patron  disappears. 
He  is  the  only  profitable  customer  the  street  railway  has  had  in  years.  Lose  him  and  the 
entire  burden  falls  on  the  shoulders  of  the  long-haul  patron,  who  must  thereafter  produce 
the  entire  revenue.  One  who  lives  beyond  the  walking  limits  suffers  most,  for  he  must  ride 
w-hile  the  others  can  walk. 

"As  patronage  diminishes  the  company  naturally  operates  fewer  cars  and  the  space 
between  them  becomes  greater.  The  service  consequently  deteriorates  and  the  whole  city 
suffers,  but  no  one  suffers  as  much  as  those  w-ho  live  far  out.  As  the  patronage  falls  off 
the  e-xpenses  must  be  shared  by  fewer  and  the  rates  of  fares  keep  going  higher.  Outside 
property  values  will  undoubtedly  feel  the  most  disastrous  effects. 

"Provided  the  fare  has  to  be  raised  it  should  be  done  so  as  to  retain  and  encourage  the 
short-haul  rider,  develop  community  riding  and  increase  the  receipts.  E.xperience  has  shown 
that  a  high  flat  rate  does  not  accomplish  this.  The  successful  merchant  gives  an  apt  illus- 
tration when  with  rising  costs  he  reduces  the  contents  of  the  package  and  keeps  the  price 
the  same  or  even  lowers  it." 

Mr.  Frederick  J.  MacLeod,  at  that  time  Chairman  of  the  Massachusetts 
Public  Service  Commission,  stated  at  page  1439  of  the  Proceedings : 

"Recent  fare  increases  in  Massachusetts  have  been  greater,  both  in  number,  variety  and 
extent,  than  in  any  other  state,  and  the  effects  of  such  increases  upon  traffic  and  revenue  are 
deserving  of  careful  consideration  by  street  railway  officials  and  public  authorities  in  other 
states.  I  am  submitting  herewith  a  tabular  statement  showing  the  various  fare  increases 
allowed  in  the  case  of  eleven  principal  street  railway  companies  since  1914,  with  the  com- 
parative revenue  results  under  successive  fare  schedules." 

He  then  referred  to  the  fluctuations  in  revenue  due  to  weather  conditions, 
the  influenza  epidemic,  increases  or  decreases  in  service  and  car  miles,  the 
development  of  jitney  competition,  the  increased  use  of  private  automobiles,  and 
the  disturbance  of  ordinary  economic  and  social  conditions  during  the  war  period, 
and  continued : 

"Making  every  allowance,  however,  for  the  influence  of  these  conditions,  if  the  revenue 
results  of  the  companies  which  increased  their  fares  are  compared  from  year  to  year  with 
those  of  other  companies  which  made  no  fare  increase  during  the  same  period,  there  is  little 
evidence  to  indicate  that  an  increase  of  rates  offers  a  panacea  for  the  present  ills  of  our  street 
railway  companies.  In  some  years  the  companies  increasing  their  rates  have  shown  a  smaller 
gain  iri  revenue  than  those  which  retained  the  former  five-cent  fares,  and  if  the  revenues  for 
the  year  ended  June  30.  1919,  are  compared  with  the  revenues  for  the  year  ended  June  30, 
1914]  in  order  to  show  the  cumulative  effect  of  all  increases  allowed,  it  appears  that  the  ten 
companies  which  increased  their  rates  during  this  period  show  an  average  increase  in  pas- 
senger revenue  of  31.92  per  cent,  while  the  remaining  company  which  retained  its_  former 
five-cent  fares,  showed  an  increase  of  24.16  per  cent  during  the  same  five-year  period.  If, 
in  order  to  afford  a  fairer  basis  of  comparison,  the  Boston  Elevated  Railway  is  excluded,  it 
appears  that  the  normal  increase  of  traffic  on  the  Union  Street  Railway  under  the  old  S-cent 
fare  yielded  a  greater  increase  in  revenue  than  was  received  on  the  average  by  the  other  nine 
companies  as  the  result  of  their  successive  fare  increases." 

The  Massachusetts  Public  Service  Commission's  conclusions  as  to  the  rela- 
tive merits  of  further  fare  increases  on  the  one  hand,  and  public  subsidies  from 


176  Electric  Railway  Problem 

taxation  on  the  other,  were  clearly  set  forth  by  Mr.  MacLeod  at  pages  1450  and 
1451  of  the  Proceedings,  as  follows: 

"In  our  judgment  street  railway  service  should  be  supported  through  the  fares  paid  by 
the  car  riders  in  so  far  as  this  can  reasonably  be  done  without  unduly  interfering  with  the 
freedom  of  traffic  which  is  essential  for  the  business  prosperity  of  the  communities  served. 
IJut  when  fares  have  been  raised  to  a  point  where  a  further  increase  is  likely  to  prevent  the 
pulilic  from  availing  themselves  with  reasonable  freedom  of  the  service  and  facilities  fur- 
nished, and  where  the  burden  upon  the  car  riders  is  likely  to  be  wholly  disproportionate  to 
any  revenue  benefits  received  by  the  company,  any  additional  revenue  needed  to  maintain 
the  service  should,  we  believe,  be  contributed  by  the  communities  served  out  of  the  general 
tax  levy.  I  believe  that  where  rides  of  substantial  length  are  furnished,  there  would  be  little 
public  protest  and  little  diminution  of  riding  if  fares  were  established  on  the  basis  of  6  cents, 
or  possibly  higher.  If  that  is  so.  and  the  fact  can  only  be  determined  in  the  light  of  ex- 
perience in  each  particular  case,  there  is  no  convincing  reason,  on  account  of  historic  reasons 
or  a  mere  accident  of  coinage,  for  preserving  lares  at  the  old  5-cent  level.  There  are.  how- 
ever, manifest  advantages  as  a  matter  of  convenience  as  well  as  a  matter  of  psychology-,  in 
retaining  the  5-cent  unit  of  fare  and  that  may  prove  to  be  the  wisest  policy.  The  present 
policy  of  constant  raises  in  fares,  resulting  in  large  traffic  losses  and  little  or  no  advantages 
to  the  company,  is  not  only  a  grave  menace  to  the  prosperity  and  welfare  of  the  whole  com- 
munity, but  is  wasteful  in  the  extreme.  As  the  burden  of  the  increased  cost  of  operation  is 
surely  heavy  enough  in  itself  the  existing  economic  scheme  which  in  effect  doubles  or  trebles 
that  burden  for  the  car  rider  should  no  longer  be  tolerated.  .'\ny  excess  revenue  required 
above  that  which  can  t>e  obtained  under  a  reasonable  system  of  fares  should  be  directly 
contributed  out  of  public  taxation. 

"What  I  mean  by  that  is  the  fact  that  if  you  start  with  the  theory  that  the  public  have 
got  to  supiwrt  the  cost  of  the  service,  and  the  car  rider  has  got  to  reach  into  hjs  pockets  and 
pay  out  $20  in  fares,  in  order  to  get  anywhere  from  $2  to  $10  into  the  treasur>'  of  the  com- 
pany, you  are  simply  creating  a  condition  where,  instead  of  the  car  rider  meeting  the  legit- 
imate advances  in  the  cost  of  operation  and  reflected  in  his  car  fare,  he  is  obliged  to  pay  for 
them  three  or  four  times  over;  and  that  is  something  for  which  nobody  gets  any  benefit, 
and  the  whole  community  suffers ;  and  the  car  rider,  as  I  believe,  as  the  individual,  is  the 
least  sufferer. 

"The  community  itself,  where  the  freedom  of  traffic,  the  mobility  of  labor  and  all  that 
sort  of  thing  is  adversely  aflFccted,  is  by  far  the  more  serious  sufferer,  more  so  even  than 
the  individual  car  rider  who  may  have  to  pay,  through  increased  fares,  three  or  four  times 
as  much  as  the  increased  cost  of  living  and  the  increase  of  prices  would  seem  to  warrant. 

"Under  that  plan  the  financial  drain  upon  the  communities  served  would  be  enormously 
less,  and  the  advantages  resulting  from  the  free  movement  of  traffic  would  inure  mainly  to 
the  benefit  of  the  merchant,  the  manufacturer  and  the  real  estate  owner,  and  would  thus 
more  than  off.sct  any  amount  i>aid  through  increased  taxation.  .\ny  payments  so  made,  it  is 
true,  are  likely  to  be  passed  on  to  the  ultimate  consumer  through  increased  rents  and  higher 
prices  paid  to  the  local  merchant,  or,  broadly  speaking,  to  the  same  class  of  persons  who 
constitute  the  present  txKly  of  car  riders,  but  the  economic  waste  under  the  existing  system 
will  be  eliminated." 

Mr.  Homer  Loring,  Chairman  of  the  Board  of  Public  Trustees  for  the  oper- 
ation of  the  lines  of  the  Eastern  Massachusetts  Street  Railway  Company  (the 
Bay  State  System),  testified  that  in  the  process  of  raising  fares  and  changing 
from  the  flat  fare  system  to  the  zone  system  of  fare  collection  the  Bay  State 
company  stopped  counting  the  number  of  revenue  fare.^  collected  or  revenue  pas- 
sengers carried,  with  the  result  that  no  e.xact  statistics  are  now  available  to  show 
what  effect  the  radical  fare  increases  have  had  upon  the  traffic  of  that  system. 
On  the  Bay  State  lines  the  old  5-cent  fare  was  discontinued  on  all  zones  outside 
of  the  cities  in  October,  1916,  and  a  6-cent  fare  substituted  therefor.  In  October, 
1917,  the  6-cent  fare  was  installed  in  the  city  zones,  but  with  the  provision  that 
20-ride  tickets  should  be  sold  for  a  dollar.  In  June,  1918,  a  new  zone  system 
was  inaugurated.  Tiie  6-cent  fare  was  continued  in  the  city  zones,  but  they 
were  reduced  in  size,  and  the  outside  territory  was  divided  into  inile  zones  and 
the  equivalent  of  a  mileage  rate  was  established  with  a  minimum  fare  of  six 
cents.     In  January,  1919,  this  zone  system  was  modified  by  the  expansion  of  the 


Effects  of  Fare  Increases  177 

size  of  the  city  zones  and  by  the  practical  doubling  of  the  length  of  the  interurban 
zones,  with  a  cash  fare  of  ten  cents  in  the  cities,  and  of  five  cents  per  zone  in 
the  country  with  a  minimum  of  ten  cents ;  but  7-cent  tickets  were  sold  in  strips 
of  five.  On  July  1,  1919,  these  tickets  were  withdrawn.  This  left  the  cash  fare 
at  ten  cents  in  the  cities  and  five  cents  per  zone  on  the  country  lines  with  a  mini- 
mum of  ten  cents. 

Commenting  on  the  results  of  these  fare  changes  and  increases,  Mr.  Loring 
stated  in  his  testimony  that  in  April  and  May,  1919,  with  a  10-cent  cash  fare  and 
7-cent  tickets  in  effect  in  the  city  zones,  the  company's  earnings  showed  an  in- 
crease of  36  or  }>7  per  cent  over  two  years  before  when  the  city  fare  was  five 
cents  and  the  country  fare  six  cents.  He  stated  that  during  July,  1919,  with  a 
straight  10-cent  fare  in  effect,  the  revenues  were  only  18  per  cent  greater  than 
two  years  before  when  the  5-cent  fare  was  still  in  effect  in  the  city  zones,  and 
in  August,  1919,  the  gain  over  two  years  before  was  only  25  per  cent.  The  Board 
of  Trustees,  he  said,  had  drawn  the  conclusion  that  somewhere  between  seven  and 
ten  ceints  the  Eastern  Massachusetts  Street  Railway  Company  had  "passed  the 
economic  point  for  getting  the  largest  amount  of  earnings  out  of  our  population." 
Commenting  upon  the  fact  that  the  principal  communities  served  by  the  Bay  State 
lines  are  industrial  cities  in  which  the  average  ride  is  probably  not  more  than  a 
mile  and  a  quarter,  he  made  the  following  statement  at  page  1643  of  the  Pro- 
ceedings : 

"We  have  come  to  the  conclusion  that  that  is  responsible,  to  a  very  great  extent.  All 
)-ou  have  to  do  is  to  go  in  the  hours  of  the  morning  and  see  the  people  walking,  to  fully 
appreciate  that  the  right  to  fix  fares  on  our  road,  and  to  raise  them,  is  not  a  very  valuable 
right.     We  have  passed  the  point  and  must  reduce.     We  have  gone  beyond  it  for  all  time." 

He  Stated  that  the  Board  of  Trustees  were  experimenting  with  different  rates  of 

fare  in  different  communities  with  the  idea  of  discovering  what  fare  would  bring 

the  maximum  amount  of  revenue.     With  respect  to  the  falling  off  of  traffic  he 

said: 

"We  installed  fare  boxes  a  year  ago,  which  count  the  money  instead  of  counting  the 
passengers,  and  the  result  is  that  at  that  time  we  entirely  lost  count.  We  have  made  some 
very  close  estimates  in  certain  cities.  We  are  taking  the  cities  and  studying  them  one  at 
a  time,  and  we  find  that,  taking  July  and  August,  with  the  10-cent  fare  and  two  years  prior 
with  the  5-cent  fare,  we  have  lost  in  many  cases  as  much  as  forty  per  cent  of  the  traffic — 
forty  per  cent  of  the  passengers  are  actually  walking  or  finding  some  other  means  of  con- 
veyance, less  than  two  years  ago."  , 

Mr.  Loring  in  his  testimony  called  attention  to  the  much  more   favorable 

results  that  have  been  obtained  from  the  10-cent  fare  on  the  Boston  Elevated 

Railway  Company  than  on  the  Bay  State  lines.     In  this  connection,  at  page  1644 

of  the  Proceedings,  he  said : 

"Take  the  Boston  Elevated  Railroad  with  an  average  haul  supposed  to  be  over  four  miles, 
and  the  results  which  they  have  obtained  from  the  10-cent  fare  have  been.  I  consider,  ex- 
ceedingly satisfactoo'.  They  made  a  31  per  cent  gain  in  August  with  a  10-cent  fare,  as  coin- 
pared  with  7  last  year.  There  is  31  per  cent  from  a  theoretical  45.  They  told  me  that  m 
September  they  were  making  a  much  larger  gain,  part  of  which  they  attributed  to  the  in- 
fluenza last  year;  but  if  there  is  anything  we  can  conclude  from  their  experience  and  ours  in 
the  same  general  territory,  it  is  that  the  successful  results  from  raising  fares  are  very  much 
in  accordance  with  your  average  haul.  Is  it  easy  fpr  the  people  to  walk?  If  so,  they  will. 
If  the  distance  is  longer  you  will  get  better  results." 


178  Electric  Railway  Problem 

And  again,  at  page  1649  of  the  Proceedings,  he  said: 

"I  feel  that  the  Boston  plan  is  working  as  well  as  those  who  studied  it  beforehand  and 
who  really  formed  their  expectations  by  careful  study  anticipated." 

The  American  Electric  Railway  Association  submitted  to  the  Commission  a 
Compilation,  dated  August  9,  1919,  purporting  to  show  the  "effect  of  increased 
rates  of  fare  on  passenger  revenues"  in  the  cases  of  125  companies.'  In  this 
tabulation  the  dates  and  nature  of  fare  increases  were  given  in  the  case  of  each 
company.  Then  a  statement  was  made  for  each  month  subsequent  to  the  first 
fare  increase  showing  the  percentage  increase  or  decrease  in  passenger  revenues 
as  compared  with  the  corresponding  month  of  the  preceding  year.  In  many  cases 
this  was  compared  with  the  theoretical  increase  in  the  rates  of  fare.  Among  the 
numerous  cases  described  in  this  tabulation,  instances  can  be  found  tending  to 
prove  almost  anything  with  respect  to  the  efTect  of  fare  increases  upon  revenues, 
even  to  support  the  theory  inadvertently  advanced  in  certain  instances  that  an 
increase  in  fare  has  stimulated  traffic.  The  tabulation  shows  a  good  many 
instances  where  revenues  have  increased  by  a  larger  percentage  than  the  fares 
charged,  and  a  good  many  other  instances  where  an  increase  in  fares  was  followed 
by  an  actual  falling  off  in  revenues  for  the  time  being.  Still,  the  general  trend 
unquestionably  indicates  that  fare  increases  are  usually  followed  by  an  increase 
in  revenues,  and  that  after  the  lapse  of  considerable  time  traffic  is  likely  to 
get  up  to  its  old  level.  The  difficulty  with  the  Association's  compilation  is  that 
each  case  is  set  down  by  itself  without  anything  to  indicate  its  relative  importance, 
and  the  comparisons  in  most  cases  begin  with  the  late  months  of  1918,  when 
traffic  was  low,  and  continued  to  May  or  June,  1919,  when  traffic  was  high,  thus 
giving  the  impression  that  the  car  riders  who  had  been  driven  away  at  first  by  the 
fare  increases  gradually  came  back. 

This  inconclusiveness  is  illustrated  by  the  figures  cited  for  the  Milwaukee 
Electric  Railway  &  Light  Company,  at  page  18  of  the  compilation.  In  this  case 
the  theoretical  increase  in  fare  that  went  into  effect  June  1,  1918,  was  17.65  per 
cent.  The  "actual  per  cent  increase''  in  passenger  revenues  is  given  for  each 
month  from  June,  1918,  to  June,  1919,  inclusive,  with  the  qualifying  note  attached : 
"Normal  increase  in  riding  accounted  for."  This  seems  to  indicate  that  per- 
centages have  been  adjusted  to  show  what  the  company  or  the  compiler  thought 
was  the  actual  increase  in  revenues  due  to  the  fare  increases  entirely  aside  from  the 
effect  of  the  nonnal  growth  of  traffic,  although  for  each  month  from  Januar}-  to 
May,  1919,  the  increase  in  revenues  was  shown  to  be  at  a  higher  percentage  than 
the  increase  in  fare.  But  the  last  month  given  is  June,  1919.  which  compared 
with  June,  1918.  shows  on  the  tabulation  an  increase  of  14.85  per  cent.  As  the 
fare  increase  was  efTective  June  1,  1918,  the  increase  from  June,  1918,  to  June, 
1919,  must  have  resulted  from  the  normal  growth  of  traffic,  except  to  the  extent 
(hat  traffic  driven  away  at  first  by  the  fare  increase  had  come  back.  A  com- 
parison of  several  months  with  the  corresponding  months  of  the  preceding  year, 
and  without  any  adjustment  for  the  "normal  increase  in  riding"  shows  the  fol- 
lowing results: 


Effects  of  Fare  Increases  179 

Theoretical  increase  Actual  increase 

based  on  increase  in  in  passenger 

Month  rate  of  fare  revenues 

(1919) 

March    17.65%  24.40% 

April    17.65%  26.997o 

Mav    17.65%  24.97% 

June    0  15.78% 

July 0  13.72% 

August     0  14.55% 

September    0  13.98% 

If  these  figures  indicate  anything,  it  is  that  not  more  than  10  per  cent  or  12  per 
cent  of  the  increase  in  revenue  was  due  to  the  increase  in  fares,  and  that  the 
balance  was  due  to  the  extraordinary  traffic  development  that  characterized  the 
year  1919  throughout  the  country. 

In  the  case  of  the  Hornell  Traction  Company,  of  Hornell.  N.  Y.,  the  com- 
parisons given  extend  over  a  period  of  more  than  twelve  months  under  the  higher 
fare  without  a  second  increase.  This  is  shown  at  page  25  of  the  tabulation.  The 
Hornell  increase  was  from  5  cents  cash  and  4Vi6-cent  tickets  to  a  straight  cash 
or  ticket  6-cent  fare,  which  would  probably  give  an  increase  of  about  33%  per 
cent  in  the  average  fare  paid.  The  raise  came  in  December,  1917.  Assuming 
that  the  percentages  shown  in  the  tabulation  are  correct,  the  comparison  for  the 
first  six  months  of  1919  should  be  as  follows : 

Theoretical  increase  Actual  increase 

based  on  increase  in                     in  passenger 

Month                                                            rate  of  fare  revenues 
(1919) 

January   0  14.70% 

February    0  6.64% 

March 0  9.08% 

April    0  12  36% 

Mav    0  12.52% 

June 0  32.17% 

The  increases  in  revenue  indicated  are  apparently  the  result  of  traffic  develop- 
ment, as  the  fare  was  exactly  the  same  during  the  months  with  which  the  com- 
parisons are  made. 

It  is  interesting  to  compare  these  increases  under  the  six-cent  fare  with  the 
increases  shown  at  page  26  of  the  compilation  in  the  case  of  the  Cumberland 
County  Power  &  Light  Company,  of  Portland,  Maine.  In  Portland,  the  revenues 
under  the  higher  fares  are  compared  with  those  of  the  corresponding  months 
of  the  preceding  year  under  a  5-cent  fare  in  the  city  and  a  6-cent  fare  on  the 
suburban  lines.     The  figures  show  the  following: 

Theoretical  increase  Actual  increase 

on  acccnmt  of  increase  in  in  passenger 

Month  rate  of  fare  revenues 

(1919) 

January    20%  13.7% 

February    20%  19.6% 

March    207o  14.3% 

April 20%  20.7% 

May    20%  16.5% 

June 40%  25.6% 


180  Electric  Railway  Problem 

Here  we  see  a  25.6  per  cent  increase  of  revenue  in  June,  witli  a  40  per  cent 
increase  in  fare  over  the  preceding  June,  while  in  Uomell,  N.  Y.,  there  was  an 
increase  of  32.17  per  cent  in  revenue  and  in  Milwaukee  an  increase  of  15.78  per 
cent  in  revenue  without  any  intervening  change  in  the  fares. 

Still  another  case  included  in  the  tabulation  where  the  period  of  comparison 
extended  over  more  than  twelve  months  is  that  of  the  Ft.  Wayne  &  Northern 
Indiana  Traction  Company.  In  Ft.  Wayne  the  6-for-a-quarter  tickets  were 
aboli.shed  and  the  straight  5-cent  fare  instituted  March  9,  1918.  This  is  described 
as  a  20  per  cent  increase  in  the  rate,  although  this  would  not  be  true  except  on 
the  assumption  that  before  the  increase  all  the  car  riders  used  tickets.  However 
that  may  be,  it  is  evident  that  when  we  get  to  April  and  May,  1919,  the  theoretical 
increase  in  revenue  over  the  corresponding  months  of  the  preceding  year  would 
be  zero,  not  20  per  cent  as  stated,  and  it  would  seem  that  the  actual  increase  in 
revenues  of  31.6  per  cent  in  April,  and  24.6  per  cent  in  May,  1919,  was  not  due 
primarily  to  the  fare  increase  in  March,  1918,  but  to  other  causes. 

The  figures  I  have  cited  do  not  prove  affirmatively  and  conclusively  that 
fare  increases  decrease  traffic  or  that  they  do  not  increase  revenues,  but  they 
suggest  that  the  figures  submitted  on  behalf  of  the  American  Electric  Railway 
Association  need  to  be  closely  scrutinized  before  they  are  accepted  as  proving 
that  traffic  lost  on  account  of  fare  increases  "comes  back." 

In  view  of  the  great  divergence  of  opinion  expressed  by  the  different  wit- 
nesses coming  from  different  parts  of  the  country  and  representing  different 
interests,  and  in  view  of  the  inconclusive  character  of  the  comparisons  submitted 
by  the  American  Electric  Railway  Association,  it  was  evident  that  no  clear  and 
certain  conclusion  could  be  drawn  as  to  the  effect  of  fare  increases  upon  traffic 
and  revenues  from  the  testimony  and  the  exhibits  presented  at  the  hearings.  At 
the  same  time,  it  seemed  to  me  that  the  Commission  could  not  afford  to  bring 
out  its  report  and  make  its  recommendations  for  the  solution  of  the  electric  rail- 
way problem  without  first  ascertaining  as  definitely  as  possible  the  facts  with 
respect  to  the  actual  effect  of  fare  increases  during  the  past  two  or  three  years 
so  far  as  those  facts  are  available.  For  this  reason,  the  Executive  Secretary,  at 
my  suggestion,  sent  out  at  the  beginning  of  December,  1919,  a  special  letter 
addressed  to  about  fifty  of  the  principal  cities  and  street  railway  systems  of  the 
country  stating  that  the  Conmiission  was  in  need  of  "more  detailed  data  with 
respect  tn  the  development  of  trattic  under  varying  conditions  during  the  past 
two  or  three  years  in  order  to  be  able  to  reach  an  intelligent  conclusion  as  to 
the  effect  of  fare  increa.ses  upon  the  future  of  the  electric  railway  as  a  public 
utility,"  and  that  it  desired  "to  make  comparisons  between  cities  and  street  rail- 
way systems  where  fares  have  not  been  increased,  and  cities  and  systems  where 
tlicy  have  been  increased."  I'or  these  reasons  the  following  specific  information 
was  requested : 

1.  The  total   iuiiiil>cr  of   rovcmic   i>asseiigcrs  carried,   by   months    from  January    1,    1917, 
to  dale. 

2.  The  gro.ss  |>asscnKer  caminRs.  by  months   from  January   1.   1917.  to  date. 

.V     The  cx.ict  dales  when  any  chauRes  in   fare  went  into  eflfect.  and  the  exact  nature  of 
.such  rhannes. 

4.     llie  exact  dales  and  duration  of  any  strikes  of  conductors  and  raotonnen  that   may 


Effects  of  Fare  Increases  181 

have  occurred  subsequent  to  January  1,  1917,  and  the  extent  to  which  traffic  was  interrupted 
by  such  strikes. 

5.     Any  other  important  factors  peculiar  to  the  local  situation  which  had  a  marked  effect 
upon  traffic  either  to  increase  it  or  to  decrease  it  at  any  time  subsequent  to  January  1,  1917. 

In  response  to  these  special  letters  sent  out  at  the  beginning  of  December, 
and  to  similar  letters  subsequently  addressed  to  a  number  of  additional  com- 
panies, the  information  requested  was  received  for  electric  railway  systems  which 
in  1917  carried  approximately  75  per  cent  of  the  total  electric  railway  traffic 
reported  for  that  year  by  the  Bureau  of  the  Census.  The  traffic  and  revenue 
statistics  have  been  tabulated  and  analyzed  so  as  to  show  for  each  city  or  system 
the  nuinber  of  revenue  passengers  carried,  and  the  amount  of  gross  passenger 
revenues  collected  during  the  first  nine  months  of  1917,  the  first  nine  months  of 
1918,  and  the  first  nine  months  of  1919.  The  average  fare  paid  during  each  of 
these  three  periods  has  been  determined  by  dividing  the  number  of  revenue  pas- 
sengers into  the  gross  passenger  revenue.  Fare  increases  are  shown  in  the  form 
of  the  percentage  of  increase  in  the  average  fare  paid  during  the  first  nine  months 
of  1919  as  compared  with  the  first  nine  months  of  1917.  In  like  manner,  increases 
or  decreases  in  traffic,  and  increases  or  decreases  in  passenger  earnings  between 
these  two  periods  have  been  figured  out  on  a  percentage  basis. 

The  figures  show  that  1918  was  generally  a  low  traffic  year.  Many  of  the 
big  electric  railway  systems  of  the  country  showed  an  actual  decrease  in  the 
number  of  revenue  passengers  carried  in  191S  as  compared  with  1917.  This  was 
true  even  where  the  comparison  was  limited  to  the  first  nine  months.  The  shrink- 
age of  traffic  in  1918  was  even  more  pronounced  during  October  and  November 
on  account  of  the  widespread  effect  of  the  influenza  epidemic.  Among  the  im- 
portant cities  or  systems  that  showed  an  actual  decrease  in  traffic  during  the 
first  nine  months  of  1918  as  compared  with  1917  were  New  York,  with  a  decrease 
of  .87  per  cent ;  Chicago,  with  a  decrease  of  nearly  2  per  cent ;  Boston,  with  a 
decrease  of  a  little  more  than  5  per  cent;  Detroit,  with  a  decrease  of  about  13  per 
cent;  Cleveland,  with  a  decrease  of  more  than  4  per  cent;  Pittsburgh,  with  a  de- 
crease of  about  12  per  cent;  St.  Louis,  with  a  decrease  of  5  per  cent;  Minneapolis 
and  St.  Paul,  with  a  decrease  of  6  per  cent;  the  Connecticut  railway  lines  serving 
New  Haven,  Hartford,  Bridgeport  and  other  cities,  with  a  decrease  of  more  than 
16  per  cent ;  the  Kansas  Cities,  v^'ith  a  decrease  of  about  2  per  cent ;  Buffalo,  with 
a  decrease  of  nearly  9  per  cent;  the  New  York  State  Railways  system  serving 
Rochester,  Syracuse,  Utica  and  other  cities,  with  a  decrease  of  over  2  per  cent; 
and  Cincinnati,  with  a  decrease  of  more  than  3  per  cent. 

On  the  other  hand,  certain  cities  and  systems  showed  a  considerable  increase 
in  traffic  during  the  first  nine  months  of  1918  as  compared  with  the  first  nine 
months  of  1917,  notwithstanding  the  adverse  conditions  that  affected  street  rail- 
way traffic  generally.  These  particular  increases  were  undoubtedly  due  in  most 
cases  to  the  local  development  of  war  industries  or  the  presence  of  military 
training  camps  in  the  vicinity.  Notable  among  the  cities  and  systems  that  showed 
an  actual  increase  in  traffic  were  Philadelphia,  with  an  increase  of  about  8  per 
cent;  the  Public  Service  Railway  system  of  New  Jersey,  serving  Newark,  Jersey 
City,  Elizabeth,  Paterson,  Bayonne,  Camden  and  other  cities  and  towns,  with 
an  increase  of  not  quite  2  per  cent;  Baltimore,  with  an  increase  of  over  8  per 


182  Electric  Railway  Problem 

cent;  Los  Angeles,  with  an  increase  of  more  than  10  per  cent;  San  Francisco, 
with  an  increase  of  16  per  cent ;  Washington,  D.  C,  with  an  increase  of  33  per 
cent ;  Milwaukee,  with  an  increase  of  less  than  1  per  cent ;  New  Orleans,  with 
an  increase  of  5  per  cent;  the  San  Francisco-Oakland  Terminal  Railways,  serving 
Oakland.  Berkeley,  Alameda  and  other  East  Bay  cities  and  towns,  with  an  increase 
of  10  per  cent ;  the  V'irginia  Railway  &  Power  Company,  serving  Richtnond, 
Norfolk  and  other  V'irginia  cities,  with  an  increase  of  about  22  per  cent;  Seattle, 
with  an  increase  of  nearly  32  per  cent ;  and  Portland,  Oregon,  with  an  increase 
of  18  per  cent. 

Taking  all  of  the  cities  and  systems  together,  for  which  the  detailed  figures 
were  obtained,  the  aggregate  traffic  during  the  first  nine  months  of  1918  was 
practically  the  same  as  for  the  corresponding  period  of  1917.  For  the  first  nine 
months  of  1919,  however,  traffic  came  back  with  a  bound  almost  everywhere 
except  in  cities  or  upon  systems  where  heavy  increases  in  fare  had  been  put 
into  effect  in  the  meantime.  For  the  entire  group  of  cities  and  systems  for  which 
the  detailed  figures  were  obtained,  the  traffic  during  the  first  nine  months  of  1919 
showed  an  increase  of  about  7  per  cent  over  the  traffic  for  the  corresponding 
period  two  years  earlier.  This  increase  for  the  two-year  period,  averaging 
3^  per  cent  per  annum,  is  only  slightly  less  than  the  ordinary  average  growth 
of  street  railway  traffic  over  the  period  of  ten  years  preceding  1917.  On  the  face 
of  the  figures,  it  would  appear  that,  taking  the  country  as  a  whole,  the  fare  in- 
creases that  were  in  etf  ect  during  the  first  nine  months  of  1919  were  not  sufficient 
to  prevent  a  substantially  normal  development  of  traffic.  But  there  are  mdi- 
cations  in  many  parts  of  the  country  that  without  the  increased  fares  the  develop- 
ment of  traffic  in  1919  would  have  been  abnormally  large.  It  is  only  by  a  com- 
parison of  the  results  in  particular  cities  or  on  particular  systems  where  fares 
were  not  increased,  with  the  results  in  other  cities  or  on  other  systems  where 
fares  were  increased  in  varying  amounts,  that  we  may  hope  to  get  anything 
like  a  clear  or  decisive  answer  to  the  main  question  raised  by  this  inquiry.  The 
comparative  figures  with  respect  to  traffic  in  relation  to  fare  increases  for  each 
of  the  important  cities  and  systems  for  which  the  detailed  figures  are  available 
is  shown  on  Table  I  entitled  "Analysis  of  Traffic  on  Principal  Street  Railway 
Systems  of  the  United  States  showing  relation  of  Revenue  Passengers  to  Fare 
Increases,  based  on  data  collected  by  the  Federal  Electric  Railways  Commission." 

Similar  figures  with  respect  to  gross  passenger  earnings  in  relation  to  fare 
increases  are  shown  on  Table  II  entitled  "Analysis  of  Gross  Passenger  Revenue 
on  Principal  Street  Railway  Systems  of  the  United  States  showing  relation  of 
Passenger  Revenue  to  Fare  Increases,  based  on  data  collected  by  the  Federal 
Electric  Railways  Commission." 

It  will  he  observed  that  an  effort  has  been  made  to  show  on  Table  I  and 
Table  II  the  traffic  and  revenue  figures  complete  for  each  of  the  principal  urban 
communities  or  districts  of  the  countrj'.  For  example.  New  York  City  has  been 
treated  as  a  unit,  although  in  point  of  fact  about  forty  individual  companies  are 
rendering  street  railway  service  within  the  limits  of  Greater  New  York.  In  most 
of  the  cities  a  single  company  has  a  complete  or  nearly  complete  monopoly  of 
street  railway  transportation  service,  and  in  many  cases  two  or  more  cities  are 


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grouped  together  in  a  transportation  area  served  by  a  single  company.  Boston 
and  Philadelphia  are  particularly  noteworthy  because  in  the  case  of  each  of  these 
cities  the  elevated,  subway  and  surface  lines  are  operated  as  a  unit  by  a  single 
company.  In  Chicago  the  surface  lines  are  operated  as  a  unit  and  the  elevated 
lines  as  a  separate  unit,  with  a  certain  amount  of  competition  between  the  two 
systems.  Detroit  gives  an  example  of  a  unified  city  transportation  system  that 
is  combined  in  a  single  operating  system  with  a  vast  net-work  of  interurban  lines.^ 
Washington,  D.  C,  is  a  notable  illustraton  of  a  city  where  two  rival  street  railway 
companies  of  nearly  equal  importance  still  survive.  Dayton,  Ohio,  still  enjoys 
the  competition  of  four  companies.  San  Francisco  has  its  Municipal  Railway 
and  also  its  United  Railroads  system.  Seattle  for  a  number  of  years  had  muni- 
cipal railway  lines  in  competition  with  the  lines  of  the  Puget  Sound  Traction 
Light  &  Power  Company,  but  on  April  1,  1919,  the  Puget  Sound  lines  were  ac- 
quired by  the  City  and  merged  with  the  Municipal  Railway.  This  gave  the  City 
a  complete  monopoly  of  local  street  railway  service  with  the  exception  of  the 
Seattle  and  Rainier  Valley  Railway  line.  In  Los  Angeles  the  major  portion  of 
the  local  service  is  furnished  by  the  Los  Angeles  Railway  Corporation,  but  the 
Pacific  Electric  Railway  Company  furnishes  some  local  service  and  a  vast  amount 
of  interurban  service  reaching  out  in  every  direction  from  Los  Angeles  as  a 
center.  The  Twin  City  Rapid  Transit  Company  combines  in  a  single  transpor- 
tation unit  the  cities  of  Minneapolis  and  St.  Paul.  The  San  Francisco-Oakland 
Terminal  Railways  Company  serves  Oakland,  Berkeley,  Alameda  and  other  com- 
munities on  the  east  side  of  San  Francisco  Bay,  and  competes  with  the  Southern 
Pacific  Railroad  Company  in  rendering  trans-bay  service  to  San  Francisco. 
Omaha,  Nebraska  and  Council  Bluffs,  Iowa,  are  served  as  a  unit  by  a  single  com- 
pany.    The  same  is  true  of  Kansas  City,  Missouri  and  Kansas  City,  Kansas. 

In  the  eastern  section  of  the  country  are  a  number  of  street  railway  systems 
that  are  almost  state-wide  in  extent.  Notable  among  these  is  the  Public  Service 
Railway  system,  of  New  Jersey,  which  has  a  monopoly  of  street  railway  opera- 
tion in  all  the  principal  cities  of  the  state  except  Trenton  and  Atlantic  City,  and 
includes  in  its  area  of  service  the  sections  of  northern  New  Jersey  that  are  tribu- 
tary to  Greater  New  York,  and  the  section  of  southern  New  Jersey  that  is  tribu- 
tary to  Philadelphia.  The  Connecticut  Company,  operating  in  New  Haven, 
Hartford,  Bridgeport  and  other  Connecticut  cities  and  towns ;  the  Rhode  Island 
Company,  operating  in  Providence,  Pawtucket,  Woonsocket  and  practically 
throughout  the  state  of  Rhode  Island ;  the  Eastern  Massachusetts  Street  Railway 
Company,  formerly  known  as  the  Bay  State  System,  operating  in  Lowell,  Fall 
River,  Lawrence,  Lynn  and  most  of  the  other  cities  of  eastern  Massachusetts 
north  and  south  of  Boston;  the  New  York  State  Railways  Company,  serving 
Rochester,  Syracuse,  Utica  and  other  cities  and  towns  of  central  New  York ;  the 
Northern  Ohio  Traction  &  Light  Company,  serving  Akron,  Canton  and  numerous 
other  communities  in  northeastern  Ohio;  the  Virginia  Railway  &  Power  Com- 
pany, serving  Richmond,  Petersburg,  Norfolk,  Portsmouth  and  other  cities  and 
towns  in  Virginia;  and  the  Michigan  Railway  Company,  operating  in  Jackson, 
Lansing,  Battle  Creek  and  Kalamazoo,  are  other  notable  examples  of  street  rail- 
way systems  which  have  combined  in  a  single  transportation  unit  different  muni- 


196  Electric  Railway  Problem 

cipalitics  of  relatively  equal  importance,  and  constituting  geographically  inde- 
pendent urban  communities. 

The  illustrations  which  I  have  cited  indicate  some  of  the  contrasts  in  operat- 
ing conditions  which  must,  to  a  certain  extent,  affect  the  significance  of  compara- 
tive statistics  of  street  railway  traffic  and  revenue.  Still  another  complication 
is  present  in  certain  cases  where  widely  separated  street  railway  systems,  though 
physically  operated  as  separate  and  distinct  units,  are  controlled  by  a  common 
holding  company  that  dominates  the  policies  of  the  different  systems  with  respect 
to  fares  and  methods  of  operation.  In  certain  cases  these  holding  company  re- 
lationships have  a  certain  significance  in  connection  with  the  traffic  and  revenue 
statistics  with  which  we  are  here  concerned.  For  example,  the  policy  of  one- 
man  car  operation  with  frequent  service,  adopted  for  the  double  purpose  of 
reducing  operating  expenses  and  stimulating  traffic  and  revenues,  is  a  policy  that 
has  been  stressed  particularly  by  Stone  &  Webster,  and  when  examining  the 
traffic  figures  of  Stone  &  Webster  properties  it  is  important  to  know  to  what 
extent  traffic  increases  are  due  to  the  use  of  one-man  cars.  Obviously,  the  time 
and  resources  at  our  disposal  in  this  investigation  do  not  permit  a  close  enough 
study  of  the  conditions  and  policies  peculiar  to  all  of  the  individual  street  rail- 
way systems  for  which  we  have  gathered  statistics  to  enable  us  to  measure  with 
nicety  the  relative  significance  of  all  the  different  factors  entering  into  the  de- 
velopment of  traffic  and  revenues  in  each  particular  case. 

Boston's  sad  experience  with  higher  fares  was  frequently  referred  to  in  the 
testimony,  but  the  Commission's  hearings  were  closed  at  too  early  a  date  to  permit 
the  definite  results  of  the  10-cent  fare  in  Boston  to  be  put  in  the  record.  As  a 
matter  of  fact,  the  financial  statement  issued  by  the  Board  of  Public  Trustees 
of  the  Boston  Elevated  Railway  Company  for  the  three  months  ended  September 
30,  1919,  still  showed  a  deficiency  in  earnings  below  the  cost  of  service  as  defined 
by  the  act  under  which  the  trustees  were  appointed.  It  is  noteworthv.  however, 
that  the  financial  statements  for  the  months  subsequent  to  September,  1919,  all 
indicate  that  the  Boston  system,  with  its  10-cent  fare,  has  finally  "turned  the 
corner"  and  is  now  earning  a  surplus  in  excess  of  the  full  cost  of  service.'  It  is 
unfortunate  that  the  Bay  State  system  stopped  counting  its  passengers  just  at  the 
point  where,  from  the  public  point  of  view,  reliable  traffic  statistics  would  begin 
to  be  of  the  greatest  importance.  A  similar  reflection  is  due  in  the  case  of  the 
Cumberland  County  Power  &  Light  Company  which  operates  the  street  railway 
lines  in  a  group  of  communities  centering  in  Portland,  Maine.  Here,  also,  upon 
the  installation  of  a  new  zoning  .system,  the  company  stopped  counting  its  pas- 
sengers. In  the  case  of  the  Rhode  Island  Company,  operating  in  Providence  and 
most  of  the  other  urban  communities  of  Rhode  Island,  nominal  statistics  of 
revenue  passengers  are  still  kept,  but  the  figures  are  practically  worthless  for 
comparative  purposes,  because  the  ba.sis  upon  which  the  number  of  passengers 
or  passenger  fares  is  counted  has  twice  been  changed  during  the  past  two  years. 
As  a  result  of  the  introduction  of  a  new  zoning  system  and  the  shortening  of  the 
zones,  a  great  many  passengers  who  were  formerly  counted  only  once  are  now 
counted  two  or  three  times.  The  consequence  is.  that  although  the  Rhode  Island 
Company  has  raised  its  fares  two  or  three  times  in  the  last  three  years,  with 


Effects  of  Fare  Increases  197 

only  slight  decreases  en  certain  suburban  lines,  in  an  effort  to  get  back  the  traffic 
that  had  been  driven  away,  the  statistics  of  passenger  revenues  furnished  by  the 
company  for  the  first  nine  months  of  1919  indicate  a  considerable  decrease  in  the 
average  fare  paid  as  compared  with  the  first  nine  months  of  1917.  If  these  three 
important  New  England  systems  centering  in  Providence,  Portland,  and  the  in- 
dustrial cities  of  eastern  Massachusetts  could  have  furnished  us  definite  statistics 
showing  the  traffic  developments  that  have  accompanied  fare  increases  and  changes 
from  the  flat  fare  system  to  a  zone  system,  it  would  have  been  of  material  help 
in  this  study. 

If  it  be  conceded  as  proven  that  the  10-cent  fare  in  Boston  has  begun  to 
succeed  in  producing  a  sufficient  amount  of  revenue  to  cover  the  entire  cost  of 
service,  while  at  the  same  time  the  10-cent  fare  on  the  Bay  State  lines  has  over- 
shot the  mark  and  will  not  produce  enough  revenue  to  cover  the  cost  of  service^ 
or  even  as  much  revenue  as  some  lower  fare  would  produce,  we  still  have  to 
determine,  from  a  study  of  the  results  on  these  and  other  systems,  whether  the 
financial  success  now  being  achieved  in  Boston,  and  the  financial  failure  still 
being  achieved  on  the  Bay  State  lines  are  worth  while  from  the  public  point  of 
view.  This  brings  us  back  to  the  detailed  comparison  of  traffic  development  in 
cities  where  street  railway  fares  have  not  been  raised,  with  traffic  development 
during  the  same  period  in  cities  like  Boston  where  fares  have  been  radically  in- 
creased. There  are  only  three  communities  in  the  country  where  elevated  rail- 
roads, subways  and  surface  lines  have  all  been  developed  as  means  of  local  trans- 
portation. These  cities  are  New  York,  Boston  and  Philadelphia.  Chicago  also 
has  an  extensive  system  of  elevated  railroads,  but  as  yet  has  no  subways. 

In  certain  respects  a  comparison  of  the  traffic  figures  for  a  small  group  of  the 
largest  cities  and  street  railway  systems  is  somewhat  simplified  if  we  take  the  six 
months  period  instead  of  the  nine  months  period.  For  example,  the  establish- 
ment of  a  transfer  charge  at  most  intersections  on  the  surface  lines  of  New 
York  took  place  August  1,  1919,  and  the  partial  disintegration  of  the  New  York 
Railways  system  of  surface  lines  began  at  that  time,  resulting  later  on  in  a  num- 
ber of  double  fares.  The  Chicago  surface  lines  continued  on  the  5-cent  fare 
until  August.  1919.  The  Boston  Elevated  Railway  did  not  put  in  the  10-cent 
fare  until  July  10,  1919.  The  Public  Service  Railway  of  New  Jersey  did  not 
experiment  with  a  zoning  plan  until  September,  1919.  I  have,  therefore,  pre- 
pared an  abbreviated  table  showing  the  number  of  revenue  passengers  carried 
during  the  first  six  months  of  1917,  1918  and  1919,  on  a  few  of  the  principal  street 
railway  systems  of  the  country.  I  have  treated  all  the  elevated,  subway  and 
surface  lines  of  New  York  City  as  a  single  system,  and  have  taken  the  traffic 
and  revenue  figures  published  by  the  Public  Service  Commission  for  the  First 
District  in  its  quarterly  summaries.  Because  of  the  existence  of  a  differential 
fare  between  the  elevated  lines  and  the  surface  lines  of  Chicago,  I  have  shown 
the  figures  for  the  two  Chicago  systems  separately.  With  New  York  and  Chicago 
I  have  taken  Philadelphia,  Boston,  the  cities  served  by  the  Public  Service  Rail- 
way system  of  New  Jersey,  Detroit,  Cleveland  and  Pittsburgh.  These  consti- 
tute the  eight  leading  street  railway  transportation  areas  of  the  countr}'.  Because 
of  the  special  significance  of  jitney  competition  in  connection  with  street  railway 


198  Electric  Railway  Problem 

fare  increases  in  New  Jersey,  I  have  also  included  the  records  of  jitney  traffic 
for  the  city  of  Newark,  in  which  the  Public  Service  Railway  system  is  centered. 

The  figures  shown  on  Table  III  are  extremely  interesting.  For  example, 
if  we  contrast  Philadelphia  and  Boston,  in  each  of  which  the  elevated,  subway  and 
surface  lines  are  operated  as  a  single  system,  we  find  that  for  the  first  six  months 
of  1917  the  Philadelphia  Rapid  Transit  Company  carried  about  101.700.0CX)  more 
revenue  passengers  than  the  Boston  Elevated  Railway,  while  for  the  first  nine 
months  of  1919  the  Philadelphia  figures  were  approximately  180.200.000  in  excess 
of  the  Boston  figures.  Throughout  this  period  the  Philadelphia  fare  was  five 
cents  cash  for  the  initial  ride,  with  an  additional  charge  of  three  cents  for  an 
exchange  ticket  at  certain  transfer  points.  In  the  figures  given  the  passengers 
using  exchange  tickets  are  counted  as  revenue  passengers.  Upon  this  basis  the 
average  fare  paid  per  revenue  passenger  in  1917  was  approximately  4.85  cents. 
If  the  exchange  ticket  users  were  counted  as  transfer  passengers  and  not  included 
among  revenue  pas.sengers,  the  average  fare  in  1917  would  be  5.16  cents.  The 
averages  for  1919  were  4.84  cents  with  the  exchange  ticket  passengers  included, 
and  5.21  cents  with  them  excluded.  In  Boston,  on  the  other  hand,  the  5-cent 
fare  in  effect  during  1917  and  a  portion  of  191S  was  changed  to  seven  cents  on 
August  1,  1918.  and  to  eight  cents  on  December  1,  1918,  so  that  during  the  entire 
first  half  of  1919  the  fare  was  eight  cents  as  compared  with  five  cents  for  the 
corresponding  period  two  years  earlier.  The  10-cent  fare  in  Boston  was  put  into 
effect  July  10,  1919,  so  that  it  does  not  affect  the  six  months  comparison. 

With  these  facts  in  mind,  namely,  that  the  Philadelphia  fare  remained  sta- 
tionary at  about  five  cents,  while  the  Boston  fare  was  increased  from  five  cents  to 
eight  cents,  it  is  significant  that  in  Philadelphia  there  was  an  increase  of  56,650.352 
passengers,  or  19.4  per  cent,  for  the  1919  half  year  as  compared  with  the  1917 
half  year;  while  in  Boston  there  was  a  decrease  of  21.867,685  passengers,  or  11.49 
per  cent.  Assuming  that  other  conditions  affecting  traffic  growth  in  the  two  com- 
munities were  substantially  the  same,  these  figures  would  indicate  that  if  Boston 
had  retained  the  5-cent  fare  it  would  have  carried  during  the  first  half  of  1919 
about  58.500,000  more  passengers,  or  35  per  cent  more  than  it  actually  did  carry. 
It  is  possible,  however,  that  other  conditions  affecting  traffic  were  different  in  the 
two  comnutnities.  Philadelphia  had  the  benefit  of  the  traffic  developed  by  the 
Hog  Island  shipyards  and  other  war  activities  in  the  vicinity,  and,  as  we  have 
already  seen,  showed  an  actual  increase  in  traffic  in  1918,  a  low  year,  over  1917. 

IVrhaps  it  would  be  fairer  to  compare  the  traffic  figures  of  the  Boston  Ele- 
vated Railway  Company  with  the  combined  traffic  figures  of  all  the  elevated,  sub- 
way and  surface  lines  operating  in  Creater  New  York.  It  will  be  seen  from  the 
table  that  the  New  York  lines  showed  an  actual,  though  a  comparatively  slight 
decrease  in  passenger  traffic  during  the  first  half  of  1918.  For  the  first  six  months 
of  1919,  however,  there  was  an  increase  of  101,308.437  revenue  passengers,  or 
10.23  per  cent,  over  the  corresponding  period  of  1917.  The  regular  fare  charged 
on  the  street  railway  lines  of  New  York  City  remained  during  this  entire  period 
at  five  cents,  with  certain  slight  variations  on  a  few  lines  which  made  the  average 
fare  paid  per  revenue  passenger  4.93  cents  in  1917  and  1918,  and  4.%  cents  in 
1919. 


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200  Electric  Railway  Problem 

If  we  assume  that  conditions  affecting  traffic,  aside  from  the  fare  increases, 
were  the  same  in  Boston  as  in  New  York,  and  if  we  assume  that  an  increase  from 
five  cents  to  eight  cents  in  New  York  would  have  had  the  same  effect  upon  traffic 
that  this  increase  had  in  Boston,  we  reach  the  result  that  during  the  first  half  of 
1919  the  New  Y'ork  transit  lines,  on  an  8-cent  fare,  would  have  carried  about 
876,000,000  instead  of  1,091,000,000,  a  decrease  of  215,000,000,  or  at  the  rate  of 
430,000,000  per  annum.  New  York  City  in  1913,  in  conjunction  with  the  local 
rapid  transit  companies,  undertook  a  program  of  subway  and  elevated  railroad 
construction  designed  to  meet  the  increasing  traffic  needs  of  the  city.  The  cost 
of  these  new  rapid  transit  facilities  was  estimated  at  the  time  at  about  $325,000,000, 
but  the  increases  in  wages  and  in  the  prices  of  materials  which  caught  the  sub- 
way builders  midway  in  the  period  of  construction,  have  swelled  the  total  cost 
to  more  than  $400,000,000.  The  indicated  effect  of  an  8-cent  fare,  judged  by  the 
results  in  Boston,  would  have  been  to  set  back  the  growth  of  street  railway  traffic 
in  New  York  City  seven  years.  The  significance  of  such  a  result  in  the  deter- 
mination of  the  City's  policy  with  respect  to  rapid  transit  construction  cannot 
be  escaped. 

Another  interesting  comparison  is  between  the  traffic  growth  in  the  Public 
Service  Railway  territory  including  the  large  cities  of  northern  New  Jersey,  which 
are  a  part  of  the  New  York  metropolitan  district,  as  well  as  Camden  and  the 
neighboring  communities  of  south  Jersey,  which  are  a  part  of  the  Philadelphia 
metropolitan  district.  The  Public  Service  Railway  system  includes  no  rapid 
transit  lines.  It  spreads  out  over  an  immense  area,  serving  no  less  than  141 
separate  municipalities  ranging  from  a  population  of  a  few  hundred  up  to  nearly 
half  a  million.  From  the  point  of  view  of  revenue  passengers  carried,  this  trans- 
portation area  stands  number  five  in  the  entire  country.  On  the  New  Jersey  lines 
a  5-cent  fare,  supplemented  by  a  3-cent  fare  for  school  children,  was  charged 
through  1917  and  up  to  August  1,  1918,  when  a  charge  of  one  cent  for  each  initial 
transfer  was  added.  On  October  15,  1918,  the  initial  fare  went  up  to  seven 
cents.  This  was  continued  until  April  1.  1919,  when  the  initial  fare  was  reduced 
to  six  cents  and  continued  at  that  figure  until  May  4th,  when  it  again  became 
seven  cents,  the  1-cent  initial  transfer  charge  and  the  school  children's  3-cent  fare 
being  retained  throughout  this  period.  No  further  changes  took  place  on  the 
Jersey  lines  until  after  July  1.  1919.  The  comparison  of  the  first  six  months  of 
1917  with  the  first  six  months  of  1919  is,  therefore,  substantially  a  comparison 
of  a  5-cent  fare  period  with  a  7-cent  fare  period. 

The  territory  served  by  the  Public  Service  Railway  lines  was  dotted  with 
war  industries,  and  in  1918  the  Public  Service  Railway  Company,  besides  having 
to  increase  its  facilities  in  the  Camden  territory,  was  compelled  to  build  an  ex- 
tension of  its  lines  to  Port  Newark  to  take  care  of  this  new  traffic.  The  effect 
of  the  war  industries,  even  before  these  additional  facilities  were  available,  is 
shown  by  the  fact  that  the  traffic  for  the  first  six  months  of  1918  showed  a  slight 
increase  over  the  traffic  for  the  corresponding  period  of  1917.  PVr  the  first  half 
of  1919.  however,  with  the  higher  fares  in  eflfect,  the  traffic  showed  a  decrease  of 
16.783.651  revenue  passengers,  or  8.45  per  cent,  as  compared  with  the  corre- 
sponding period  two  years  earlier. 


Effects  of  Fare  Increases  201 

Thus,  we  see  that  where  the  fares  had  not  been  raised  there  was  an  increase 
of  10.23  per  cent  in  traffic  in  New  York  Citj-  on  one  side  and  of  19.4  per  cent 
in  Philadelphia  on  the  other  side;  while  in  the  intervening  territory'  in  New 
Jersey,  served  by  the  Public  Service  Railway  Company,  with  an  increase  of  about 
40  per  cent  in  the  rate  of  fare,  there  was  an  actual  decrease  of  8.45  per  cent 
in  traffic.  It  is  especially  noteworthy  that  in  the  city  of  Newark,  which  is  the 
center  of  the  Public  Service  Railway  system,  there  was  an  increase  in  jitney 
traffic  from  4,466,377  for  the  first  half  of  1917,  to  16,249.008  for  the  first  half 
of  1919,  or  263.8  per  cent.  The  regular  jitney  fare  remained  at  five  cents  during 
this  period. 

The  effect  upon  traffic  of  an  increase  in  the  rate  of  fare  can  be  seen  very 
clearly  by  a  comparison  of  the  traffic  figures  for  the  elevated  lines  and  the  surface 
lines  in  Chicago.  During  the  first  half  of  1917  and  the  first  half  of  1918  the 
5-cent  fare  was  retained  on  all  the  Chicago  lines.  The  figures  show  that  from  the 
first  half  of  1917  to  the  first  half  of  1918,  the  latter  being  a  low  traffic  year,  the 
number  of  passengers  carried  by  the  Chicago  elevated  lines  increased  4.918.013, 
or  slightly  more  than  5  per  cent ;  while  during  the  same  period  the  number  of 
revenue  passengers  carried  by  the  Chicago  surface  lines  decreased  17,628,717,  or 
5  per  cent.  This  contrast  seems  to  show  the  normal  tendency  of  traffic  in  a  large 
city  to  gravitate  toward  the  rapid  transit  lines  so  long  as  fare  conditions  remain 
the  same.  In  November,  1918,  the  fare  on  the  elevated  lines  was  raised  to  six 
cents,  while  the  surface  lines  continued  to  charge  five  cents  until  early  in  the 
second  half  of  1919.  The  figures  for  the  first  half  of  1919  reflect,  therefore,  the 
effect  of  the  6-cent  fare  on  the  elevated  lines  as  compared  with  the  5-cent  fare 
on  the  surface  lines.  On  the  elevated  lines,  where  the  fare  increase  took  place,  the 
former  tendency  to  traffic  growth  was  reversed,  so  that  during  the  first  half  of 
1919,  7,020.354,  or  6.87  per  cent,  fewer  passengers  were  carried  than  during  the 
corresponding  period  of  1918.  In  fact  the  gain  made  in  1918  over  1917  was  more 
than  lost,  so  that  the  1919  figures  show  a  decrease  of  2.16  per  cent  as  compared 
with  1917.  On  the  other  hand,  the  surface  lines,  where  the  fare  had  not  been  in- 
creased, showed  a  gain  of  45.202,782  passengers,  or  13.75  per  cent,  over  the  cor- 
responding period  of  1918.  This  contrasts  with  a  decrease  of  6.87  per  cent 
between  the  same  periods  in  the  traffic  on  the  elevated  lines  where  the  fare  had 
been  increased  to  six  cents,  indicating  that  without  the  increase  in  fare  the  elevated 
lines  would  have  carried  during  the  first  half  of  1919  at  least  22  per  cent  more 
passengers  than  thev  did.  and  upon  this  basis  would  have  collected  a  greater 
total  revenue  at  five  cents  than  they  actually  collected  at  six  cents.  Indeed,  if  the 
tendency  shown  from  1917  to  1918  for  the  elevated  lines  to  increase  their  traffic 
in  the  face  of  adverse  conditions,  while  the  traffic  on  the  surface  lines  fell  off, 
had  been  continued  from  1918  to  1919,  the  elevated  lines  would  have  carried,  at  a 
5-cent  fare,  an  even  greater  excess  of  passengers  over  the  number  which  they 
actually  carried  than  is  indicated  by  this  percentage. 

It  is  significant  that  Detroit  and  Cleveland,  both  of  which  are  low  fare  cities, 
show  an  actual  falling  off  of  traffic  from  the  first  half  of  1917  to  the  first  half 
of  1919.  In  Detroit  the  average  fare  charged  in  the  first  half  of  1919  was  4.66 
cents,  but  this  represented  an  increase  of  28.7  per  cent  over  the  average  fare 


202  Electric  Railway  Problem 

charged  during  the  first  half  of  1917.  In  Cleveland  the  increase  was  from  3.40 
cents  in  1917  to  5.29  cents  in  1919,  or  nearly  56  per  cent.  The  only  other  city 
shown  on  Table  III  is  Pittsburgh.  Here  there  was  a  striking  decrease  in  traffic 
from  1917  to  1918,  and  a  partial  recovery  in  1919,  with  the  result  that  the  figure 
for  the  first  half  of  1919  was  9,469,644  below  the  figure  for  1917.  In  the  case 
of  Pittsburgh,  there  had  been  in  the  meantime  a  sharp  increase  in  the  rate  of 
fare.  Instead  of  the  5-cent  fare  which,  with  certain  minor  variations,  prevailed 
throughout  the  year  1917,  the  fare  system  in  ctTect  during  the  first  half  of  1919 
was  based  on  a  division  of  the  urban  territory  into  two  areas.  In  the  inner  area 
the  fare  was  five  cents,  and  in  the  outer  area  seven  cents,  with  eight  tickets  for 
55  cents.  On  August  1,  1919,  the  zones  were  abolished  and  a  cash  fare  of  ten 
cents,  with  tickets  at  the  rate  of  four  for  thirty  cents,  were  introduced,  but  this 
last  increase  in  the  rate  does  not  affect  the  traffic  figures  for  the  periods  covered 
by  Table  III. 

It  seems  to  be  clearly  shown  from  comparisons  based  on  the  figures  given 
in  Table  III  that  considerable  fare  increases,  even  where  they  start  from  a  low 
base  as  in  Cleveland  and  Detroit,  have  adversely  affected  the  development  of  traffic 
on  the  great  metropolitan  street  railway  systems  of  the  country.  It  seems  clear, 
also,  from  these  comparisons  that  where  there  have  been  no  fare  increases  the 
traffic  during  the  first  half  of  1919  showed  a  remarkable  development.  Phila- 
delphia's striking  increase  of  19.4  per  cent  contrasts  with  the  general  average 
of  about  7  per  cent  for  the  entire  group  of  big  systems  for  which  the  figures 
are  given  on  Table  I  and  Table  II ;  while  Boston's  decrease  of  11.49  per  cent  was 
even  more  striking  at  the  other  end  of  the  scale. 

Passing  on  from  the  great  metropolitan  communities  to  cities  farther  down 
in  the  scale  of  population  and  traffic,  we  find  that  the  figures  are  more  or  less 
"spotted,"  and  that  the  general  results  of  fare  increases  upon  traffic  and  revenues 
are  not  so  clear.  We  find,  for  example,  that  San  Francisco,  without  an  increase 
in  fare,  shows  an  increase  of  nearly  32  per  cent  in  traffic  for  the  first  9  months  of 
1919  as  compared  with  the  corresi)onding  period  of  1917,  a  part  of  which  is  ac- 
counted for  by  the  fact  that  the  1917  figures  were  reduced  considerably  by  a 
strike  on  the  United  Railroads.  At  the  san»e  time  Washington,  D.  C,  with  an 
increase  of  about  20  per  cent  in  the  average  fare  paid,  nevertheless  shows  an 
increase  of  more  than  46  per  cent  in  traffic.  It  is  reasonably  clear  that,  because 
of  the  extraordinary  increase  of  population  and  governmental  military  activities 
in  and  about  Washington  during  the  war,  the  Washington  figures  have  little  or 
no  significance.  The  two  Kansas  Cities  show  quite  an  opposite  result.  There, 
also,  the  average  fare  was  increased  about  20  per  cent,  and  traffic  fell  off  1.S.08 
per  cent.  The  combined  Seattle  lines,  with  only  a  slight  increase  in  fare,  showed 
an  increase  of  nearly  42  per  cent  in'traffic,  and  at  the  other  end  of  the  continent 
the  X'irginia  Railway  &  Power  lines,  al.-^o  with  a  slight  increase  in  fare,  showed 
an  increase  of  about  34;^  per  cent  in  traffic.  A  number  of  cities,  notably  New 
Orleans,  (Xikland,  Indianapolis,  Portland,  Ore.,  and  Atlanta,  showed  marked 
increases  in  Iratlic  along  with  considerable  fare  increases.  On  the  other  hand, 
Worcester,  Mass.,  with  an  increase  of  30  per  cent  in  the  fare,  shows  a  falling  off 


Effects  of  Fare  Increases  203 

of  11.7  per  cent  in  traffic,  and  Scranton,  Pa.,  with  an  increase  of  42  per  cent 
in  the  fare,  shows  a  falling  off  of  14  per  cent  in  traffic. 

The  effect  of  fare  increases  upon  revenues  is  determined  by  their  effect  upoa^___-^ 
traffic.  An  increase  from  a  straight  5-cent  fare  to  a  straight  6-cent  fare  without  / 
any  resulting  diminution  in  traffic  would  produce  an  increase  of  20  per  cent  in 
revenues.  In  like  manner  an  increase  from  5  cents  to  7  cents  would  produce  a 
40  per  cent  increase  in  revenues ;  an  increase  from  5  cents  to  8  cents  would  pro- 
duce a  60  per  cent  increase,  and  an  increase  from  5  cents  to  10  cents  would  double 
the  revenues.  While  it  was  shown  by  the  evidence  presented  to  the  Commission 
that  in  certain  cases  an  increase  in  fare  has  been  followed  by  an  immediate  decrease 
in  revenues,  the  general  consensus  of  opinion  expressed  by  witnesses  represent- 
ing the  Electric  Railway  Association  was  that  in  practically  every  case  an  increase 
in  fares  will  be  followed,  if  not  immediately,  at  least  within  a  comparatively 
short  time,  by  an  increase  in  revenues.  This  contention  is  clearly  borne  out  so 
far  as  the  large  street  railway  systems  are  concerned  by  the  analysis  of  the 
traffic  and  revenue  figures  given  on  Table  I  and  Table  II.  For  convenience  in 
determining  the  effect  upon  gross  revenues  of  traffic  decreases  accompanying 
higher  fares,  the  following  is  an  easy  formula: 

(100  minus  16%)   times  6=100  times  5 

(100  minus  284^)  times  7=100  times  5 

(100  minus  37ii>)   times  8=100  times  5 

(100  minus  44%)   times  9=100  times  5 

(100  minus  SO)      times  10=100  times  5 

This  shows  that  a  falling  off  of  16%  per  cent  in  traffic  is  required  to  obliterate 
the  effect  of  the  6-cent  fare  upon  revenues  where  the  change  is  made  from  a 
straight  5-cent  fare;  if  the  fare  is  "jumped"  from  5  cents  to  7  cents,  the  result 
will  be  neutralized  if  the  traffic  falls  off  28%  per  cent;  an  increase  from  5  cents 
to  8  cents  will  be  overcome  by  a  drop  of  yjy'<  per  cent  in  traffic,  and  an  increase 
from  5  cents  to  9  cents  by  a  drop  of  44%  per  cent  in  traffic.  Obviously,  where 
the  fare  is  doubled  the  revenues  will  be  increased  unless  traffic  is  reduced  at  least 
one  half.  A  consideration  of  these  percentages  and  of  the  figures  given  on  Table 
I  show  the  average  increase  in  the  rate  of  fare  and  the  average  increase  or  de- 
crease in  the  traffic  makes  it  almost  unnecessary  to  look  at  Table  II  for  the  effects 
upon  revenues. 

In  view  of  the  fact  that  so  many  variant  conditions  have  been  found  during 
the  past  three  years  in  different  sections  of  the  country  entirely  aside  from  the 
fare  increases,  it  is  clear  that  in  order  to  reach  an  entirely  trustworthy  conclusion 
it  will  be  necessary  to  summarize  the  results  found  on  a  large  number  of  different 
systems  classified  according  to  the  amount  of  increase  in  the  average  fares  paid. 
For  this  purpose  I  have  divided  the  cities  and  systems  for  which  the  detailed 
figures  were  received  into  four  classes.  Class  "A"  includes  those  where  there 
was  no  increase  in  the  average  far?  paid,  or  an  increase  of  less  than  3  per  cent ; 
Class  "B"  those  where  the  increase  in  the  average  fare  paid  was  between  3  per 
cent  and  10  per  cent ;  Class  "C"  those  where  the  increase  was  from  10  per  cent 
to  25  per  cent,  and  Class  "D"  those  where  the  increase  was  more  than  25  per  cent. 

The  figures  on  Table  II  show  that  in  most  transportation  areas  there  was 
some  fluctuation   in  the  average   fare  paid  even  where  the  rates  had  not  been 


204  Electric  Railway  Problem 

changed.  This  is  due  to  the  fact  that  ahhough  prior  to  the  present  era  of  fare 
increases  5  cents  was  the  general  cash  fare  unit,  a  great  many  systems  sold  reduced 
fare  tickets  or  gave  special  concessions  to  school  children  or  other  children,  or  had 
special  fares  on  particular  lines,  so  that  the  average  fare  paid  by  all  the  revenue 
passengers  taken  together  was  in  most  cases  either  more  or  less,  but  usually  less, 
than  5  cents.  For  example,  in  New  York  City  there  was,  even  in  1917,  a  slight 
variation  from  the  5-cent  fare.  This  was  due  in  part  to  the  fact  that  on  several 
short  lines,  including  local  service  on  the  East  River  bridges,  fares  below  5  cents 
were  charged;  also  in  part  to  the  fact  that  on  some  of  the  Brooklyn  Rapid  Transit 
lines  a  3-cent  fare  for  children  was  charged  under  an  old  franchise  requirement; 
also  to  the  fact  that  on  the  uptown  branch  of  the  Hudson  &  Manhattan  Railroad 
the  fare  was  7  cents. 

It  is  noteworthy  that  the  average  fare  before  the  era  of  fare  increases  in  the 
five  chief  transportation  areas  of  the  country  was  very  close  to  5  cents.  On  the 
table,  Philadelphia  shows  an  average  fare  of  4.85  cents,  but  this  is  because  the 
exchange  ticket  passengers  are  included  in  the  Philadelphia  statistics  along  with 
the  initial  5-cent  fare  passengers.  If  we  treat  the  exchange  ticket  riders  as  trans- 
fer passengers,  the  Philadelphia  average  fare  would  be  5.16  cents,  which  is  some- 
what higher  than  the  average  in  1917  for  any  of  the  other  principal  transportation 
districts  of  the  country  not  affected  by  interurban  fares.  It  is  noteworthy  that 
in  Detroit  the  average  fare  on  the  city  lines  in  1917  was  only  3.63  cents;  in  Cleve- 
land, 3.4  cents;  in  Washington,  4.3  cents;  in  Milwaukee,  4.25  cents;  in  Indian- 
apolis, 4.26  cents;  in  Columbus,  Ohio,  3.24  cents;  in  Toledo.  4.31  cents;  in  Dayton, 
Ohio,  4.29  cents  (Peoples  Railway  lines),  and  in  Trenton,  N.  J.,  4.28  cents. 
These  were  the  principal  low  fare  cities  at  that  time.  During  the  first  9  months  of 
1919  the  average  Detroit  fare  had  advanced  to  4.78  cents ;  the  Cleveland  fare  to 
5.2  cents;  the  Washington  fare  to  5.14  cents;  the  Milwaukee  fare  to  a  straight  5 
cents;  the  Indianapolis  fare  also  to  a  straight  5  cents;  the  Toledo  fare  to  5.63 
cents :  the  Dayton  fare  to  4.78  cents,  and  the  Trenton  fare  to  6  cents.  The  only 
one  of  these  low  fare  cities  which  showed  no  material  increase  was  Columbus, 
Ohio,  where  the  average  fare  for  1919  was  still  only  3.31  cents,  an  advance  of 
.07  of  a  cent  over  1917.  It  will  be  noticed  that  some  of  the  low  fare  cities  had 
a  striking  increase  on  the  percentage  basis,  even  though  after  the  increases  had 
become  effective  the  fares  were  still  relatively  low,  approximately  the  same  as 
the  average  fares  on  all  the  systems  in  1917.  For  example,  the  increase  on  the 
Detroit  city  lines  was  31.68  per  cent  but  still  not  sufficient  to  bring  the  fare  up 
to  5  cents;  the  increase  on  the  Cleveland  lines  was  54.12  per  cent  and  made  the 
average  fare  only  slightly  more  than  5  cents.  Curiously  enough,  the  classifica- 
tion of  cities  on  the  basis  of  jjcrccntages  of  increase  in  the  average  fare  paid  per 
revenue  passenger  puts  Cleveland  and  Detroit  in  the  same  class  with  Boston, 
Pittsburgh  and  the  Public  -Service  Railway  of  New  Jersey. 

Table  1\'  presented  herewith  shows  a  comparative  summary  of  the  traffic 
data  with  relation  to  fare  increases  upon  the  principal  street  railway  svstems  of 
the  country  here  under  discussion,  separated  into  the  four  classes  above  described. 
I  able  \  shows  a  comparative  summary  of  passenger  revenue  in  relation  to  fare 
increases  on  the  same  systems. 


Effects  of  Fare  Increases 


?05 


TABLE  IV— PAGE  1. 

Comparative  Summary  of  Traffic  Data  in  Relation  to  Fare  Increases  Upon  the  Principal 

Street  Railway  Systems  of  the  United  States,  as  Reported  to  the  Federal 

Electric  Railways  Commission,  for  the  First  Nine  Months  of 

1917   and  the   First  Nine   Months  of   1919 

The  cities  and  systems  for  which  traffic  and  fare  statistics  are  sho7i.ii  on  Table  I  are  here 
distributed  into  four  classes  according  to  the  percentage  increase  in  the  average  fare  paid 
per  rci'cnue  passenger  during  the  first  nine  months  of  1919  as  compared  with  the  first  nine 

months  of  1917. 

CLASS  A— CITIES  OR  SYSTEMS  WHERE  THERE  WAS  NO  INCREASE  IN  THE 

AVERAGE  FARE  PAID,  OR  WHERE  THE  INCREASE  WAS 

LESS  THAN  3  PER  CENT. 

%  Increase       %  In-         %  De- 

In  Averace     crease  In      crease  In 

Fare — 1919     Revenue        Revenue 

Revenue  Passengers     Revenue  PassenEers        over  1917     Passengers  Passengerf 

First  9  Months  First  9  Months  {'Indicates    — 1919  — 1919 

City  or  System  of  1917  of  1919  Decrease)     over  1917  over  1917 

New   York— All   Lines 1,489,962,657  1,667,426,486  061  1L91 

Philadelphia— All  Lines    436.909,768  526,535,845  0.21*  20.51 

Detroit— Interurban  Lines   20,928,614  27,561.729  0.99  31.69 

Minneapolis  and  St.  Paul 145,162,419  153,576,078  0.00  5.79 

Los  Angeles— Citv  Lines   89.534,769  106.261.432  1.62  18.68 

San  Francisco— All  Lines 126,478.799  166,715,177  0.40*  31.81 

Columbus,   Ohio    50.406.073  52,682.219  2.16  4.51 

Birmingham    29.846.954  34.273,258  2.84  14.83 

Kalamazoo,    Mich 4.497,554  5,118,566  1.12  13.81 

Nashville    22.012.483  28.032.224  2.59  27.35 

For   Worth— aty   Lines    16,124,648  24,496,694  0.40  51.92 

San  Antonio  16.867,713  24,347,314  0.41  44.34 

New    Bedford    16,707.643  20,211,655  2.69  20.97 

TOTALS     2,465.440.094        2.837.238.677  0.41        15.08 

CLASS  B— CITIES   OR   SYSTEMS  WHERE  THE   INCREASE   IN  THE  AVERAGE 
FARE  PAID  WAS  BETWEEN  3  PER  CENT  AND  10  PER  CENT. 

Chicago— Surface  Lines   523,370,743  551,381,266  7.61  5.35 

Buffalo,    Niagara   Falls,   etc....  113.609.101  119.740.900  6.47  5.39 

Kansas   City,   Kansas    16,406,749  13,965.368  5.22                        14.88 

Richmond,  Norfolk,  etc 54,630,318  73.463.000  4.84  34.47 

Seattle— All    Lines(l)     53,504,761  75,960,360  5.51  41.97 

Omaha  and  Council  Bluffs 45,688.544  52.511.447  3.52  14.93 

Memphis 31,185,675  34,991,207  8.02  12.52 

Dallas— .-Ml   Lines  24,970.223  33.855,986  5.29  35.59 

Des   Moines  23.445.067  26.371,094  7.25  12.48 

Schenectady— City  Lines    13,957.763  14.396,780  8.85  3.15 

Terre  Haute-City  Lines  7,742.211  9,349,623  4.89  20.76 

TOTALS    908,511,155        1.005.987,031  6.63        10.73 

(1)  Not  including  the  Seattle  and  Rainier  Valley  Railway  Line. 


206 


Electric  Railway  Problem 


TABLE  IV— PAGE  2. 

Comparative  Summary  of  Traffic  Data  in  Relation  to  Fare  Increases  Upon  the  Principal 

Street  Railway  Systems  of  the  United  States,  as  Reported  to  the  Federal 

Electric  Railways  Commission,  for  the  First  Nine  Months  of 

1917   and  the  First   Nine   Months  of   1919 

The  cities  and  systems  for  which  traffic  and  fare  statistics  arc  shotvn  on  Table  J  are  here 
distributed  into  four  classes  according  to  the  fercentatje  increase  in  the  averaye  fare  paid 
per  revenue  passenger  during  the  first  nine  months  of  1919  as  compared  with  the  first  nine 

months  of  1917. 

CLASS  C— CITIES  OR  SYSTEMS  WHERE  THE  INCREASE  IN  THE  AVERAGE 
FARE  PAID  WAS  BETWEEN  10  PER  CENT  AND  25  PER  CENT. 


ReTcnuff  P«ii!wni;rrf  RrTrnue  Piisscnirrr* 

First  9  Months  Ftrst  '.>  Months 

CIW  or  Sjslcm  of  I  !i  1 7  of  1 9 1  !l 

St.  Louis  196.739,976  195.211.572 

Baltimore 159.028.504  181,651.331 

New   Haven,  Hartford,   Bridge- 

p(,rt,   etc 141,555,122  128,522.107 

Los   Angeles— Interurban    Lines  48.724.644  51,588.152 

Rochester.  Syracuse.   Utica,  etc.  109.721,679  107,784,111 

Kansas   City,    Mo 83,932,965  68232,548 

Washington,    D.   C— All   Lines.  90.291,052  132.152,869 

Milwaukee    85,449.596  93,986.497 

Cincinnati    82,631,009  81,059.828 

New   Orleans    69,260.548  79.032,169 

Oakland.   Berkeley,  etc 57.8aS,617  64.877.797 

Indianapolis    55.031.522  60.750.611 

Akron,  Canton,  etc 49,467.059  56.977,359 

Denver    45.3.W.077  47,816,757 

Portland,  Ore.— City  Lines 43.893..';82  55,352.547 

Atlanta   and   Vicinity    42.171.415  56,427,064 

Youngstown   and   Vicinity .V ,888.8^1  .%.698.212 

Springticld.   Mass.,  and   Vicinity  35,644,600  36,274,159 

AlWntown,    Bethlehem,   etc 34,769,663  35,563,277 

Davton 

'  People's  Railwav  Lines    . . .  9,028,145  10,164.616 

Oakwood  Street  Ry.  Lines.  2.926.512  3.488.281 

Lansing.    Mich 5.008.727  5.614.226 

Battle   Creek,    Mich 4,386.400  4.299,505 

Michigan     Railway,     Interurban 

Lines    5.809.005  5.687,565 

Salt   Lake   City   and    Vicinity...  25.510,649  24.605..W7 

Wilmington,    Del 20289.998  20.M<M75 

Grand    Rapids    19,498,885  19,568.259 

Fort   Worth,   Interurban   Lines.  1,448.016  2.310,680 

Harristnirg    17„109.396  19,504.823 

Schenectady,    Interurban   Lines.  3,234,606  3,233,863 

TOTALS    1,583,795,790  1,689,085,597 


%  IncrMM 
In  AT«rmse 
Fare — 1919 
Offr  1917 

creaie  In 
R^Tcnue 
PaasenKtri 
— 1919 
0T«  1917 

creue  In 
Rrreoue 

TmMatngtn 
—1919 

OTU  19ir 

20.00 

0.77 

2123 

14.22 

20.44 

927 

13.37 

5.87 

11.07 

1.76 

23.29 

23.01 

19.53 

46.36 

17.64 

9.08 

21.12 

1.90 

23.45 

14.11 

17.01 

12.23 

17.37 

10.39 

11.65 

15.18 

19.00 

5.46 

20.86 

26.16 

11.80 

33.80 

17.19 

3.14 

18.58 

1.77 

19.01 

228 

11.42 

12.58 

11.48 

19.20 

17.66 

12.09 

24.83 

1,98 

15.70 

2.09 

18.57 

3.55 

23.61 

1.77 

16.83 

0.36 

16.61 

59.57 

22.45 

12.68 

10.79 

10.85 

17.80 


6.65 


Effects  of  Fake  Increases 


207 


TABLE  IV— PAGE  3. 

Comparative  Summary  of  Traffic  Data  in  Relation  to  Fare  Increases  Upon  the  Principal 

Street  Railway  Systems  of  the  United  States,  as  Reported  to  the  Federal 

Electric  Railways  Commission,  for  the  First  Nine  Months  of 

1917  and  the  First  Nine   Months  of   1919 

The  cities  and  systems  for  which  traffic  and  fare  statistics  are  shozmi  on  Tabic  I  arc  here 
distributed  into  four  classes  according  to  the  percentage  increase  in  the  average  fare  paid 
per  revenue  passenger  during  the  first  nine  months  of  1919  as  compared  with  the  first  nine 

months  of  1917. 

CLASS  D— CITIES  OR   SYSTEMS  WHERE  THE  INCREASE   IN   THE   AVERAGE 
FARE  PAID  WAS  MORE  THAN  25  PER  CENT. 


%  In- 

% De- 

crease In 

crease  In 

%  Increase      Revenue 
In  Average    Passengers 

Revenue  Passeneers 

Revenue  PaesenKers 

Passeneers 

First  9  Months 

First  9  Months 

Fare — 1919     — 1919 

—1919 

City  or  System 

of  1917 

of  V.'Vi 

over  1917      over  1917 

over  1917 

Chicago— Elevated  Lines   143,741.130  136,839,Z25 

Boston    283.538,270  239,677,336 

Newark,   Jersey   City,   etc 268,384,308  242,182,829 

Detroit— One  Fare  Zone    233,966,707  238,296,671 

Cleveland    218,108,253  212,581,057 

Pittsburgh     199,799,054  174,3.52,989 

Worcester  and  Vicinity 49,049,904  43,309,315 

Toledo    43,173,868  41,453,499 

Jackson,    Mich 5,850,851  5,434,806 

Owosso-Corunna,    Mich 243,892  263,985 

Scranton   and   Vicinity 21,484,778  18,468.199 

Erie  and  Vicinity  19,336,629  18,641,243 

Trenton    15,304,987  13,598,832 

Terre  Haute— Interurban   Lines  6,599,696  6,180,906 

Tacoma— City  Lines  (1)    13,132,660  15,706,196 

TOTALS    1,521,714,987  1,406,987,088 

(1)  Not  including  Tide  Flats  municipal  line. 

SUMMARY  —  CITIES     AND 
SYSTEMS    OF    ALL 

CLASSES    COMBINED..  6,479,462,026  6,939,298,393 


26.89 

5.04 

70.36 

15.47 

40.28 

9.69 

31.68 

1.85 

54.12 

2.53 

29.98 

12.73 

30.16 

11.70 

30.65 

4.00 

27.53 

7.11 

31.00 

8.24 

42.32 

14.04 

30.73 

3.60 

40.19 

11.15 

42.27 

6.35 

44.09 

1929 

41.77 


13.97 


7.54 


7.10 


208 


Electric  Railway  Problem 


TABLE  V— PAGE  1. 

Comparative  Summary  of  Passenger  Revenues  in  Relation  to  Fare  Increases  Upon  the 

Principal   Street   Railway   Systems   of   the   United   States,  as   Reported   to 

the  Federal  Electric  Railways  Commission,  for  the  First  Nine 

Months  of  1917  and  the  First  Nine  Months  of  1919 

The  cities  and  systems  for  which  revenue  and  fare  statistics  are  shown  on  Table  II  are  here 
distributed  into  four  classes  according  to  the  percentage  increase  in  the  average  fare  paid 
per   reiciiuc   passenger   during    the   first   nine   months   of    1919   as   compared   uith    the   first 

nine  months  of  1917. 

CLASS  A— CITIES  OR  SYSTEMS  WHERE  THERE  WAS  \0  LVCREASE  1\  THE 

AVERAGE  FARE   PAID.   OR   WHERE  THE   LXCREASE 

WAS  LESS  THAN  3  PER  CENT. 

^r  Increase 

<?n  Iiwreaae  In  Pasat-n- 

iD  ATerace  cer  Earn- 

Fare — 1919  Inia.  1919 

Passt'nRer  Revenue  Pawenger  Revenue  Over  I.M"  Over  1H17 

First  9  M(HlUu  First  9  Monttu  (  Mn.Ucates  (  'Indicates 

City  or  System  of  1917  of  1919  Decrease)  Decrease) 

New  York— All  Lines   $73,795,447.83  $82,965,981.94  061  1241 

Philadelphia— AH   Lines    21,168,746.48  25,466,994.58  0.21*  20.30 

Detroit— Interurban   Lines    1,686.946.41  2.244,182.87  0.99  33.03 

Minneapolis  and  St.  Paul  7,261,120.95  7,678,803.90  0.00  5.75 

Los  Angeles— City   Lines    4.415,738.45  5,322.772.40  1.62  20.54 

San   Francisco— All  Lines   6,312,923.52  8,277,085.01  0.40*  31.11 

Columbus,  Ohio   1,633.315.93  1.743.702.95-  2.16  6.72 

Birmingham    1,470.755.51  1,738.017,88  2.84  18.17 

Kalamazoo,   Mich 200.984J4  231.153.92  1.12  15.01 

Nashville    1,129262.19  1,441,907.83  2.59  27.69 

Fort  Worth— City  Lines   782,719.78  1,194.239.50  0.40  52.57 

San  Antonio    816,563.46  1,184,542.05  0.41  45.64 

New  Bedford   808,269.98  1,005,393.25  2.69  24.39 

TOTALS    $121,482,794.73         $140,494,778.06  0.41  15.65 

CLASS  B— CITIES  OR  SYSTEMS  WHERE  THE  INCREASE  IN  THE  AVERAGE 
FARE  PAID  WAS  BETWEEN  3  PER  CENT  AND  10  PER  CENT. 

Chicago— Surface  Lines    $26,112,648.00  $29,604,964.00  7.61  13.37 

Buflfalo,   Niagara  Falls,  etc 5.961,979.21  6,694.808.71  6.47  12.29 

Kansas  City,  Kansas   816,816.52  731.353.54  5.22  10.46* 

Richmond,   Norfolk,   etc 2.596,097.93  3,835,808.13  4.84  47.75 

Seattle— All   Lines(l)    2,526.797.01  3,785.423.89  5.51  49.81 

Omaha  and  Council  Bluffs   ....  2,.«!;.883.34  2,777.497.29  3.52  18.96 

Memphis     1.554.872.00  1.887.285.00  8.02  21.38 

Dallas— All   Lines   1.1.^4,571.84  1.018,382.74  5.29  Al.tA 

Dcs  Moines   1.067,809.01  1,288.188.77  725  20.64 

Schenectady— City    Lines    693,835.74  778228.02  8.85  12.16 

Tcrre  Haute— City  Lines 363,661.17  461.358.06  4.89  26.86 

TOTALS    $45,264,972.37  $53,463,298.15  6.63  18.11 

(1)  Not  including  the  Seattle  and  Rainier  Valley  Railway  Line. 


Effects  of  Fare  Increases  209 


TABLE  V— PAGE  2. 

Comparative  Summary  of  Passenger  Revenues  in  Relation  to  Fare  Increases  Upon  the 

Principal   Street   Railway   Systems   of  the   United   States,   as   Reported   to 

the  Federal  Electric  Railways  Commission,  for  the  First  Nine 

Months  of  1917  and  the  First  Nine  Months  of  1919 

The  citii-s  and  systems  for  ivhich  revenue  and  fare  statistics  are  shown  on  Table  II  are  here 
distributed  into  four  classes  according  to  the  percentage  increase  in  the  average  fare  paid 
per   revenue  passenger   during    the   first   nine   months   of    1919   as   compared   'with    the   first 

nine  months  of  1917. 

CLASS   C— CITIES  OR  SYSTEMS  WHERE  THE  INCREASE   IN  THE  AVERAGE 
FARE  PAID  WAS  BETWEEN  10  PER  CENT  AND  25  PER  CENT. 

%  Increase 

%  Increase        In  Passen- 

Passengcr  Revenue  Passenger  Revenue  In  Average         ger  Sam- 

Plrst  9  Months  First  ;i  Months  Fare — 1919      Ings.  1919 

City  or  System  of  1917  ofl'llS  over  I91T  orec  1917 

St.    Louis    $9,744,453.05  $11,590,590.69 

Baltimore    7.716,89.100  10,674,467.00 

New    Haven,    Hartford,    Bridge- 
port, etc 7.580,645.83  8.190,332.14 

Los    Angeles— Interurban    Lines  5,099,802.08  6,125,505.58 

Rochester.   Syracuse,   Utica,    etc.  6,041.478.00  6,598,948.00 

Kansas   City,   Missouri    4,177,160.00  4.187,178.00 

Washington,  D.  C— All  Lines..  3,881,249.29  6.798,510.61 

Milwaukee    3.629.035.81  4,699,107.75 

Cincinnati    4,108,444.12  4.876,694.85 

New   Orleans    3.363.028.00  4,741,899.00 

Oakland,  Berkeley,  etc 3,399,317.01  4461,580.63 

Indianapolis     2,.34S,502.94  3,037,028.79 

Akron,   Canton,   etc 3,223,893.29  4.145.482.86 

Denver    2,276,950.63  2,847,201.52 

Portland,  Ore.— Citv  Lines 2,229,217.46  3.396,980.37 

Atlanta  and   Vicinity    2.108,570.60  3,151,463.62 

Youngstown   and   Vicinity    1.941,740.39  2,200,387.51 

Springfield.    Mass..   and    Vicinity  1.764,761.19  2,128,089.17 

Allontown.   Bethlehem,   etc 1.610,531.14  1,958,414.64 

Dayton 

People's  Railway  Lines 386,764.53  485,967.28 

Oakwood   Street   Ry.  Lines.  124,847.93  166,383.20 

Lansing.    Mich 235,163.07  310,550.36 

Battle  Creek,  Mich 194,174.90  2i7.S7Q.i7 

Michigan       Railway — Interurban 

Lines    1.553,980.55  1,760,501.13 

Salt  Lake  City  and  Vicinity     ..  1,182,066.00  1.350,028.00 

Wilmington.    Del 987,926.58  1,242,961.96 

Grand   Rapids   973,785.48  1,141,113.56 

Fort   Worth— Interurban   Lines.  503,925.35  937,993.85 

Harrisburg    847,714.00  1,174,108.00 

Schenectady— Interurban    Lines.  335,633.38  372,043.47 

TOTALS   $83,568,655,60         $104,989,083.91  17.80  25.63 


20.00 

18.9S 

21.23 

38.33 

20.44 

8.04 

13.37 

20.11 

11.07 

9.23 

23.29 

0.24 

19.53 

75.19 

17.64 

29.49 

21.12 

18.70 

23.45 

41.01 

17.01 

31.25 

17.37 

29.48 

11.65 

28.59 

19.00 

25.04 

20.86 

52.38 

11.80 

49.46 

17.19 

13.32 

18.58 

20.59 

19.01 

21.60 

11.42 

25.65 

11.48 

33.27 

17.66 

32.06 

24.83 

22.35 

15.70 

13.29 

18.57 

14.22 

23.61 

25.81 

16.83 

17.18 

16.61 

86.13 

22.45 

38.50 

10.79 

10.85 

210 


Electric  Railway  Problem 


TABLE  V— PAGE  3. 

Comparative  Summary  of  Passenger  Revenues  in  Relation  to  Fare  Increases  Upon  the 

Principal   Street   Railway   Systems   of   the   United   States,   as    Reported   to 

the  Federal  Electric  Railways  Commission,  for  the  First  Nine 

Months  of  1917  and  the  First  Nine  Months  of  1919 

The  cities  and  systems  for  which  revenue  and  fare  statistics  are  shown  on  Table  II  are  here 
distributed  into  four  classes  according  to  the  percentage  increase  in  the  average  fare  paid 
per   revenue  passenger   during    the  first    nine   months   of    1919   as   compared   zcith    the   first 

nine  months  of  1917. 

CLASS   D— CITIES  OR  SYSTEMS  WHERE  THE  INCREASE  IN  THE  AVERAGE 
FARE  PAID  WAS  MORE  THAN  25  PER  CENT. 


PaMenppr  R^rpnue 

'  FInt  9  Monlht 

CUj  or  Bjltrm  nt  1917 

Chicago— Elevated   Lines    $7,424,740.27 

Boston   14.162.362.,% 

Newark,  Jersey  City,  etc 13..179.4«8.46 

Detroit— One   Fare  Zone    8,495.9S4.00 

Cleveland    7,425.361.9.3 

Pittslnirgh 9.934.592.00 

Worcester   and   Vicinity    2.422,516.39 

Toledo   1,860.350.00 

Jackson.   Mich 271.992.73 

Owosso-Corunna,    Mich 12.191.85 

Scranton    and    Vicinity    1.09(U91.15 

Erie  and  Vicinity   1.164,382.75 

Trenton    6.54.978.58 

Terrc  Haute — Interurban   Lines.  1.417.701.86 

Tacoma— City  Lincs(l)    622.277.31 

TOTALS   170,339.311.64 

(1)  Not   including  Tide  Flats  Municipal  Line. 

SU.MMAKY  —  CITIES     AND 
SYSTEMS     OF    ALL 

CLASSES    COMBINED...  $320,655,734.34 


PasMneer  Revenue 

Flr>l  »  Months 

of  1919 


%  IncreftM 
In  ATermne 

Flire — 1919 
oter  1917 


inPUMB- 
Ker  Earn- 
Inn.  I81( 
srarltir 


$8,981,192.54 

26.89 

20.96 

20,369,190.05 

70.36 

43.83 

16,942.840.32 

40.28 

26.63 

11,399.518.02 

31.68 

34.18 

11.136.974.15 

54.12 

49.98 

11.269,485.00 

29.98 

13.44 

2,773276.99 

30.16 

14.48 

2,333,540.81' 

30.65 

25.44 

321,990.14 

27.53 

18.38 

17.282.98 

31.00 

41.76 

1,334.628.11 

42.32 

22.40 

1,467,308.95 

30.73 

26.01 

816.230.74 

40.19 

24.62 

1,888.599.95 

42.27 

33.15 

1.073.284.98 

44.09 
41.77 

72.48 

$92,125,343.73 

30.97 

$391,072,503.87 


13.97 


21.96 


Effects  of  Fake  Increases  211 

In  order  still  further  to  summarize  and  visualize  the  results  of  fare  increases 
upon  traffic  and  revenues  as  shown  by  the  figures  in  the  particular  transporta- 
tion areas  and  groups  of  areas  on  Table  I,  Table  II,  Table  IV  and  Table  V,  I  have 
prepared  Table  VI  (page  212),  which  gives  the  number  of  cities  or  systems  in  each 
of  the  four  classes,  the  total  number  of  revenue  passengers  carried  during  the  first 
9  months  of  1917,  the  first  9  months  of  1918  and  the  first  9  months  of  1919  on  each 
group  of  systems,  the  per  cent  of  the  total  electric  railway  traffic  of  the  country 
carried  by  each  group  in  1917,  and  the  average  fare  per  revenue  passenger  on 
each  group  during  the  first  9  months  of  1917  and  the  first  9  months  of  1919.  It 
will  be  observed  that  the  four  groups  of  cities  included  in  this  analysis  carried 
76.63  per  cent  of  all  the  electric  railway  traffic  of  the  country.  The  first  group, 
where  fares  were  not  appreciably  increased,  carried  a  little  over  29  per  cent ;  the 
second  group,  where  fares  were  increased  between  3  per  cent  and  10  per  cent, 
carried  nearly  1 1  per  cent  of  the  traffic ;  the  third  group,  where  fares  were  in- 
creased from  10  per  cent  to  25  per  cent,  carried  about  18'}4  per  cent  of  the  total 
traffic,  and  the  fourth  group,  where  fares  were  increased  more  than  25  per  cent, 
carried  18  per  cent  of  the  total  traffic. 

The  significant  figures  in  which  the  results  of  the  analysis  of  the  effects  of 
fare  increases  upon  traffic  and  revenues  are  summarized  are  those  contained  in 
the  last  three  columns  of  Table  VI.  It  will  be  seen  that  the  first  of  these  columns 
shows  for  each  group  and  for  all  groups  together  the  per  cent  increase  in  the 
average  rate  of  fare  paid  in  1919  as  compared  with  1917;  the  second  shows  the 
per  cent  increase  or  decrease  in  the  traffic  over  the  same  period,  and  the  last 
column  shows  the  per  cent  increase  in  passenger  revenues.  These  columns  tell 
the  story.  For  the  four  classes  the  increases  in  the  average  fare  paid  are  0.41 
per  cent,  6.63  per  cent,  17.80  per  cent  and  41.77  per  cent  respectively.  The  traffic 
changes  for  the  same  groups  are  15.08  per  cent  increase,  10.73  per  cent  increase, 
6.65  per  cent  increase  and  7.54  per  cent  decrease,  respectively.  As  the  per  cent 
increase  in  fares  goes  up  the  per  cent  increase  in  traffic  goes  down,  and  in  the 
fourth  class  is  changed  into  an  actual  decrease.  The  per  cent  increases  in  pas- 
senger revenues  are  15.65  per  cent,  18.11  per  cent,  25.63  per  cent  and  30.97  per 
cent,  respectively,  showing  a  steady  upward  trend. 

If  we  compare  the  first  group  of  communities,  where  as  a  result  of  the  normal 
growth  of  traffic  and  without  any  appreciable  increase  in  the  rate  of  fare,  revenues 
for  the  first  9  months  of  1919  increased  more  than  15  per  cent  over  the  cor- 
responding period  of  1917,  with  the  fourth  group,  where  with  an  actual  decrease 
of  7.54  per  cent  in  traffic  the  revenue  showed  an  increase  of  30.97  per  cent  as  a 
result  of  fare  increases  averaging  41.77  per  cent,  we  are  able  to  draw  the  con- 
clusion with  considerable  definiteness  that  the  difference  between  an  increase  of 
15.65  per  cent  in  revenues  and  an  increase  of  30.97  per  cent  in  revenues  is  the 
real  measure  of  the  increase  in  revenues  due  to  an  average  increase  of  over  40 
per  cent  in  fare.  In  other  words,  the  conclusion  seems  to  be  reasonably  clear 
that  an  increase  of  40  per  cent  in  fare  may  be  expected  to  produce  only  about 
15  per  cent  increase  in  revenue.  Dr.  Thomas  Conway,  testifying  on  behalf  of 
the  American  Electric  Railway  Association,  stated  as  a  result  of  his  rather  exten- 
sive studies,  that  a  40  per  cent  increase  in  fare  could  be  expected  to  produce  an 


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Effects  of  Fare  Increases  213 

increase  of  from  15  per  cent  to  25  per  cent  in  revenues.     Our  analysis  tends  to 
substantiate  his  minimum  figure. 

There  is  still  one  possible  element  of  doubt  as  to  the  soundness  of  the  con- 
clusions drawn  from  this  analysis  of  the  efTect  of  fare  increases  upon  traffic  and 
revenues.  The  point  may  be  raised  that  possibly  the  decrease  in  traffic  in  certain 
communities  has  been  the  cause,  rather  than  the  result,  of  fare  increases.  Unques- 
tionably, the  general  tendency  for  a  slowing  down  or  a  complete  cessation  of  traffic 
development  during  the  early  part  of  1918,  and  even  more  markedly  during  the 
later  months  of  the  year,  when  war  and  influenza  combined  to  restrict  traffic 
growth,  accentuated  the  financial  difficulties  in  which  many  street  railway  com- 
panies found  themselves,  and  stimulated  the  general  movement  for  fare  increases. 
It  is  not  possible,  from  a  general  survey  of  the  statistics,  to  check  with  certainty 
and  complete  accuracy  the  relative  position  of  traffic  decreases  as  the  cause 
or  elYect  of  fare  increases  in  particular  communities.  Yet,  some  light  will  be 
thrown  upon  this  matter  by  an  examination  of  the  traffic  tendencies  in  the  dif- 
ferent communities  prior  to  the  dates  when  fares  were  increased.  For  example, 
it  may  be  seen  from  Table  I  that  both  New  York  and  Boston  showed  an  actual 
traffic  decrease  in  1918  as  compared  with  1917,  although  the  decrease  in  Boston 
was  more  marked  than  in  New  York.  The  1919  figures  show  this  tendency 
sharply  reversed  in  New  York,  where  fares  remained  unchanged,  and  sharply 
accentuated  in  Boston,  where  fares  were  radically  increased.  Taking  the  Phila- 
delphia and  New  Jersey  systems,  we  see  that  traffic  in  1918  showed  an  increase 
on  both  systems  as  compared  with  1917.  although  the  increase  was  much  less  on 
the  New  Jersey  lines  than  on  the  Philadelphia  lines.  The  1919  figures  show 
that  in  Philadelphia,  with  no  increase  in  fare,  this  tendency  of  traffic  to  increase 
was  sharply  accentuated,  while  in  New  Jersey,  with  a  radical  increase  in  fares, 
the  tendency  was  reversed.  In  Detroit,  Cleveland,  Pittsburgh  and  St.  Louis, 
where  marked  fare  increases  were  in  effect  in  1918,  the  falling  ofT  in  traffic  was 
much  more  noticeable  than  in  New  York  where  the  fares  remained  the  same. 
In  Detroit  and  Pittsburgh  where  the  greatest  increases  in  fare  took  place  between 
1917  and  1918,  the  falling  off  in  traffic  in  1918  was  much  more  marked  than  in 
the  other  two  cities,  and  indeed  was  more  marked  than  in  Boston  where  the 
average  fare  paid  showed  a  considerable  increase  as  a  result  of  the  7-cent  fare 
charged  during  the  last  two  months  of  the  9  months  period.  These  comparisons 
tend  to  substantiate  the  final  results  obtained  by  the  general  analysis  summarized 
on  Table  VI.  At  the  same  time  they  do  not  quite  prove  that  decreases  in  traffic 
may  not  be  a  contributory  cause  as  well  as  a  principal  effect  of  fare  increases 
in  certain  communities. 

A  number  of  witnesses  laid  great  stress  upon  another  point,  namely,  their 
conviction  that  even  though  traffic  may  fall  off  as  the  immediate  result  of  fare 
increases  it  will  gradually  come  back.  An  important  distinction  is  to  be  made 
here.  If  fare  increases  mean  merely  the  setting  back  of  traffic  growth  for  a 
period  of  seven  years,  as  I  have  suggested  in  my  comparison  of  the  Boston  and 
New  York  figures,  and  if  under  the  higher  rates,  after  this  setback,  traffic  will 
start  on  again  developing  normally  at  the  same  rate  as  it  develops  in  cities  where 
lower  fares  are  charged,  then  it  may  be  urged  that  although  the  results  of  fare 


214  Electric  Railway  Problem 

increases  are  more  or  less  painful  and  temporarily  disadvantageous  to  the  com- 
munity, the  ultimate  results  are  not  very  serious;  that  the  street  railways  will 
gradually  redevelop  the  riding  habit  under  the  new  fare  conditions  and  "tag 
along"  in  the  procession,  with  the  only  difference  that  they  will  be  a  few  years 
behind  other  cities,  where  fare  increases  are  not  put  into  eflfect.  On  the  other 
hand,  if  a  radical  increase  in  fares  not  only  sets  back  the  development  of  traffic 
but  has  the  effect  of  stimulating  competitive  methods  of  transportation  and  of 
alienating  the  public  so  as  to  make  it  impossible  for  the  street  railways  to  get  the 
full  degree  of  cooperation  that  is  necessary  if  they  are  to  go  on  and  prosper,  then 
the  results  will  be  more  serious. 

We  even  have  to  consider  in  this  connection  the  question  as  to  whether  or 
not  the  development  of  the  riding  habit  beyond  the  point  of  necessity  is  con- 
ducive to  public  welfare,  and,  therefore,  something  that  from  the  public  point  of 
view  we  should  demand  of  the  street  railways.  It  is  noteworthy  that  almost  all 
authorities  on  health  consider  the  walking  habit  as  one  of  the  most  advantageous 
habits  that  can  be  formed.  It  may  be  that  a  close  study  of  traffic  conditions  and 
of  the  social  effects  of  transportation  service  would  place  a  limit  upon  the  demand 
for  mere  convenience  riding.  If  so,  the  usefulness  of  the  street  railways  cannot 
be  accurately  measured  by  the  luunber  of  passengers  they  carry,  and  we  cannot 
draw  the  firm  conclusion  that  a  diminution  in  the  number  of  passengers  carried 
means  a  corresponding  diminution  in  the  usefulness  of  the  street  railway  as  a 
public  utility.  It  would  be  a  mistake  to  become  mawkish  or  sentimental  in  our 
advocacy  of  the  riding  habit  and  in  our  demand  that  financial  considerations  in 
the  operation  of  street  railways  shall  be  subordinated  to  mere  considerations  of 
public  convenience  ratiier  than  public  necessity.  It  always  seems  simpler  and 
easier  to  deal  with  such  a  problem  as  local  transportation  as  a  distinct  and  separate 
problem  without  giving  full  consideration  to  its  bearing  upon  other  social  and 
governmental  problems,  and  perhaps  it  is  safer  in  approaching  the  transportation 
problem  to  assume  that  the  riding  habit  formed  as  a  result  of  convenient  service 
is  entirely  beneficial  to  the  community. 

From  the  point  of  view  of  the  street  railways  there  can  he  no  doubt  that 
the  falling  off  of  traffic  as  a  result  of  fare  increases,  or  the  halt  in  the  develop- 
ment of  the  riding  habit  from  this  or  any  other  cause  is  an  evil.  Under  certain 
conditions  it  may  be  the  lesser  of  two  evils,  but  it  is  nevertheless  an  evil.  It  is 
reasonably  clear  that  the  decrease  in  convenience  or  short-haul  riding,  whatever 
the  cause  of  the  decrease  may  be,  tends  to  increase  the  average  cost  of  the  service 
rendered.  It  is  a  generally  recognized  fact  that  the  high  peaks  of  traftic  at  the 
rush  hours  constitute  one  of  the  greatest,  if  not  the  greatest,  financial  problem  of 
the  street  railways.  It  is  much  more  expensive  to  give  the  same  character  of 
service  during  the  rush  hours  than  at  other  times.  If  a  company  were  compelled 
to  furnish  seats  to  all  passengers  during  the  rush  hours,  the  cost  in  many  cases 
would  be  prohibitive  at  present  rates  of  fare.  It  is  pretty  clear  that  the  rush 
hour  traffic  is.  for  the  most  ])art,  a  relatively  long-haul,  necessity  traffic.  The 
short-haul,  convenience  tratVic  is.  for  the  most  part,  picked  up  during  the  day  at 
oflT-pcak  hours.  It  can  hardly  he  doubted  that  the  result  of  fare  increases  is 
to  accentuate  the  peak  of  the  load  by  depressing  the  traffic  valleys  during  the 


Effects  of  Fare  Increases  215 

non-rush  hours  and  thus  increase  the  practical  difficulties  and  the  financial  diffi- 
culties of  street  railway  transportation. 

If  a  street  railway  is  not  receiving  sufficient  revenues  to  cover  the  full  cost 
of  service,  and  if  it  is  impossible  to  make  both  ends  meet  by  a  decrease  in  expenses 
or  by  an  increase  in  traffic,  or  by  the  development  of  other  sources  of  revenue, 
then  it  is  unquestionably  necessary  and  proper  that  fares  should  be  increased  to 
the  point  where  the  car  rider  will  pay  the  full  cost  of  service  even  though  the 
number  who  pay  the  cost  is  considerably  reduced.  This  is  merely  a  statement  of 
obvious  necessity.  In  other  words,  so  long  as  the  pul)lic  depends  upon  private 
agencies  to  render  transportation  service,  and  so  long  as  it  insists  that  the  service 
is  necessary  and  must  be  rendered  while  at  the  same  time  it  is  unwilling  to  as- 
sume any  public  initiative  in  the  matter  or  make  any  contribution  to  the  cost  of 
the  service  from  the  public  treasury  or  otherwise,  the  agencies  that  perform  the 
service  must  be  pemiitted  to  collect  from  the  users  of  the  service  all  that  the 
service  costs  if  it  is  possible  to  do  so,  and  if  it  is  not  possible,  then  the  only  limit 
upon  the  charges  to  be  made  for  service  will  be  the  economic  limit  represented 
by  the  expression  "all  that  the  traffic  will  bear."  The  social  consequences  of 
higher  fares  may  be,  and  in  many  cases  doubtless  are  very  serious,  but  this  fact 
does  not  warrant  or  enable  a  community  to  secure  through  private  agencies  a 
continuous  and  necessary  service  for  less  than  its  necessary  cost. 

It  is  significant  that  the  average  fare  paid  per  revenue  passenger  on  those 
electric  railways  carrying  three-fourths  of  the  traffic  for  the  entire  country  was 
4.95  cents  during  the  first  nine  months  of  1917  and  5.64  cents,  an  increase  of  13.97 
per  cent,  two  years  later.  During  this  period  traffic  increased  7.1  per  cent  and 
passenger  revenues  21.96  per  cent.  On  those  systems  where  there  was  no  ap- 
preciable increase  in  fares,  traffic  and  passenger  revenues  increased  15.08  per  cent 
and  15.65  per  cent  respectively.  At  the  other  end  of  the  scale,  where  fares  in- 
creased an  average  of  41.77  per  cent,  traffic  fell  oflf  7.54  per  cent  and  revenues 
increased  30.97  per  cent. 

The  Executive  Secretary  did  not  address  special  inquiries  with  respect  to 
fare  increases  and  their  effect  upon  traffic  and  revenues  to  cities  or  street  railway 
systems  outside  of  the  United  States  except  in  the  case  of  the  two  principal 
Canadian  cities,  Montreal  and  Toronto.  It  was  thought  that  the  figures  for 
Montreal  might  be  quite  important,  as  the  Montreal  Tramways  Company  two 
years  ago  entered  into  a  new  contract  with  the  City  of  Montreal  in  which  a 
service-at-cost  plan  without  any  maximum  limitation  on  fares  was  incorporated. 
Under  this  contract  the  fares  in  Montreal,  which  were  relatively  low  under  the 
old  franchise,  have  been  increased  on  two  occasions.  The  new  service-at-cost  con- 
tract was  executed  January  28,  1918,  but  it  was  not  until  October  3,  1918,  that 
a  new  schedule  of  rates  went  into  effect.  A  new  rate  schedule  was  fixed  by  the 
Montreal  Tramways  Commission,  acting  under  the  terms  of  the  contract,  in  the 
summer  of  1918,  but  an  appeal  was  taken  to  the  Quebec  Public  Utilities  Com- 
mission, and  the  schedule  proposed  by  the  Tramways  Commission  was  revised 
before  being  put  into  efifect  in  October.  These  new  rates  proved  insufficient  to 
meet  the  entire  cost  of  service  as  defined  by  the  contract,  and  in  1919  again  it 
became  necessary  to  increase  the  fares.    For  the  second  time  an  appeal  was  taken 


216  Electric  Railway  Problem 

from  the  schedule  proposed  by  the  Montreal  Tramways  Commission,  and  the 
decision  of  the  Quebec  Public  Utilities  Commission  increasing  the  rates  did  not 
go  into  effect  until  October  26,  1919.  In  view  of  the  particular  interest  attaching 
to  the  Montreal  service-at-cost  experiment,  it  is  worth  while  to  make  a  some- 
what detailed  comparison  of  the  changes  that  have  taken  place  in  the  Montreal 
fare  schedules.  Prior  to  October  3,  191S.  the  day  schedule,  extending  from  five 
o'clock  in  the  morning  until  midnight,  included  a  5-cent  cash  fare,  six  tickets  for 
25  cents  or  twenty-five  tickets  for  $1.00,  good  at  all  times  and  for  all  persons, 
ten  tickets  for  25  cents  for  school  children,  good  at  all  times,  and  eight  tickets 
for  25  cents,  good  for  all  persons  between  five  o'clock  and  eight  o'clock  in  the 
moniing  and  between  five  o'clock  and  seven  o'clock  in  the  afternoon.  Between 
midnight  and  five  o'clock  in  the  morning  the  cash  fare  was  10  cents.  Transfers 
were  free  throughout  the  tweny-four  hours.  Under  this  schedule  the  average 
fare  paid  per  revenue  passenger  during  the  first  nine  months  of  1917  was  4.09 
cents,  and  during  the  first  nine  months  of  191S,  4.08  cents. 

The  first  new  schedule  of  fares  installed  in  accordance  with  the  terms  of  the 
service-at-cost  contract  was  in  effect  from  October  3,  1918  to  October  25,  1919. 
The  day  rate  under  this  schedule  included  a  6-cent  cash  fare,  with  five  tickets  for 
25  cents,  good  lor  all  persons  and  at  all  times,  six  tickets  for  25  cents,  good  for  all 
persons  between  six  o'clock  and  eight  o'clock  in  the  morning  and  between  five 
o'clock  and  seven  o'clock  in  the  afternoon  on  weekdays,  and  seven  tickets  for  25 
cents  for  school  children,  good  between  eight  o'clock  in  the  morning  and  six  o'clock 
in  the  afternoon  on  weekdays.  For  the  "Owl"  service,  between  midnight  and  five 
o'clock  in  the  morning,  the  fare  was  15  cents,  whether  by  cash  or  tickets.  Free 
transfers  were  continued  under  this  schedule.  The  average  fare  paid  per  revenue 
passenger  during  the  first  nine  months  of  1919  was  4.79  cents. 

The  ])resent  schedule  of  rates  has  been  in  effect  since  October  26,  1919.  The 
day  rale  includes  a  7-cenl  cash  fare,  with  book  tickets  at  the  rate  of  forty-four 
for  $2.50,  or  strip  tickets  at  the  rate  of  five  for  30  cents,  good  fur  all  persons 
and  at  all  times,  and  tickets  at  the  rate  of  seven  for  25  cents,  good  for  school 
children  between  eight  o'clock  in  the  morning  and  six  o'clock  in  the  afternoon  on 
weekdays.  The  15-cent  "Owl"  service  rate  and  the  free  transfers  are  continued. 
The  average  fare  paid  during  the  month  of  November,  1919,  with  the  present 
schedule  in  effect  during  the  entire  month  was  5.84  cents  per  revenue  passenger. 

Comparing  the  traffic  and  revenue  figures  for  the  first  nine  months  of  1919 
with  the  first  nine  months  of  1917,  wc  find  an  increase  of  17.11  per  cent  in  the 
average  fare  paid;  an  increase  of  4.61  per  cent  in  the  number  of  revenue  pas- 
sengers carried,  and  an  increase  of  22.55  per  cent  in  the  gross  passenger  revenue. 
Comparing  the  month  of  November,  1919,  under  the  present  schedule,  with  the 
month  of  November,  1917,  which  was  before  the  service-at-cost  contract  went 
into  effect,  we  find  an  increase  of  43.84  per  cent  in  the  average  fare  paid;  an 
increase  of  1.92  i>er  cent  in  the  number  of  revenue  passengers  carried,  and  an 
increase  of  46.83  per  cent  in  the  gross  passenger  revenue.* 

It  was  also  thought  that  the  Toronto  data  would  be  of  considerable  interest 
because  of  the  fact  that  both  the  Toronto  Railway  Companv  and  the  City  of 
Toronto  operate  street  railway  lines.     The  Civic  Lines  were  constructed  by  the 


Effects  of  Fare  Increases  217 

City  in  the  suburban  districts  outside  of  the  old  municipal  boundaries.  The  City 
undertook  the  construction  of  these  lines  because  of  the  refusal  of  the  Toronto 
Railway  Company  to  build  extensions  into  these  suburban  districts  under  the 
terms  of  its  franchise  contract.  The  Civic  Lines  have  been  operated  for  quite  a 
number  of  years  at  a  very  low  fare,  and  the  losses  from  operation  have  been  borne 
by  the  tax  payers.  Both  the  City  of  Toronto  and  the  Toronto  Railway  Company 
furnished  the  data  requested,  but  the  Toronto  Railway  Company  asked  that  the 
detailed  figures  be  not  published.  The  average  fare  paid  on  the  Toronto  Railway 
lines  during  the  first  nine  months  of  1919  was  3.9  cents.  There  had  been  no 
increase  in  fare,  and  consequently  the  average  for  1917  and  1918  was  approxi- 
mately the  same.  On  the  Civic  Lines  the  average  fare  for  all  three  years  was 
I73  cents.  Traffic  on  the  Civic  Lines  showed  an  increase  of  56.8  per  cent  for 
the  first  nine  months  of  1919  as  compared  with  the  first  nine  months  of  1917. 
On  the  Toronto  Railway  lines  the  increase  in  traffic  over  the  same  period  was 
13.91  per  cent.  The  combined  figures  for  the  two  systems  showed  an  average 
fare  of  3.72  cents  for  1917,  3.66  cents  for  1918  and  3.62  cents  for  1919,  the  gradual 
decrease  being  due  to  the  increasing  proportion  of  the  total  traffic  carried  by  the 
Civic  Lines.  The  increase  in  the  number  of  revenue  passengers  on  the  combined 
systems  was  17.91  per  cent  for  the  first  nine  months  of  1919  as  compared  with 
the  corresponding  period  two  years  earlier,  but  owing  to  the  slight  decrease  in 
the  average  rate  of  fare  paid,  the  total  passenger  earnings  increased  only  16.5 
per  cent  over  this  period. 

A  comparison  of  the  combined  Toronto  figures  with  the  latest  figures  from 
Montreal  is  quite  illuminating,  as  shown  by  the  following  data  :^ 

Toronto  Railway  Co.  & 

Montreal  Toronto  Civic  Lines 

Tramivays  Company  combined 

Average   fare,   November,    1917 4.06c.  3.68c. 

Average    fare,    November,    1919 5.84c.  3.61c. 

Increase   in   average   fare,   Nov.,   1919    over   Nov., 

1917    43.84%  1.90%   (Decrease) 

Increase  in   number  of   revenue   passengers,   Nov., 

1919    over    Nov.,    1917 1.92%  22.60% 

Increase  in   gross  passenger  revenues,   Nov.,    1919 

over    Nov.,    1917        46.83%  19.91% 

The  figures  I  have  given  prove  beyond  question  that  fare  increases  have  not 
been  great  enough  as  yet  on  any  important  group  of  street  railway  systems  in 
this  country  to  result  in  a  curtailment  of  revenues,  bat  they  have  been  great 
enough  to  cause  a  substantial  curtailment  of  the  usefulness  of  the  street  railway 
in  certain  communities.  There  is  very  little  evidence  that  fare  increases  alone 
would  put  the  electric  railway  business  on  its  feet  financially  and  enable  it  to 
function  properly  under  private  management  for  an  indefinite  period.  On  the 
other  hand,  there  is  a  great  deal  of  evidence  to  show  that  the  public  welfare  would 
be  sacrificed  in  important  respects  by  the  adoption  of  unlimited  fare  increases 
as  the  only  remedy  for  the  present  financial  difficulties  of  the  industry. 


Chapter  XXIX 
THE  ZONE  FARE  OR  DISTANCE  TARIFF 

The  uniform  flat  fare  has  been  a  characteristic  of  American  street  railway 
poUcy  from  the  beginning.  Indeed,  it  may  be  said  that,  if  the  municipalities  of 
this  country  have  had  any  distinctive  policy  with  respect  to  street  railway  de- 
velopment and  street  railway  fares,  it  has  been  the  policy  suggested  by  the  'one- 
city,  one-fare"  slogan.  In  the  early  days,  when  separate  horse  railroad  companies 
were  organized  to  operate  individual  lines,  the  ride  given  was  comparatively 
short,  but  when  the  horse  roads  were  consolidated  and  electricity  was  introduced 
a  great  expansion  of  the  uniform  fare  area  took  place.  The  "one-city,  one-fare" 
policy  involved  not  merely  a  uniform  flat  fare  for  all  initial  rides,  but  also  the 
necessity  for  free  transfers.  As  the  consolidated  street  railway  systems  expanded 
beyond  the  limits  of  the  municipality  and,  in  certain  cases,  reached  out  so  as  to 
combine  the  service  of  a  group  of  municipalities  covering  an  entire  section  of  a 
state,  it  was  obviously  impossible  to  extend  the  uniform  flat  fare  to  cover 
the  entire  area  of  service.  What  happened  was  that  the  uniform  fare,  usually 
5  cents  cash  with  or  without  a  reduced  rate  ticket,  was  made  to  apply  in  most 
cases  within  the  limits  of  a  given  municipality  and  its  immediate  suburbs;  and 
upon  lines  extending  far  into  the  country  or  to  other  urban  centers  zones  were 
established,  sometimes  corresponding  to  town  boundaries  and  sometimes  on  some 
sort  of  a  mileage  basis.  Usually  the  fare  in  each  of  these  outlying  or  interurban 
zones  was  the  same  uniform  sum  which  applied  within  the  one-fare  city  zone. 
In  populous  cities,  especially  in  those  covering  large  areas,  the  tendency  of  the 
"one-city,  one-fare"  policy  was  greatly  to  extend  the  maximum  length  of  ride  that 
could  be  taken  for  a  single  fare,  until,  in  New  York  for  example,  on  the  rapid 
transit  lines  it  is  now  possible  to  ride  as  much  as  twenty  miles  for  a  single  fare 
of  5  cents,  and  this  maximum  ride  for  the  unit  fare  will  be  increased  to  about 
27  miles  when  the  "Dual"  rapid  transit  system  is  completed. 

A  great  deal  has  been  said  about  these  magnificent  distances  covered  by  the 
5-cent  fare,  and  about  the  increase  in  the  average  length  of  haul  on  account  of 
the  extension  of  electric  railway  systems  in  great  urban  communities.  With  a 
uniform  flat  fare  system  in  use  it  is  difficult  to  get  any  accurate  data  showing 
the  average  length  of  ride  per  passenger,  except  as  estimates  are  made  through 
special  traffic  investigations  and  surveys.  The  hope  of  the  uniform  flat  fare  as 
a  revenue  producer  lies  in  the  expectation  that  as  the  street  railway  system  ex- 
pands and  the  number  of  long-distance  riders  increases  there  will  be  a  correspond- 
ing or  even  greater  increase  in  the  number  of  short-haul  riders.  It  is  expected 
that  the  loss  incurred  in  carrying  long-distance  passengers  at  less  than  the  cost 

218 


The  Zone  Fare  219 

of  the  service  will  be  offset  by  the  gain  in  carrying  the  short-distance  riders  at 
more  than  the  cost  of  the  service. 

In  Great  Britain  and  European  countries  a  quite  different  system  of  street 
railway  fares  is  in  use.  The  lines  are  divided  into  comparatively  short  zones, 
and  passengers  pay  according  to  the  distances  they  ride.  This  foreign  system  is 
referred  to  as  a  "zone  fare"  or  "distance  tariff'."  The  theory  of  this  system  is 
that  everybody  who  rides  on  the  street  railways  should  pay  according  to  the  length 
of  his  ride,  upon  the  assumption  that  a  payment  based  upon  distance  will  come 
nearest  to  representing  the  cost  of  the  service.  It  is  also  the  theory  of  the  zone 
fare  or  distance  tariff  that  it  will  cultivate  short-haul  traffic  by  giving  cheap  rates 
for  short  rides.  From  the  American  point  of  view  the  "one-city,  one-fare"  policy, 
as  opposed  to  the  zone  fare  or  distance  tariff',  has  been  supposed  to  be  better 
adapted  to  social  purposes  on  account  of  its  alleged  effectiveness  in  spreading 
out  population  and  promoting  suburban  development. 

It  has  long  been  a  source  of  wonderment  to  British  tramway  managers  that 
the  American  street  railway  systems  could  survive  on  the  basis  of  the  uniform  flat 
fare.  The  increase  in  the  cost  of  street  railway  service  resulting  from  the  eco- 
nomic changes  that  have  grown  out  of  the  war  has  brought  this  problem  of  the 
uniform  flat  fare  on  American  street  railway  systems  to  a  head.  Even  though 
people  in  this  country  were  generally  accustomed  to  the  payment  of  a  nickel  a  ride 
for  street  railway  service,  it  was  shown  before  the  war  that  in  Cleveland  and  else- 
where the  reduction  of  the  unit  fare  below  5  cents  was  accompanied  by  a  con- 
siderable increase  in  the  riding  habit.  It  has  also  been  shown  during  the  past  two 
or  three  years  that  straight  fare  increases  always  or  nearly  always  have  the  im- 
mediate effect  of  diminishing  traffic,  and  the  weight  of  the  evidence  presented 
to  the  Commission  indicates  that  the  greater  the  increase  in  the  unit  fares,  the 
more  will  the  traffic  be  reduced  by  the  higher  fares.  Moreover,  the  riders  who 
are  driven  away  by  the  high  unit  fares  are  principally  the  short-haul  riders,  who 
prefer  to  walk  or  take  a  jitney  rather  than  pay  what  they  consider  an  excessive 
or  unnecessarily  high  street  car  fare.  It  is  generally  agreed  that  the  loss  of  the 
short-haul  riders  means  the  loss  of  the  most  profitable  part  of  the  street  railway 
traffic.  It  is  also  believed  that  the  loss  of  short-haul  and  convenience  riders  means 
the  relative  accentuation  of  the  peak  loads  of  traffic,  which  are  already  the  greatest 
source  of  physical  and  financial  difficulty  for  the  street  railway  companies.  It 
appears,  therefore,  that  in  a  period  of  rising  costs,  increasing  flat  fares  tend  to 
neutralize  their  own  effect  as  revenue  producers  by  iricreasing  the  expense  per 
passenger  of  the  traffic  that  remains  with  the  street  railway  companies. 

The  discrimination  in  the  case  of  the  uniform  flat  fare  system  between  the  per- 
son who  rides  only  a  few  blocks  and  the  person  who  rides  4,  5  or  6  miles,  is 
obvious,  even  though  the  unit  fare  is  as  low  or  lower  than  5  cents ;  but,  of  course, 
the  lower  the  fare  the  less  the  short-haul  rider  resents  the  discrimination.  How- 
ever, when  fares  are  being  increased  to  6,  7,  8  or  10  cents,  the  discrimination 
between  the  short-distance  rider  and  the  long-distance  rider,  who  pay  the  same 
rate,  is  accentuated  and  brought  to  consciousness.  There  seems  to  be  general 
agreement  that  street  railway  rates  on  the  uniform  flat  fare  basis  may  be  increased 
to  a  point  where  the  system  will  break  down  as  far  as  the  production  of  revenues 


220  Electric  Railway  Problem 

is  concerned;  the  short  riders  will  feel  the  discrimination  against  them  so  keenly 
that  they  will  cease  to  use  the  cars,  and  the  cost  of  service  per  passenger  will  fol- 
low closely  upon  the  increased  rate,  and  ultimately  overtake  and  pass  it.  Clearly 
the  present  emergency  in  the  electric  railway  business  has  subjected  our  historical 
American  fare  policy  to  a  critical  test.  The  issue  between  uniform  fiat  fares 
and  a  zoning  system  is  upon  us  and  must  be  decided.  It  may  be  that  a  proper 
zoning  plan,  by  its  retention  and  development  of  the  short-haul  traffic,  as  well  as 
by  its  increase  in  the  rates  paid  by  the  long-haul  riders,  will  be  able  to  solve 
the  financial  problem  of  many  a  street  railway  company  that  could  not,  under 
present  conditions,  survive  without  substantial  public  assistance  upon  the  old  fiat- 
fare  system. 

The  importance  of  some  of  the  issues  involved  was  clearly  set  forth  by  the 
New  Jersey  Board  of  Public  Utility  Commissioners  in  its  report  of  December  2, 
1919,  when  it  reluctantly  permitted  the  abandonment  of  the  zone  fare  experiment 
on  the  Public  Service  lines.     The  Board  says: 

"It  has  been  consistently  insisted  and  maintained  by  the  Board  that  any  rates  fixed  with 
a  flat  charsc  alike  to  all  riders  upon  street  railways  as  presently  developed,  are  inequitable 
and  discriminatory  against  the  short-haul  rider.  In  normal  times  and  in  the  evolution  of  the 
development  of  street  railways  the  flat  five-cent  charge  for  a  ride,  regardless  of  the  distance 
permitted,  was  accepted  by  the  public  generally  without  a  great  deal  of  objection.  With  the 
advent  of  the  highly  increased  costs  of  operation,  due  to  increases  in  the  costs  of  materials 
and  labor,  street  railways  throughout  the  country  have  been  confronted  with  serious  difficulties. 
To  raise  the  additional  revenue  required,  in  localities  where  the  flat-rate  method  of  charging 
existed,  the  railways  generally  resorted  to  the  plan  most  available  of  increasing  the  charge 
to  the  extent  necessary  to  meet  the  requirements.  This  generally  was  resented  by  the  patrons, 
particularly  the  most  lucrative  class  thereof,  viz..  the  short-haul  riders.  Many  of  these 
abandoned  the  use  of  the  cars,  and  cither  walked  or  used  other  means  of  transportation.  The 
jitney  competition  flourished,  and  the  loss  in  patrons  largely  ofl^.sct  the  calculated  revenues 
which  the  increased  rates  were  estimated  to  yield.  In  many  instances  companies  have  sought 
successive  increases  in  excess  of  the  previously  existing  five-cent  rate,  in  some  cases  reaching 
the  limit  of  ten  cents.  The  history  of  the  experiences  of  the  various  street  railways  employ- 
ing this  method  to  meet  the  difficulty  indicate  clearly  that  it  threatens  catastrophe  to  street 
railway  transportation." 

The  issues  involved  in  the  abandonment  of  our  characteristic  American  fare 
policy  and  the  substitution  therefor  of  some  form  of  distance  tariff  arc  of  the 
utmost  importance  to  the  electric  railways,  both  from  the  point  of  view  of  their 
owners  and  from  the  point  of  view  of  the  general  public.  So  far  as  the  owners 
are  concerned,  some  adaptation  of  the  distance  tariff  may  prove  to  be  their  finan- 
cial salvation  under  present  operating  conditions.  On  the  other  hand,  the  adoption 
of  a  distance  tariff  may  have  an  adverse  effect  upon  social  conditions  and  bring 
results  that  the  American  public  has  always  been  anxious  to  avoid.  From  the 
point  of  view  of  the  companies  the  difficulties  involved  in  the  adoption  of  the 
distance  tariff  are  chicffy  difficulties  in  the  collection  of  fares  and  in  accounting 
for  them.  These  diflicullies  would  not  be  .serious  except  for  the  American  habit 
of  overcrowding  the  cars.  It  is  admitted  on  all  sides  that  where  street  cars 
during  the  rush  hour  are  loaded  so  that  there  are  twice  as  many  people  standing 
as  people  who  liave  seats,  the  collection  of  zone  fares  presents  a  very  difficult 
problem.  Also,  it  is  to  be  observed  that  the  inauguration  of  a  general  zoning  plan 
would  add  considerably  to  the  difficulties  in  the  use  of  one-man  cars,  as  it  is 
admitted  that  the  motornian-conductor  cannot  be  expected  to  handle  collections 
expeditiously  unless  the  fare  system  is  a  simple  one.     He  can  hardly  be  expected 


The  Zone  Fare  221 

to  stop  his  car  every  little  way  to  go  through  it  and  collect  additional  fares  from 
the  passengers.  Another  serious  difficulty  for  the  companies  in  the  inauguration 
of  a  distance  tariff  may  be  found  in  the  public  disapproval  that  sometimes  ex- 
presses itself  with  considerable  violence  where  a  long-cherished  institution  like 
the  uniform  street  car  fare  is  set  aside. 

The  fact  that  the  British  municipalities  operating  municipal  tramways  have 
weathered  the  prolonged  crisis  of  the  World  War  in  much  better  financial  con- 
dition than  the  American  street  railway  companies  is  undoubtedly  due  in  part 
to  the  more  conservative  financial  policies  pursued  by  the  British  cities,  but  it 
may  also  be  due  in  part  to  the  fact  that  the  British  tramways  have  established 
their  charges  for  service  on  the  zone  plan,  and  have,  therefore,  been  able  to 
readjust  their  charges  to  meet  the  increased  costs  of  the  war  period  much  more 
readily  than  can  be  done  by  the  American  street  railway  companies  using  the 
flat  fare  system,  even  where  they  have  the  full  cooperation  of  public  regulating 
authorities  in  raising  their  rates.  The  zone  plan  as  used  on  British  systems  is 
unquestionably  much  more  flexible  and  adaptable  to  changes  in  economic  condi- 
tions than  is  the  American  uniform  flat  fare  system. 

From  the  point  of  view  of  the  pubHc  the  introduction  of  the  zone  plan  or 
distance  tariff  presents  difficulties  not  only  with  respect  to  the  distribution  of 
population  as  such,  but  also  with  respect  to  the  unsettlement  of  suburban  and 
other  realty  values  which  have  developed  on  the  basis  of  uniform  flat  rates  for 
electric  railway  service.  But  the  main  theoretical  controversy  with  respect  to  the 
adoption  of  the  zoning  plan  in  this  country  rages  about  the  problem  of  congestion 
of  population.  Those  who  favor  the  retention  of  the  flat  fare  maintain  that  the 
old  American  policy  is  a  good  one ;  that  it  tends  to  spread  out  population  and 
encourage  suburban  development,  and  that  its  consequences  are  so  beneficial  and 
so  essential  to  the  welfare  of  urban  communities  as  to  make  a  fundamental  change 
in  our  fare  policy  undesirable.  Those  who  favor  the  adoption  of  the  zone  plan 
contend,  on  the  other  hand,  that  the  uniform  flat  fare  system  has  had  very  little 
to  do  with  the  spreading  out  of  population,  and  that  the  zone  fare  in  vogue  in 
Great  Britain  is  not  to  any  appreciable  extent  responsible  for  congestion  of  popu- 
lation in  British  cities.  The  issue  is  a  momentous  one,  and  it  cannot  be  said  that 
the  evidence  produced  before  the  Commission  is  such  as  to  enable  us  to  answer 
with  complete  assurance  the  questions  raised  by  it. 

The  American  Electric  Railway  Association  at  its  convention  held  at  Atlantic 
City  in  October,  1919,  received  a  report  from  the  Committee  on  Zone  Systems. 
Included  in  the  membership  of  this  committee  were  three  men  who  had  appeared 
before  the  Commission  as  witnesses  for  the  Association.  These  were  Dr.  Thomas 
Conway,  who  had  been  connected  with  the  zoning  study  conducted  by  the  Public 
Service  Railway  Company  of  New  Jersey,  Mr.  C.  L.  S.  Tingley,  Vice-President 
of  the  American  Railways  Company  of  Philadelphia,  and  Mr.  Lucius  S.  Storrs, 
President  of  the  Connecticut  Company.  This  committee  points  out  in  its  report 
that  the  higher  net  revenue  required  by  the  electric  railways  of  the  country  can  be 
secured  only  in  one  or  more  of  three  different  ways:  (1)  by  operating  economies, 
(2)  by  a  substantial  increase  in  revenue  per  passenger,  and  (3)  by  a  substantial 
increase  in  the  number  of  passengers  carried  at  a  profit.     The  committee  stated 


222  Electric  Railway  Problem 

its  belief  that  "a  zone  system,  where  it  can  be  properly  applied,  should  tend  to 
encourage  riding  in  practically  every  case."  It  submitted  the  following  funda- 
mental definitions  of  terms : 

"A  Zone  System  of  Fares  is  one  in  which  the  fare  varies  with  the  distance  traveled,  and 
might  properly  have  been  called  a  "distance  system.' 

"A  Zone  M  one  of  the  relatively  short  subdivisions  of  more  or  less  uniform  length,  into 
which  a  route  is  divided  for  the  purpose  of  fare  determination. 

"There  are  four  general  forms  of  the  zone  system  which  have  been  considered  by  this 
Committee  and  are  defined  below. 

"L'uiform  Rale  Zone  System  is  one  in  which  the  fare  is  directly  proportional  to  the 
number  of  zones  traveled  in  or  through,  that  is,  one  in  which  the  fare  per  zone  is  the  same 
in  each  zone,  including  the  first. 

'Initial  Charge  Zone  System  is  one  in  which  the  fare  for  the  initial  zone  of  any  ride  is 
greater  than  that  for  the  succeeding  zones. 

"fixed  Minimum  Zone  System  is  one  in  which  a  certain  rate  per  zone  is  charged,  with  a 
definite  fixed  minimum  fare,  which  minimum  disappears  when  the  sum  of  the  zone  charges 
exceeds  it. 

"Central  Area  Zone  System  is  one  in  which  a  flat  fare  or  uniform  charge,  regardless  of 
length  of  ride,  within  an  established  central  area,  is  combined  with  zone  charges  on  routes 
which  extend  beyond  such  central  area. 

"The  Uniform  Rate  Zone  System  is  a  form  which  has  been  in  use  in  England  and  other 
foreign  countries  for  many  years,  and  has  there  apparently  encouraged  short  haul  riding  and 
improved  the  service  load  factor.  It  is,  however,  most  discriminatory  in  favor  of  the  short- 
haul  rider,  because  cost  of  service  is  admittedly  not  directly  proportional  to  the  distance 
traveled." 

With  respect  to  some  of  the  principal  dangers  and  difficulties  inherent  in  the 
adoption  of  a  zone  plan  in  this  country-,  the  committee  said : 

"In  many  localities  there  is  a  distinct  danger  that  the  uniform  rate  zone  system  would 
result  in  lower  gross  and  net  revenue  on  account  of  the  large  percentage  of  passengers  which 
may  be  carried  below  actual  cost.  Short-haul  riding  and  all  riding  must  be  encouraged,  this 
being  one  of  the  principal  objectives  of  any  zone  system,  but  great  care  must  be  taken  that 
the  short-haul  rider  is  not  too  unduly  or  unfairly  favored.  It  might  he  noted  at  this  point  that 
in  general  the  English  systems  are  municipally  owned;  discrimination  is  flagrantly  practiced, 
and  the  rate  of  fare  and  length  of  zone  are  very  largely  based  on  what  the  traffic  will  bear, 
rather  than  upon  what  is  fair  and  equitable  to  all  classes  of  passengers.  Furthermore,  this 
form  involves  the  maximum  of  fare  collection  difliculties.  although  it  should  not  be  con- 
demned on  that  account. 

"It  has  been  widely  claimed  that  zone  systems  produce  congestion  of  population.  If  this 
were  true,  this  congestion  would  lie  more  highly  developed  with  this  form  than  with  any 
other,  but  the  facts  are  that  foreign  cities  using  this  form  are  not  really  congested  to  any 
greater  degree  than  many  of  our  flat  rate  .-Xmcncan  cities.  The  tendency,  however,  in  Euro- 
pean cities  is  towards  a  more  even  spreading  of  the  occupied  territory,  rather  than  to  the  un- 
economical, haphazard  and  spotted  development  so  frequently  found  surrounding  our  cities; 
if  is  probable  that  the  zone  system,  in  contrast  to  the  flat  fare,  has  something  to  do  with  this, 
thus  changing  the  sociological  argument  to  favor  the  zone  system." 

Near  the  end  of  its  report,  the  committee  gave  voice  to  the  following  special 
warning: 

"It  is  the  thought  of  this  Committee  that  where  and  when  any  zone  system  is  contem- 
plated the  fact  that  the  purchasing  power  of  the  dollar  has  decreased  should  he  fully  taken 
mto  account  to  the  end  that  the  minimum  charge  per  passenger  be  not  set  too  low." 

Within  the  past  six  years  modifications  of  the  foreign  zone  plan  have  been 
introduced  on  several  street  railway  systems  of  this  country  with  var>-ing  degrees 
of  success.  The  first  noteworthy  experiment  of  this  kind  in  the  United  States 
was  commenced  in  1914  in  Milwaukee.  Wisconsin.  There  a  central  zone,  extend- 
ing roughly  to  the  bountiaries  of  the  municipality,  was  established,  and  in  this 
central  zone  the  old  uniform  5-ccnt  flat  fare  was  retained.  Outside  of  this  central 
zone  the  suburban  and  intenirban  lines  were  divided  into  zones  of  approximately 
one  mile  in  length,  with  a  luiit  fare  of  2  cents  per  zone,  and  a  minimum  charge 


The  Zone  Fare  223 

of  5  cents  good  for  two  zones.  Besides  these  cash  fares  there  were  reduced  rate 
ticket  fares  both  in  the  central  and  in  the  suburban  zones.  On  June  1,  1918,  after 
the  cost  of  service  had  increased,  the  ticket  fares  were  abolished,  and  since  the 
hearings  before  the  Federal  Electric  Railways  Commission  were  closed  the  Mil- 
waukee fares  have  been  further  increased.  A  7-cent  cash  fare  with  six  tickets  for 
35  cents  or  eighteen  for  $1.00  in  the  city  zone  became  effective  in  November,  1919. 
At  the  same  time  the  fare  in  the  outer  zones  was  raised  to  3  cents  per  zone,  with 
twenty-five  tickets  for  50  cents. ^ 

Another  zone  fare  experiment  has  been  tried  in  Pittsburgh.  It  went  into 
effect  on  June  20,  1918,  and  was  continued  until  July  30,  1919,  when  the  flat  fare 
system  in  the  urban  district  was  restored.  Under  the  experimental  zone  plan 
the  urban  territory  was  divided  into  two  areas,  referred  to  as  the  Inner  Area  and 
the  Outer  Area,  with  a  flat  fare  of  5  cents  in  the  Inner  Area  and  a  flat  fare  of  7 
cents  in  the  Outer  Area  and  for  rides  from  one  area  into  the  other.  Tickets  were 
sold  in  the  Outer  Area  at  the  rate  of  eight  for  55  cents.  The  Inner  Area  was 
defined  by  a  radius  of  about  2i^  miles  from  the  downtown  center  of  the  city. 
A  free  transfer  was  given  where  necessary  for  the  completion  of  the  ride  within 
the  area  to  which  the  cash  fare  applied.  The  revenues  derived  by  the  Pittsburgh 
Railways  under  the  zone  fare  system  proved  to  be  insufficient,  in  the  opinion  of 
the  receivers,  and  on  August  1,  1919,  the  zones  were  abolished,  and  the  uniform 
flat  fare  plan  reestablished,  but  this  time  the  rate  was  10  cents  in  cash  or  7i/2  cents 
by  metal  tokens,  the  latter  being  sold  at  the  rate  of  four  for  30  cents.  Mr.  Charles 
A.  Fagan,  one  of  the  receivers  for  the  Pittsburgh  Railways  Company,  explains 
at  page  617  of  the  Proceedings  the  reasons  which  led  to  the  abandonment  of  the 
zoning  experiment  in  Pittsburgh,  where  he  says: 

"Mr.  Warren:  I  judge  from  the  method  you  are  adopting  of  increasing  the  fare  this 
time  a  flat  increase  to  seven  and  a  half  cents  for  tickets  and  ten  cents  for  cash  that  you  have 
reached  the  conclusion  that  in  Pittsburgh  a  flat  increase  is  more  desirable  than  dividing  the 
city  into  two  or  more  zones. 

"Mr.  Fagan  :  We  thought  so,  because  when  the  city  was  divided  into  zones,  we  got  no 
credit  from  the  people  who  lived  in  the  cheaper  zone,  and  it  gave  an  argument  to  the  people 
who  lived  in  the  higher  zone  against  the  inequity  of  the  proposition." 

A  zone  plan  was  introduced  on  the  lines  of  the  Rhode  Island  Company  in 
Providence  and  the  surrounding  communities  on  May  5,  1918.  Under  this  system 
5-cent  zones  having  a  radius  of  2i/<  miles  were  established  about  the  traffic  centers 
of  Providence,  Pawtucket  and  Woonsocket,  beyond  which  2-cent  zones  about  1 
mile  in  length  were  marked  off.  On  the  outlying  lines  a  minimum  fare  of  5 
cents,  good  for  a  ride  through  two  zones,  was  established.  This  plan  remained 
in  effect  until  October  23,  1918,  when  the  fare  system  was  again  changed.  The 
inner  zones  were  contracted  to  a  radius  of  approximately  2  miles,  outside  of  which 
were  established  a  series  of  zones,  the  first  about  l^i  miles  in  length  and  the 
second  and  succeeding  zones  about  \^  miles  in  length.  The  5-cent  fare  with  a 
charge  of  1  cent  for  a  transfer  was  made  applicable  uniformly  to  all  the  zones, 
both  city  and  suburban.  On  May  1,  1919,  fares  were  reduced  slightly  on  some 
of  the  suburban  lines  by  a  reduction  in  the  number  of  zones.  This  change  was 
made  in  an  effort  to  recover  some  of  the  long-haul  traffic  which  had  been  driven 
away  by  the  excessive  charges  under  the  zone  plan.     On  September  28,   1919, 


224  Electric  Railway  Problem 

the  unit  fare  was  increased  to  6  cents  per  zone,  and  the  transfer  charge  was  in- 
creased to  2  cents,  with  no  change  in  zone  boundaries.-  Mr.  William  C.  Bliss. 
Chairman  of  the  Public  Service  Commission  of  Rhode  Island,  describes  the  finan- 
cial effects  of  the  zoning  experiments  on  the  Rhode  Island  lines  at  pages  11S2 
and  1183  of  the  Proceedings,  as  follows: 

"The  effect  upon  revenues  of  the  two-cent  zone  plan  which  remained  in  operation  from 
May  5th  until  October  23rd,  1918,  produced  additional  revenue,  as  nearly  as  it  could  be  figured 
amounting  to  $,!05,0()0  a  year,  compared  with  estimates  of  $540,000.  It  produced  that  revenue 
in  spite  of  the   following  factors: 

"During  the  months  of  May  and  June  it  produced  well  up  to  the  estimates  and  during  the 
months  of  July  and  August,  the  street  railway  companies  of  New  England  all  reflected  a 
tremendous  loss  of  travel.  People  were  busily  engaged  in  manufactures ;  the  ordinary  out- 
ings were  given  up.  the  dance  halls  that  were  operated  six  nights  a  week  were  open  only 
on  three  nights  a  week;  and  there  was  a  distinct  falling  off  in  travel  reflected  on  all  of  the 
street  railway  lines,  which  was  suffered  by  this  company  as  well  as  the  others. 

"In  the  latter  part  of  SepteiTil)er  and  during  October  the  influenza  epidemic  practically 
depleted  it,  so  that  under  the  increased  rates  of  fare  this  company  showed  less  gross  revenue 
than  it  showed  the  year  before. 

"But  even  operating  under  all  those  unfortunate  conditions  the  two-cent  zone  plan  with 
the  contracted  five-cent  center  operated  in  Rhode  Island  to  hold  the  traffic  on  the  cars.  There 
was  very  little  if  any  loss  of  traffic  on  the  part  of  the  company,  and  it  was  believed  by  the 
commission  that  for  that  reason  this  easy  gradation  from  five  to  seven  to  nine  cents  would 
hold  the  traffic,  and  the  result  of  the  operation  of  the  plan  showed  it  did  hold  the  traffic  and 
it  did  not  work  any  undue  hardship  or  any  injurious  economic  or  social  results. 

"The  five-cent  zone  plan,  that  is,  with  the  still  further  contracted  central  five-cent  zone 
and  with  the  fivc-oent  units  outside,  with  respect  to  a  large  part  of  our  population  which 
prior  to  May  5,  1918  paid  S  cents  to  get  back  and  forth  to  the  centers,  made  them  pay  10 
cents  and  was  estimated  to  pnxluce  $1,250,000  revenue.  In  practical  operation  for  the 
period  from  October  2.?rd  until  the  present  time  that  has  operated  to  produce  onlv  about 
$350,000  out  of  the  $1,262,000  that  was  estimated.  In  other  words,  it  fell  short  $912,000  of 
producing  the  revenue  that  was  estimated  for  it.  There  was  a  distinct  loss  of  travel  during 
the  early  months  from  Octotwr  23rd  until  .\pril  1st,  when  we  modified  the  interurban  rate. 
Since  that  time  the  showing  has  Iwen  distinctly  better,  and  if  this  increase  had  been  based 
upon  the  showing  of  the  months  from  April  1st  down  to  the  present  time,  the  shortage  would 
not  have  been  nearly  as  great. 

"In  connection  with  the  5-cent  zone  plan  it  is  to  be  noted  that  provision  was  made  for 
the  application  of  a  one-cent  charge  for  transfers.  The  one-cent  charge  for  transfers  was 
estimated  to  produce  $172,000  and  has  actually  produced  $150,000  a  year,  which  has  operated 
to  reduce  the  use  of  transfers  alxiut  15  per  cent.  It  seems  to  have  been  received  by  the 
people  without  any  complaint  whatever,  and  possibly  one  of  the  reasons  ii>r  that  is  that  we 
have  retained  the  central  5-ccnt  unit,  and  I  think  many  of  the  people  living  within  that  area 
feel  as  if  they  ought  to  pay  more  for  their  carfares,  little  realizing  that  the  principle  involved 
in  retaining  the  5-ccnt  central  unit  is  that  the  average  of  the  short-haul  travel  really  makes 
the  short-haul  traveler  pay   far  more  than  he  should  |)ay   for  his  transportation. 

"The  5-cent  zone  plan  as  modified  I  have  explained  to  you.  It  was  modified  simply  in 
the  interests  of  the  company  and  the  public  to  try  to  get  more  revenue  out  of  the  people, 
for  in  the  final  analysis  the  rate  plus  the  traffic  represents  your  gross  revenue.  You  can  put 
your  rate  up  and  drive  your  traffic  unit  so  low  that  you  are  worse  off.  So  that  the  company 
and  the  commission — and  the  results  have  proved  the  wisdom  of  it — have  shown  that  the 
modification  of  this  rate  somewhat  has  operated  to  increase  the  traffic  to  such  an  extent  that 
the  company  is  U-ttcr  off  with  the  lower  rate  than  with  the  higher" 

Mr.  Rliss  then  goes  on  to  explain  the  economic  effects  of  the  second  zone 
plan  by  which  the  rates  of  fare  to  the  outlying  sections  of  Providence  and  to  the 
surrounding  towns  were  radically  increased.  His  testimony  on  this  point  is 
unusually  significant,  as  it  indicates  the  tendency  of  such  a  plan  to  decentralize 
business.     At  pages  1 1S3  and  1184  of  the  Proceedings,  he  says: 

"Just  a  moment  now  to  refer  to  the  social  and  economic  effects  that  we  have  n.ited  with 
reference  to  the  contraction  of  the  5-rent  limit  and  creating  ID-cent  limits  within  the  city  of 
Providence.  These  outlying  sections  of  the  city  of  I'rovidence  pay  10  cents  to  get  into  the 
center  of  the  city,  and  of  course  the  outlying  communities  formerly  in  the  5-cent  limits  out 
of  Providence  arc  now  paying  10  cents. 


The  Zone  Fare  225 

"The  most  marked  effect  has  been  in  the  case  of  Pawtucket  and  Providence,  Pawtucket 
being  a  city  which  is  north  of  Providence  and  borders  on  Providence,  a  thickly  built  up  section 
all  the  way  between  the  cities,  so  that  from  a  social  point  of  view  they  are  all  part  of  one 
community.  The  rate  between  Providence  and  Pawtucket,  originally  5  cents,  later  7  cents 
and  now  10  cents,  has  operated  to  tremendously  stimulate  the  business  activities  of  the  center 
of  Pawtucket  and  to  the  same  extent  to  take  away  the  business  from  the  center  of  Providence. 

"The  operation  of  the  strike  which  limited  the  methods  of  transportation  also  operated 
to  very  greatly  stimulate  the  business  industries  of  Pawtucket. 

"Olneyville,  which  is  a  business  center  to  the  northwest  of  Providence  and  a  natural 
center  of  the  car  lines  with  a  big  mill  population  located  around  that  center,  has  shown  a 
tremendous  increase  in  its  business  activities.  The  people  come  in  and  trade  in  Olneyville 
rather  than  to  pay  the  other  S  cents  to  get  on  to  Providence. 

"The  same  thing  is  true  in  East  Providence,  where  an  overlap  e.xists.  The  people  save 
the  5  cents  in  and  out  of   Providence  and  trade  locally. 

"In  other  words,  the  effect  of  this  is  to  decentralize  business.  The  merchants  in  the  center 
of  the  city,  the  big  department  stores,  are  tlie  losers  by  it,  and  I  believe  that  the  men  who  are 
the  owners  of  the  centralized  business  enteq'rises  can  well  aft'ord  to  not  only  pay  the  in- 
creased tax  rate  which  would  be  involved  in  giving  up  their  franchise  taxes  and  paving 
obligations  on  the  part  of  the  company,  but  also  could  go  out  there  and  subsidize  these  roads 
to  retain  a  low  rate  of  fare  to  the  center. 

"Commissioner  Gadsden:  From  the  social  standpoint  why  is  not  that  a  good  result? 
Why  should  not  the  towns  trade  with  themselves  instead  of  going  to  some  other  towns,  from 
the  social  standpoint  ? 

"Mr.  Bliss :  Well.  I  assume  that  centralized  business  operations  can  be  carried  on  with 
the  greatest  economy  and  I  presume  there  is  greater  economy,  I  think  it  is  shown  there  in 
the  case  of  the  big  public  markets  in  Providence,  w-hich  are  carried  on  on  a  cash  basis ; 
I  think  the  prices  reflect  the  ability  of  these  companies  to  do  business  in  a  large  way  and 
deal  with  a  large  number  of  people.  In  other  words,  one  set  of  overheads  is  applied  to  larger 
business  while  the  separate  overheads  applied  to  smaller  markets  would  operate  to  greatly 
increase  cost." 

The  question  was  raised  as  to  whether  this  effect  of  the  zone  fares  upon 
the  decentralization  of  business  might  not  be  temporary  rather  than  permanent. 
This  question  evidently  involves  a  consideration  of  popular  psychology  which  all 
the  evidence  before  the  Commission  shows  to  be  a  matter  of  prime  importance 
in  any  possible  solution  of  the  street  railway  problem.  At  pages  1184  and  1185 
of  the  Proceedings,  the  following  questions  and  answers  throw  light  upon  this 
point : 

"Commissioner  Meeker:  If  the  department  stores  can  conduct  business  so  much  more 
economically  than  the  smaller  stores  in  outlying  communities,  will  the  people  not  eventually 
learn  that  and  trade  in  the  central  districts  of  Providence  as  thev  did  before? 

"Mr.  Bliss:     Well,  if 

"Commissioner  Meeker:  If  the  economy  of  centralized  business  is  sufficient,  then  the 
people  of  Paw-tucket  and  the  outlying  districts  could  well  afford  to  pay  the  extra  street 
railway  fare  ? 

"Mr.  Bliss :  Well,  I  think  that  is  largely  a  question  of  psychology  on  the  part  of  the 
housewife.  When  the  housewife  figures  the  actual  10  cents  that  she  has  got  to  pay  or  20 
cents  to  go  in  and  out  of  Providence  now  from  the  suburbs,  and  the  question  of  going  down 
to  the  corner  grocery  and  the  20  cents  that  she  can  see  plainly,  that  she  would  save  perhaps 
by  the  lower  priced  goods,  that  she  perhaps  cannot  see  that  so  plainly.  But  I  am  simply  point- 
ing out  to  you  the  actual  effect  of  the  application  of  these  increased  rates  so  far  as  the 
decentralization  of  business  is  concerned. 

"Commissioner  Meeker:  Yes,  we  have  to  recognize  that  man  is  far  from  being  a  rational 
animal.  He  does  not  act  as  the  economic  man  is  alleged  to  act.  For  example,  when  the  price 
of  milk  increased  1  cent  in  Boston  the  amount  of  milk  consumed  was  cut  in  half,  although 
at  that  increased  price  milk  was  still  the  cheapest  food  product. 

"Mr.  Bliss :  Well,  the  same  thing  is  true  with  regard  to  transportation.  There  never 
has  been  on  the  part  of  those  in  public  positions  or  on  the  part  of  the  press  any  disposition 
to  prevent  the  facts  of  the  problem  clearly  being  presented  to  the  public,  and  the  public  have 
shown  an  animus  and  with  the  application  of  these  increased  fares  they  walk  down  to  the 
5-cent  points,  and  everybody  was  talking  against  the  company,  and  the  public,  acting  in  the 
same  irrational  manner  that  you  have  referred  to.  were  simply  hurting  themselves,  because 
every  bit  of  revenue  that  they  took  away  from  this  company  so  much  the  sooner  forced  a 
still  further  fare  increase." 


226  Electric  Railway  Problem 

The  chief  argument  against  the  zone  plan,  from  the  public  point  of  view,  has 
been  that  this  plan  tends  to  congestion  of  population.  The  experience  of  Provi- 
dence, where  the  observed  effect  of  the  zone  plan  has  been  to  encourage  decen- 
tralization in  business,  seems  to  weigh  against  the  congestion  argument.  In  fact, 
under  the  conditions  prevailing  in  that  community,  Mr.  Bliss  observed  no  ten- 
dency to  congestion  of  population  as  a  result  of  the  increased  fares  from  the 
central  area  to  the  outlying  zones.  On  this  point,  at  page  1185  of  the  Proceedings, 
he  says : 

"The  social  effects  have  not  been  so  marked.  That  is,  you  would  naturally  expect  under 
a  substantially  increased  fare  that  we  have  applied  that  you  would  have  the  centralization  of 
residence  on  the  part  of  the  people;  they  would  all  crowd  within  this  5-cent  area.  The  lack 
of  housiuK  accommodation  has  operated  in  such  a  way  as  to  show  but  very  little  eflfcct  upon 
the  people  socially.  There  seems  to  \ye  no  less  a  demand  for  tenements  outside  the  5-cent 
limits  than  within.  .\nd  while  that  tendency  I  think  would  be  very  marked  with  the  resumption 
of  normal  conditions  and  the  resumption  of  building,  I  think  under  the  present  emergency 
conditions  there  has  been  no  serious  effect  from  that." 

Still  another  important  experiment  with  the  zone  system  is  being  carried 
on  by  the  Eastern  Massachusetts  Street  Railway  Company  on  the  Bay  State 
system,  which  includes  over  900  miles  of  track  serving  most  of  the  cities  of  eastern 
Massachusetts.  The  zone  fare  was  inaugtirated  on  this  system  on  June  24,  1918, 
when  a  series  of  central  city  zones  were  established  with  a  6-cent  fare,  and  the 
lines  outside  of  the.ie  city  zones  were  divided  into  suburban  or  country  zones 
approximately  1  mile  in  length.  On  most  of  these  outlying  zones  the  fare  was  2 
cents  per  zone,  but  on  certain  light  lines  the  fare  was  2j^  cents  per  zone,  and  in 
some  cases  3  cents  per  zone.  In  all  cases,  however,  the  mininuim  fare  collected 
was  6  cents.  This  system  continued  in  effect  until  January  8.  1919,  when  it  was 
modified  by  the  expansion  of  the  size  of  the  city  zones  and  by  the  consolidation 
of  approximately  every  two  of  the  country  mile  zones.  .At  this  time  the  fare 
in  the  city  zones  was  increased  to  10  cents  cash  or  7  cents  by  tickets,  which  were 
sold  in  strips  of  five.  On  the  country  zones  the  cash  fare  was  5  cents  per  zone, 
with  a  10-ccnt  minimum.  The  7-cent  tickets  were  also  good  on  the  country  zones. 
Finally,  on  July  1,  1919,  the  7-cent  tickets  on  the  Bay  State  system  were  with- 
drawn, leaving  the  cash  fare  10  cents  in  the  city  zones  and  5  cents  per  zone  in 
the  country,  with  a  miiiinniin  of  10  cents.  Since  then,  the  zone  system  has  been 
retained,  but  the  Board  of  Public  Trustees  operating  the  Eastern  Massachusetts 
Street  Railway  Company  has  been  conducting  a  series  of  experiments  with  dif- 
ferential ticket  fares  in  a  number  of  cities.' 

Zone  jilans  have  also  been  tried  on  certain  other  electric  railway  systems 
in  Massachusetts,  notably  those  centering  in  Springfield  and  Holyoke.  The 
Springfield  zone  plan,  approved  by  the  Massachusetts  Public  Service  Commission 
on  March  30,  191S,  was  quite  complicated.  The  original  5-cent  fare  area,  slightly 
enlarged,  was  divided  into  an  inner  zone  and  an  outer  zone,  with  a  5-cent  fare 
in  each.  Tickets  were  sold  at  the  rate  of  six  for  40  cents,  good  for  rides  from 
any  point  in  (lie  inner  zone  to  any  point  in  the  outer  zone  not  more  than  five 
miles  distant  by  the  car  track  from  the  traffic  center.  Tickets  at  the  rate  of  six 
for  50  cents  were  sold,  good  for  a  ride  from  any  poiiu  in  the  inner  zone  to  any 
point  ill  the  outer  zone,  without  limitation.     Beyond  the  limits  of  the  second  zone. 


The  Zone  Fare  227 

additional  zones  of  about  1  mile  in  length  were  established,  with  a  zone  rate  of 
2  cents  per  mile  and  a  minimum  fare  of  6  cents,  good  for  a  ride  through  three 
zones.  This  system  went  into  efifect  May  1,  1918,  but  it  was  found  necessary  a 
few  months  later  to  increase  the  rates  of  fare  under  the  zone  plan.  On  Septem- 
ber 16,  1918,  the  cash  fare  in  either  the  inner  or  the  outer  zone  was  raised  to  6 
cents,  and  the  zone  rate  outside  of  the  city  area  was  increased  to  2i/2  cents  per 
mile.  The  ticket  rates  were  also  increased  from  six  for  40  cents  to  six  for  45 
cents,  and  from  six  for  50  cents  to  seven  for  65  cents.  On  October  19,  1919, 
the  fares  were  again  increased.  The  cash  fare  on  the  Springfield  zones  and  on 
certain  other  divisions  was  increased  to  7  cents,  and  the  rate  on  certain  of  the 
outlying  lines  was  increased  to  3  cents  per  mile.  The  ticket  rates  were  increased 
from  six  for  45  cents  to  eleven  for  $1.00,  and  from  seven  for  65  cents  to  nine 
for  $1.00.* 

On  the  Holyoke  street  railway  system  a  central  zone  with  a  radius  of  about 
four  miles  was  established  in  December,  1918,  with  a  7-cent  fare.  Beyond  the 
limits  of  the  central  zone  the  lines  were  divided  into  zones  about  two  miles  in 
length,  and  a  fare  of  5  cents  per  zone  was  charged.  In  December,  1919,  a  uni- 
form fare  of  6  cents  per  zone  was  established  on  the  Holyoke  system. 

Interstate  Commerce  Commissioner  Eastman,  who  was  a  member  of  the 
Massachusetts  Public  Service  Commission  for  several  years  during  the  period 
when  the  street  railway  problem  in  that  state  was  most  acute,  expressed  the 
opinion  that  the  zone  fare  plan  is  still  in  the  experimental  stage  in  this  country. 
His  testimony  on  this  point  is  found  at  pages  2074  and  2075  of  the  Proceedings, 
as  follows : 

"The  Chairman :  You  have  had  quite  a  little  experience  with  the  zone  system,  and  your 
testimony  shows  that  your  zones  have  been  narrowed  and  extended  and  expanded  and  in  some 
cases  abandoned,  I  believe.  Generally  speaking,  do  you  believe  that  a  zone  system  is  a 
proper  system? 

"Commissioner  Eastman :  Well,  that  is  a  ver>'  difficult  question.  As  I  say,  I  at  first 
was  very  much  attracted  by  the  theory  of  the  zone  system.  It  seemed  to  me  it  made  the 
rider  pay  in  proportion  to  what  he  got  and  it  also  enabled  the  company  to  attract  the  short 
distance  rider.  And,  if  you  had  originally  started  on  that  basis  I  think  in  all  probability  it 
would  he  a  proper  system  to  adopt  in  this  country  just  as  they  have  done  in  Great  Britain, 
for  example. 

"But  when  a  community  has  grown  up  on  the  other  basis,  it  undoubtedly  causes  a  serious 
dislocation,  in  many  cases,  by  suddenly  changing  the  system  from  a  flat  fare  system  to  a  zone 
system,  so  that  some  people  will  still  retain  their  five-cent  fare  and  others  will  have  to  pay 
a  much  higher  fare.  And  it  was  my  experience  that  the  introduction  of  the  zone  system 
caused  more  irritation  on  the  whole  than  a  flat  increase  in  fare. 

"The  Chairman:     Did  that   irritation  continue   for  a  long  time? 

"Commissioner  Eastman  :  Well,  of  course,  a  good  many  of  the  things,  relatively  speak- 
ing, have  not  been  in  operation   very  long. 

"The  Chairman :  Has  the  system  been  in  operation  long  enough  to  enable  you  to  form 
a  judgment  as  to  whether  it  tends  to  decentralize  a  community  or  scatter  industries  over 
larger  areas? 

"Commissioner  Eastman :  No,  I  do  not  think  that  I  have  any  very  positive  information 
on  that  subject.  I  suggested  to  the  Commission  of  Massachusetts  which  is  now  investigating 
the  street  railway  situation  that  they  should  endeavor  to  collect  all  the  direct  and  positive 
information  that  they  could  in  regard  to  the  effect  of  the  higher  fares.  I  saw  in  one  of  the 
Boston  papers  the  other  day  that  the  ten-cent  fare  there  is  causing  a  great  demand  for 
tenements  and  lodgings  within  walking  distance  of  the  central  districts,  and  that  the  demand 
is  much  greater  than  the  supply.  I  was  told  in  some  of  the  cases  of  the  Bay  State  cities, 
and  I  think  it  was  Lynn,  that  an  investigation  was  made  after  the  establishment  of  the  zone 
system,  and  it  was  found  that  houses  and  apartments  could  be  easily  secured  outside  the 
central  district,  but  that  within  the  central  district  the  demand  was  much  greater  than  the 
supply  there,  showing  the  tendency  of  population  to  move  inward. 


228  Electric  Railway  Problem 

"Mr.  Warren:     Where  was  that? 

"Commissioner  Eastman  :  Lynn.  But  I  do  not  think  the  experience  has  been  sufficient  at 
the  present  time  to  do  anything  more  than  to  raise  the  possibility  of  danger  in  that  respect. 
In  other  words,  it  is  no  positive  proof. 

"The  Chairman  :  Do  you  regard  a  zone  fare  as  still  in  the  experimental  stage  in  this 
country  ? 

"Commissioner  Eastman :     I  should  say  so." 

I  have  already  called  attention  to  the  fact  that  with  the  inauguration  of  the 
zone  plan  on  the  Bay  State  lines  the  company  stopped  counting  the  passengers, 
so  that  it  is  impossible  to  get  accurate  and  detailed  figures  with  respect  to  the 
effect  of  zone  fares  on  traffic  on  that  system.  The  same  is  true  of  the  zone  system 
established  on  the  lines  of  the  Cumberland  County  Power  and  Light  Company 
in  Portland,  Maine,  and  vicinity,  as  I  have  also  pointed  out.  In  Portland  the 
zone  system  was  originally  put  into  effect  in  October,  1918,  but  was  considerably 
modified  in  March,  1919,  and  the  fares  were  increased  in  June,  1919.  Under 
the  present  Portland  plan  the  city  area  is  divided  into  three  zones,  and  the  lines 
outside  of  the  city  limits  are  divided  into  zones  approximately  one  mile  in  length. 
The  company  has  adopted  a  plan  to  induce  the  car  riders  to  use  tickets  instead 
of  paying  cash.  Within  the  city  area  the  minimum  cash  fare  is  9  cents,  which 
is  good  for  a  ride  through  three  zones,  but  tickets  are  sold  by  which  the  fare 
is  reduced  to  7  cents.  On  the  outlying  zones  the  cash  fare  is  3  cents  per  zone, 
with  a  minimum  charge  of  9  cents,  good  for  three  zones,  and  the  ticket  fare  is 
2y3  cents  per  zone,  with  a  minimum  charge  of  7  cents.  The  system  is  explained 
by  Mr.  A.  H.  Ford,  Vice-President  and  General  Manager  of  the  Cumberland 
County  Power  &  Light  Company,  at  page  355  of  the  Proceedings,  where  he  says : 

"We  have  106  miles  of  track,  and  the  system  was  divided  up  into  practically  mile  zones 
and  a  charge  is  made  of  so  much  for  each  zone.  Our  rate  at  tlie  present  tiitie  is  3|i  cents 
for  a  zone,  the  city  proper  tjeing  divided  up  into  three  zones,  making  a  7-cent  fare. 

"The  Chairman :  Do  you  mean  by  that  that  there  is  a  rate  of  less  than  3  cents  within 
one  zone  ? 

"Mr.  Ford:  Yes,  sir;  that  is,  you  can  ride  on  an  initial  ride  of  three  zones  for  7  cents, 
and  then 

"Mr.  Warren:     That  is  the  minimum  initial  fare? 

"Mr.  I'ord :     Yes. 

"The  Chairman:     For  the  shortest  ride? 

"Mr.  I'ord :     Yes,  the  initial  ride  of  three  zones. 

"Mr.   Warren:     Or  less.     If  you  ride  one  mile  you  pay  7  cents,  or  three  zones. 

"Commissioner  Sweet:     How  about  one  block? 

"Mr.   l'\)rd  :     Seven  cents. 

"Mr.  Warren:  That  7  cents,  however,  is  good,  if  you  want  to  go  so  far,  for  three  of 
your  zones  ? 

"Mr.  l'"ord:     Y'es. 

"Con\missioner  Sweet :     That  would  Ix;  in  a  continuous  journey  ? 

"Mr.  h'ortl:  Yes,  but  if  you  \yant  to  ride  four  zones  yon  pay  9'<i  cents,  but  it  is  handled 
by  a  system  of  tickets.  \  zone  ride  ticket,  which  is  the  popular  ticket  used,  costs  .15  cents. 
Then  we  have  what  wc  call  a  15-zone  ticket  that  costs  .^.S  cents.  So  that  the  passenger  supplies 
himself  with  two  kinds  of  tickets,  tlie  7-cint  ticket,  tive  rides,  and  the  l?-zone  ticket,  and 
if  he  wants  to  make  four  zones  the  conductor  punches  one  ticket  out  for  the  7-ccnt  ride  or  the 
3-zonc  ride  and  then  he  punches  one  of  these  IS-zone  coupons  out  for  the  extra  one  that 
he  rides. 

"Mr.  Warren:     How  many  zones  arc  there  in  the  city  limits? 

"Mr.  1-nrd:     Three. 

"Mr.  Warren:  Then  am  I  right  in  thinking  that  the  net  effect  of  that  system  in  the 
city  limits  is  a  7-ccnt  fare? 

"Mr.  Ford  :     Yes,  sir. 

"Mr.  Warren:    Jnst  the  same  as  if  you  had  a  flat  7-cent  fare  in  the  city  of  Portland? 

"Mr.    I'..r.|       I'x.ullv" 


The  Zone  Fare  229 

Mr.  Ford  states  that  so  far  as  he  has  obser\-ed,  the  Portland  zone  fare  plan 
has  not  tended  to  create  congestion  of  population.  His  testimony  upon  this 
point  is  found  at  page  360  of  the  Proceedings,  as  follows: 

"Commissioner  Meeker:  You  think  the  institution  of  the  zone  system  will  not  have  any 
appreciable  effect  upon  the  growth  of  the  community,  centering  the  population  rather  than 
spreading  it  out  as  in  times  past,  so  as  to  diminish  the  rate  of  increase? 

"Mr.  Ford:  I  think  not.  The  zone  system  is  in  my  judgment  the  fairest  way  to  fix  a 
rate  for  the  reason  that  people  pay  for  what  they  get. 

"Commissioner  Sweet:     When  did  you  establish  the  zone  system? 

"Mr.  Ford  :     That  was  established  October  2nd  last  year. 

"Commissioner   Sweet:      1918? 

"Mr.  Ford  :     Yes,  sir. 

"Commissioner  Sweet :  Since  that  has  been  in  operation  have  you  noticed  any  tendency 
to  greater  congestion  in  the  center  of  your  city? 

"Mr.  Ford  :     No,  sir." 

Obviously,  a  zone  system  within  the  old  5-cent  fare  area  of  the  .city  of 
Portland  that  is  in  effect  the  same  as  a  7-cent  flat  fare  could  not  be  expected  to 
affect  congestion  in  the  way  that  a  distance  tariff  is  expected  to  affect  it.^ 

The  two  most  important  experiments  with  the  zone  fare  plan  thus  far  made 
in  this  countr}'  are  undoubtedly  those  made  by  the  Public  Service  Railway  Com- 
pany of  New  Jersey  and  by  the  Connecticut  Company.  The  New  Jersey  experi- 
ment was  made  at  the  instance  of  the  Board  of  Public  Utility  Commissioners.  In 
March,  1918,  the  Public  Service  Railway  Company  applied  for  emergency  relief 
in  the  form  of  an  increase  of  its  uniform  unit  fare  froiri  5  cents  to  7  cents,  to- 
gether with  a  charge  of  2  cents  for  each  initial  transfer  and  1  cent  additional  for 
a  second  transfer.  The  New  Jersey  Commission,  in  a  decision  rendered  July  10, 
1918,  dismissed  the  company's  application  for  a  7-cent  fare,  but  authorized  it  to 
institute  a  charge  of  1  cent  for  each  initial  transfer.  Prior  to  this  time  the  Public 
Service  Railway  lines  had  been  divided  into  broad  zones,  in  each  of  which  the 
uniform  flat  5-cent  fare  had  been  charged,  as  required  in  many  cases  by  ordinance 
contracts  with  the  several  municipalities  served.  Early  in  1918,  however,  the 
New  Jersey  courts  had  decided  that  the  state  commission  was  vested  with  author- 
ity to  increase  a  street  railway  company's  rates  beyond  the  limits  fixed  by  its 
local  franchises.  In  its  order  of  July  10,  1918,  the  New  Jersey  commission  dis- 
cussed the  question  of  readjustment  of  fares  as  follows: 

"Numerous  witnesses  produced  by  the  petitioner  clearly  indicated  as  their  opinion  that  the 
flat  rate  fare  system  was  an  inheritance  from  horse-car  days  and  was  in  no  sense  a  scientific 
or  proper  charge  for  the  service  rendered.  While  the  Board's  power  to  increase  railway 
fares  despite  the  existence  of  a  municipal  ordinance  specifying  the  maximum  fare  to  be 
charged  has  been  sustained,  an  important  question  would  arise  as  to  whether  we  would 
countenance  a  horizontal  raise  of  the  uniform  five-cent  rate  without  an  investigation  of  the 
nature  and  extent  of  the  service  rendered  for  the  fare  charged  and  all  the  elements  involved 
therein.  The  charge  for  the  service  does  not  bear  any  fixed  relation  to  the  service.  Under 
the  present  existing  five-cent  uniform  rate,  some  passengers  are  permitted  to  be  carried  a 
considerably  greater  distance  for  the  same  rate  than  other  passengers.  This  may  unduly 
discriminate  against  the  short-haul  passenger  or  short-rider,  and  any  horizontal  increase  in  the 
flat  rate  would  further  exaggerate  this  discrimination. 

"The  witnesses  for  the  company  further  testified  that  in  the  event  of  a  horizontal  increase 
in  fares  it  was  reasonably  certain  that  the  traffic  would  diminish  by  from  fifteen  to  twenty 
per  cent,  and  that  this  loss  of  traffic  would  be  the  short-haul  traffic,  for  the  reason  that  most 
of  the  short-riders  in  cities  would  walk  rather  than  use  the  cars  at  the  increased   fares. 

"If  the  intimations  of  the  president  of  the  company  are  correctly  interpreted,  we  can 
expect  with  the  advent  of  normal  times  after  tlie  war  an  application  by  the  company  for  a 
readjustment  of  fares  on  its  lines,  and  the  matter  as  to  the  method  of  raising  revenue  and 
adjusting   rates   having   been    so    fully   discussed    in   the    present   application,    we   are   of   the 


230  Electric  Railway  Problem 

opinion  that  it  would  not  be  remiss  for  us  to  suggest  that  the  company  make  a  comprehensive 
study  of  the  question  for  future  use.  It  is  important  to  the  public  as  well  as  to  the  company 
that  the  short-haul  traffic  business  should  be  retained.  Such  business  may  be  the  determining 
feature  which  will  make  possible  a  general  reduction  of  fares,  inasmuch  as  the  best  method 
of  developing  is  clearly  to  retain  a  low  minimum  fare.  Admitting  the  necessity  for  modifica- 
tion of  the  fares  charged,  some  method  can  certainly  be  devi.sed  by  a  proper  study  of  the 
company's  system.  While  the  system  is  extensive,  covering  nearly  a  thousand  miles  of  track, 
it  is  separated  and  operated  in  si.\  divisions  and  is  capable  of  a  practical  zoning  system." 

The  commission  therefore  directed  the  company  to  file  or  submit  before 
January  1,  1919  "a  plan  whereby  the  method  of  charging  at  present  in  force 
may  be  revised  by  an  equitable  zoning  system  over  its  entire  territory,  proper 
consideration  being  given  to  all  of  the  elements  to  more  properly  relate  the  cost 
of  service  with  the  length  of  haul  and  value  of  service."  Subsequently,  on  ac- 
count of  certaiti  wage  increases  awarded  by  the  National  War  Labor  Board,  the 
company  was  permitted  to  put  in  the  7-cent  fare  pending  the  proposed  investi- 
gation of  zoning.  Acting  under  the  direction  of  the  commission,  the  company 
made  an  elaborate  study  of  the  problems  involved  in  a  change  from  the  uniform 
flat  fare  to  a  zone  system,  and  submitted  a  voluminous  report  upon  this  subject 
in  March,  1919.  In  this  report  the  company  proposed  a  division  of  its  entire 
system  of  more  than  KOO  miles  of  track  into  nearly  unifonn  mile  zones,  and 
suggested  the  establishment  of  a  minimum  charge  of  5  cents  for  a  ride  in  one 
zone,  and  a  further  charge  of  1  cent  per  zone  mile  for  any  distance  ridden  beyond 
the  first  zone.  The  company  also  suggested  a  charge  of  1  cent  for  a  transfer, 
with  an  additional  charge  of  1  cent  per  zone  mile  for  any  distance  ridden  on  the 
transfer.  This  scheme  rejected  entirely  the  central  zone  idea  which  had  char- 
acterized the  zone  plans  previously  tried  in  this  country.  .At  the  same  time,  the 
New  Jersey  plan  did  not  go  the  full  length  of  adopting  the  distance  tariff  upon 
which  British  zone  plans  are  based.  Instead,  the  authors  of  the  plan  attempted  a 
detailed  analysis  of  the  cost  of  service  upon  the  theory  that  just  and  reasonable 
rates  should  be  worked  out  not  strictly  according  to  the  length  of  the  rides 
taken,  but  on  the  basis  of  a  combination  of  two  factors,  referred  to  as  "standby" 
and  "movement"  costs.  Their  idea  was  that  the  amount  paid  for  a  particular 
ride  should  be  made  up  of  two  elements:  (1)  a  "readiness-to-serve"  charge 
which  would  be  the  same  for  every  car  rider,  and  (2)  a  "movement"  charge 
which  would  vary  according  to  the  distarice  traveled.  As  a  result  of  its  analysis 
of  costs  the  company  arrived  at  3.3S4  cents  as  the  average  "stand-by"  cost  per 
passenger  under  the  conditions  prevailing  at  the  time  its  zone  report  was  filed 
in  March,  1919.  It  arrived  at  '"Hoo  of  a  cent  per  mile  as  the  average  "move- 
ment" cost  per  passenger.  A  strict  application  of  the  theory  upon  which  its 
analysis  was  based  would  have  required  it  to  ignore  transfers  and  to  treat  a 
passenger  using  a  second  car  on  any  given  trip  as  if  he  were  taking  two  entirely 
separate  and  independent  rides.  The  company  realized,  however,  that  such  a 
result  of  its  analysis  would  not  be  acceptable  to  the  riding  public,  which  had  long 
been  accustomed  to  free  transfer  privileges.  Therefore,  in  the  schedule  of  rates 
proposed,  it  eflfected  r.  compromise  by  which  the  transfer  passenger  would  be  let 
off  with  a  "st.ind-by"  charge  of  1  cent  only,  while  the  "stand-by"  charge  for  the 
initial  ride  would  be  increased  from  the  theoretical  ,5,^X4  cents  to  an  even  4  cents. 


The  Zone  Fare  231 

This  proposed  schedule  of  zone  fares  was  subjected  to  considerable  criticism 
by  the  Associated  Municipalities  of  New  Jersey,  on  the  ground  that  it  was  too 
inflexible  and  that  the  company's  analysis  of  standby  and  movement  costs  was  of 
-  little  or  no  significance  in  the  establishment  of  either  a  scientific  or  a  practicable 
street  railway  rate  schedule.  The  charge  of  inflexibility  was  proven  by  the  fact 
that  while  the  hearings  before  the  New  Jersey  Commission  were  still  going  on  the 
company  found  itself  confronted  with  additional  expenses  on  account  of  a  new 
wage  increase  awarded  by  the  National  War  Labor  Board,  and  was  unable  to 
suggest  a  modification  of  its  zone  fare  schedule  to  produce  the  additional  revenue 
required  without  getting  away  from  some  of  the  fundamental  principles  of  its 
plan.  As  a  result  of  evidence  produced  by  the  municipalities  to  the  effect  that 
low  fares  for  short  rides  have  been  effective  in  other  jurisdictions,  particularly 
in  Great  Britain,  in  stimulating  short-haul  traffic,  the  Public  Service  Railway 
Company  submitted  to  the  New  Jersey  Commission  a  new  proposal  under  which 
the  mile  zone  system  would  be  retained,  but  the  initial  fare  for  a  ride  through 
a  single  zone  would  be  reduced  to  3  cents,  and  the  charge  for  each  additional 
zone  would  be  increased  from  1  cent  to  2  cents,  all  transfers  and  transfer  charges 
being  done  away  with.  The  commission,  in  a  report  dated  July  30,  1919,  author- 
ized the  company  to  put  this  new  plan  into  effect.  Accordingly,  on  September 
14,  1919,  the  much  heralded  zone  experiment  was  inaugurated  on  all  the  Public 
Service  Railway  lines.  The  results  were  little  short  of  disastrous.  In  Camden 
and  vicinity  public  disorders  and  riots  ensued,  and  the  people  established  a  boy- 
cott against  the  street  car  service.  General  dissatisfaction  prevailed  throughout 
the  state  of  New  Jersey.  The  abolition  of  transfer  privileges,  the  rapid  piling  up 
of  the  charges  against  the  long-distance  riders,  and  the  slowing  down  of  operating 
schedules  on  account  of  delays  in  the  collection  of  fares,  all  combined  to  make 
the  new  system  unpopular.  From  its  point  of  view,  the  company  found  that  the 
new  rates  produced  much  less  revenue  than  had  been  produced  by  the  uniform 
7-cent  fare  with  a  1-cent  transfer  charge.  After  a  very  short  time,  therefore, 
the  company  applied  to  the  commission  for  permission  to  abandon  the  zone  plan 
and  go  back  to  a  flat  fare  schedule.  The  commission  was  loath  to  grant  this 
request,  because  it  felt  that  a  fundamental  principle  to  which  it  had  given  its 
adherence  was  at  stake,  and  that  the  zone  plan  had  not  yet  received  a  fair  trial. 
The  commission,  in  a  report  dated  October  23,  1919,  refused  the  company's 
request  to  abandon  the  zone  plan,  and  recommended  instead  that  the  plan  should 
be  modified  so  as  to  meet  some  of  the  most  serious  objections  thus  far  developed 
in  connection  with  its  practical  application.  The  3-cent  fare  for  the  initial  zone 
had  apparently  failed  to  accomplish  much  in  the  way  of  developing  short-haul 
traffic.  The  commission  suggested  therefore,  that  the  5-cent  minimum  rate  be 
restored,  but  that  it  be  made  to  cover  a  ride  of  two  zones  instead  of  one,  and  that 
beyond  the  two  zones  the  additional  charge  should  be  1  cent  per  zone  mile.  It 
also  recommended  that  the  transfer  system  be  reestablished,  with  a  transfer 
charge  of  1  cent.  The  company  at  first  refused  to  accept  this  recommendation, 
but  finally  did  accept  it,  and  the  new  rates  were  put  into  effect  November  16,  1919. 
The  results  from  the  company's  standpoint  were  even  more  disastrous  under  this 
plan  than  they  had  been  before,  and  the  commission   was  finally  persuaded  to 


232  Electric  Railway  Problem 

permit  the  company  to  restore  the  7-cent  fare.     In  its  report  of  December  2,  1919, 
the  commission  says : 

"We  are  of  the  opinion  that  neither  a  sufficient  nor  a  fair  trial  of  the  plan  under  the 
existing  rates  has  been  had  or  under  present  conditions  is  practicable.  The  trial,  however, 
has  alike  been  costly  to  the  company  as  well  as  to  the  principle  involved.  By  its  calculations 
the  company  shows  that  under  the  present  plan,  with  the  present  rates,  at  the  end  of  the 
present  year  it  will  have  an  actual  operating  loss  of  $750,000  after  the  payment  of  fixed 
charges  and  ta.xes,  exclusive  of  any  sum  whatsoever  for  depreciation  reserve.  A  careful 
analysis  of  these  figures  is  not  necessar\-,  as  it  is  evident  that  neither  rate  under  the  zone 
pjan  has  yielded  as  much  as  the  flat  rate  of  seven  cents  would  have  yielded  had  it  been  con- 
tinued in  effect.  Neither  is  it  necessary  to  determine  whether  the  flat  rate  of  seven  cents,  with 
one  cent  for  a  transfer,  will  yield  the  amount  of  revenue  which  the  company  estimates  it  will 
yield.  The  company's  officials  lielieve  that  it  can  "pull  through'  until  the  pending  proceedings 
are  finally  determined,  and  are  satisfied  to  be  permitted  to  make  such  a  change. 

"On  December  1.  1919,  interest  on  outstanding  bonds  of  the  company  to  the  amount  of 
approximately  $750,000  became  due.  Other  large  amounts  of  interest  on  outstanding  bonds 
will  Income  due  on  January  1st  ne.xt.  The  company  was  without  sufficient  funds  to  meet  it, 
and  was  re(|uired  to  borrow  it.  Bankers  were  unwilling  to  loan  the  necessary  funds  to  it  if 
the  zone  system  were  continued  in  effect,  and  would  make  the  necessary  advances  if  the  fiat 
fare  of  seven  cents  and  one  cent  for  a  transfer  is  restored.  It  was  alleged  that  in  the  event 
of  default  on  the  txmd  interest  insolvency  would  result,  terminating  in  a  receivership. 

"It  is  evident  that  the  company's  receipts  under  the  zone  plan  are  not  sufficient  for  it  to 
remain  solvent.  The  Irankruptcy  of  an  important  public  utility  is  always  accompanied  by 
adverse  conditions  which  affect  not  only  investors  in  its  securities,  but  the  public  served  by  it. 
That  a  public  utility  may  remain  solvent  is  not  controlling  in  fixing  its  charges,  but  the  Board 
cannot,  with  the  knowledge  that  bankruptcy  would  likely  result,  insist  upon  a  rate  unless  it 
clearly  appears  that  the  rate  is  just  and  reasonable  and  should  be  imposed  without  regard  to 
its  effect  upon  the  securities  of  the  company.  As  has  been  stated  heretofore,  the  Board  is 
now  conducting  a  proceeding  which  will  result  ultimately  in  the  fixing  of  a  rate  just  and 
reasonable  to  the  public  and  which  will  afford  a  fair  return  to  the  company  upon  the  value 
of  its  property  used  and  useful  in  the  .service  of  the  public.  The  Board  does  not  have  sufficient 
evidence  to  justify  it  in  determining  that  the  existing  rate  is  one  which  can  be  ordered  con- 
tinued without  regard  to  the  imminent  insolvency  of  the  company. 

"In  view  of  all  the  facts  and  circumstances  involved,  the  Board  regrets  that  for  the  time 
being  at  least  the  zone  plan,  the  principle  of  which  has  commended  itself  to  our  judgment, 
must  be  discontinued  and  the  rates  of  fare  in  effect  before  its  adoption  again  charged." 

The  Xew  Jersey  fiasco  was  little  short  of  a  tragedy  to  those  who  had  begun 
to  look  upon  the  adoption  of  the  zone  system  as  a  possible  means  of  restoring 
the  electric  railways  of  the  countiy  to  a  condition  of  financial  vigor.  It  came 
just  at  a  time  when  the  .American  Electric  Railway  Association  was  .giving  care- 
ful and  hopeful  thought  to  the  solution  of  the  practical  difficulties  in  the  way  of 
the  adoption  of  the  zone  fare  system  in  this  country.  Indeed,  while  the  Asso- 
ciation was  assembled  in  convention  at  .\tlantic  City  early  in  October,  1919,  the 
ntws|)apcrs  were  full  of  tlie  echoes  of  the  zone  fare  riots  in  Camden  and  of  the 
Public  Sei^fice  Railway  Company's  demands  that  it  be  permitted  to  abandon  the 
zone  system  as  a  failure.  Nothing  deterred,  however,  the  Connecticut  Company 
proceeded  to  put  into  effect  u])on  its  lines  in  New  Haven,  Hartford,  Bridgeport, 
Waterbury,  New  Britain,  Middletown,  Meriden,  Norwalk  and  Stamford  and  on 
the  rural  lines  connecting  these  cities,  a  conii>rchensive  zone  i)lan,  which  was 
described  at  length  by  Mr.  Lucius  S.  Storrs  in  a  letter  to  the  E.xecutive  Secretary 
under  date  of  Deceniber  2,  1919.     Mr.  Storrs  says: 

"In  laying  out  our  zone  plan  we  divided  the  property  into  three  groups:  first  class  cities 
such  as  Hartford,  New  Haven,  Bridgeport  and  Watcrlnirv,  second  class  cities  comprising  the 
reniaindcr,  and,  third,  the  country  litics.  \Vc  took  the  traffic  center  in  each  city  as  the  central 
point  and  starting  from  this  point  the  zones  were  laid  out  by  steel  tape  measurements  as  the 
track  runs  on  the  basis  of  one  and  one-half  miles  for  the  fir.st  zone  with  additional  zones  of 
one  mile,  the  numl)cr  of  one  mile  zones  depending  upon  the  density  of  p<ipulation;  this  apply- 
ing to  the  first  class  cities.     In  the  other  cities  the  first   zone   from  the  traffic  center  is   1.2 


The  Zone  Fare  233 

miles  in  length  and  as  the  density  of  population  usually  begins  to  fall  off  materially  at  this 
distance  from  the  center,  there  are  no  one-mile  zones.  The  country  lines  are  divided  into 
zones  eight-tenths  of  a  mile  in  length. 

"Our  rate  is  si.x  cents  for  the  first  two  zones  and  two  cents  for  each  additional  zone, 
transfers  being  issued  in  all  cases  where  a  passenger  has  to  change  cars  which  will  enable 
him  to  complete  two  lull  zones  for  his  initial  fare.  You  will  see,  therefore,  that  a  passenger 
who  rides  across  the  center  in  the  first  class  cities  may  obtain  a  maximum  ride  of  three  miles 
for  six  cents,  which  is  at  the  rate  of  two  cents  per  mile,  and  continue  at  this  two  cents  a  mile 
rate  until  the  country  territory  is  reached  where  the  rate  is  two  and  one-half  cents  per  mile, 
the  zones  having  been  fixed  at  eight-tenths  of  a  mile  in  order  that  this  rate  may  be  collected 
in  two-cent  increments.  In  the  other  cities  the  maximum  six-cent  ride  is  2.4  miles,  which 
gives  us  the  same  rate  per  mile  as  on  the  country  lines. 

"The  method  of  collection  is  very  much  the  same  as  that  used  by  the  Public  Service 
Railway  with  which  I  presume  you  are  familiar.  The  passenger  enters  at  the  front  door, 
is  given  a  zone  check  by  the  motorman  which  indicates  the  zone  in  which  he  boarded  the  car, 
and  upon  leaving  the  car  hands  the  zone  check  to  the  conductor  who  advises  him  the  amount 
of  his  fare,  which  the  passenger  is  required  to  deposit  in  the  registering  fare  box.  .-Ml  of 
our  cars  are  equipped  with  Johnson  fare  boxes  and  the  conductor  is  not  allowed  to  deposit 
any  money  in  the  box. 

"We  have  adopted  a  metal  ticket  which  is  sold  in  packages  of  17  for  $1.00,  or  in  broken 
lots  at  six  cents  each,  which  materially  lessens  the  number  of  coins  which  the  conductor  is 
required  to  grind  through  the  box. 

"A  tariff  card,  which  indicates  the  zone  in  which  the  car  is  and  the  rate  of  fare  to  that 
zone  from  any  other  zone,  is  provided  for  the  use  of  the  conductor  and  information  of  the 
passengers.  *  *  *  »  j ^g  motorman  is  not  required  to  operate  one  of  these  as  is  the  case 
in  New  Jersey. 

"We  realized  that  in  order  to  inaugurate  such  a  radical  change  in  fare  collection  methods 
it  would  be  necessary  that  the  public  be  fully  informed  as  to  the  details  and  our  employes 
thoroughly  instructed  in  the  methods  of  operation.  Both  of  these  matters  received  the  closest 
of  attention  and  for  a  period  of  several  weeks  we  gave  the  public  full  information  relative 
to  specific  zone  points,  rates  and  the  methods  which  we  expected  to  pursue  in  the  collection 
of  the  fares. 

"The  car  crews  were  divided  into  classes  of  ten  and  each  class  received  three  hours  of 
instruction  culminating  in  an  examination  in  which  each  individual  was  obliged  to  demon- 
strate to  the  instructor  that  the  operation  was  thoroughly  understood.  We  also  held  meetings 
of  the  employes  on  the  different  divisions  at  which  the  need  of  the  company  for  additional 
revenue  was  fully  explained.  The  result  of  all  of  this  was  that  we  inaugurated  the  system  on 
November  2nd,  with  our  employes  thoroughly  instructed  and  exhibiting  a  fine  spirit  of 
cooperation  and  the  public   fully  informed. 

"In  the  beginning  we  experienced  considerable  delay  and  consequent  irregularity  of 
schedules,  but  succeeded  in  handling  the  industrial  operatives  so  that  practically  all  of  the 
vast  number  using  our  cars  to  get  to  the  factories  were  delivered  on  time  the  first  morning 
and  have  been  so  handled  since  that  time. 

"We  e.Kperienced  no  trouble  whatever  from  rowdyism,  .•\fter  a  few  days,  conditions 
became  normal  and  we  have  had  no  disruption  of  schedules  due  to  the  method  of  fare  collection. 
Our  conductors  pass  through  the  cars  and  make  change  for  the  passengers  and  issue  trans- 
fers so  they  have  the  exact  fare  ready  to  deposit  in  the  box  and  the  unloading  is,  therefore, 
facilitated.  .\s  a  matter  of  fact  it  requires  less  time  to  unload  a  car  with  the  passengers 
paying  out  than  it  did  to  load  a  car  under  the   P.  A.  Y.  E.  system. 

"Under  the  Connecticut  law  we  are  able  to  change  a  company-made  rate  at  any  time 
without  the  consent  of  the  Public  Utilities  Commission.  However,  upon  petition  of  any  ten 
individuals  or  from  any  municipality  the  commission  is  required  to  investigate  and  decide 
whether  or  no  the  rate  is  reasonable.  Such  petitions  have  been  sent  to  the  commission  by 
a  number  of  the  municipalities  and  civic  organizations  and  the  hearings  on  same  will  begin 
ne.xt    week. 

"The  increase  in  revenues  of  November  this  year  over  November  last  year  is  showing 
approximately  20  per  cent.  The  influenza  epidemic  as  affecting  this  territor>'  last  year  was 
over  by  the  first  week  in  November,  having  started  about  the  middle  of  September.  In  this 
respect  we  differed  in  this  portion  of  New  England  from  experiences  in  points  in  New  Jersey 
and  points  south  and  west,  in  that  the  epidemic  w-as  not  of  as  long  duration  and  started  earlier. 

"What  is  most  gratifying  in  connection  with  the  revenue  is  that  our  receipts  are  increasing 
from  day  to  day.  showing  a  return  to  the  cars  of  short-distance  riders  who  always  abandon 
the  service  with  any  change  whatever  in  rates  of  fare  or  service  changes. 

"I  understand  that  statements  have  been  made  outside  of  Connecticut  jurisdiction  that 
neither  the  public  nor  our  men  were  satisfied  with  the  system.  May  I  say  from  the  standpoint 
of  the  men  there  is  the  most  loyal  cooperation  and  while,  of  course,  individuals  will  be  found 
in  an  Organization  as  large  as  ours  who  are  critical  to  any  change  whatever  in  their  accustomed 
methods,  a  large  majority  of  them  are  favorably  disposed,  and  in  fact  many  of  them  have 


234  Electric  Railway  Problem 

expressed  themselves  as  preferring  this  method  of  collection  to  the  old  system.  The  system 
accomplishes  what  we  have  all  been  hoping  for.  namely,  a  closer  relation  between  the  train 
crews  themselves  and  the  public  on  the  cars,  thus  emphasizing  the  personal  equation,  which 
is,  of  course,  of  great  value." 

In  another  letter,  dated  January  15.  1920,  Mr.  Storrs  gives  the  gross  passen- 
ger revenues  of  the  Connecticut  Company  by  months  for  the  years  1917,  1918  and 
1919.     In  that  connection,  he  says: 

"Fortunately  1  have  been  able  to  include  in  this  (retabulation)  earnings  for  the  months  of 
Novemlx-r  and  December,  during  which  period  we  were  operating  under  the  distance  tariff 
throughout  our  entire  territory,  and  you  will  note  the  figures  show  a  very  satisfying  increase 
in  gross." 

As  a  matter  of  fact  the  increase  in  gross  passenger  earnings  for  these  two 
months  as  compared  with  the  same  months  of  1917  was  18.48  per  cent,  while  the 
increase  in  the  month  of  October,  immediately  preceding  the  adoption  of  the  zone 
system,  was  17.65  per  cent.     The  difTerence  is  so  slight  as  to  be  negligible. 

The  zone  plan  placed  in  operation  by  the  Connecticut  Company  in  Xovember, 
1919,  was  modified  in  May,  1920,  as  a  result  of  a  decision  of  the  Connecticut 
Public  Utilities  Commission  handed  down  in  April.  One  of  the  most  important 
changes  effected  by  this  decision  is  the  establishment  of  a  uniform  system  of  one- 
mile  zones  on  all  the  company's  lines,  similar  to  that  which  was  put  into  effect 
temporarily  on  the  lines  of  the  Public  Service  Railway  of  New  Jersey.  The  fare 
remains  6  cents  for  the  first  two  zones,  but  the  cash  fare  for  each  additional 
zone  is  increased  from  2  cents  to  3  cents.  A  zone  ticket  book  containing  50  tickets 
is  to  be  sold  for  $1.00,  with  not  less  than  3  tickets  to  be  collected  for  a  ride  in 
three  zones  or  less,  and  one  ticket  for  each  additional  zone.  Monthly  commu- 
tation tickets,  good  for  daily  rides  between  traffic  centers  of  cities  with  a  popu- 
lation of  25,000  or  more  and  points  5  zones  distant  from  the  traffic  center,  are  to 
be  sold  at  the  rate  of  1.75  cents  per  zone  per  ride.  School  tickets  are  to  be  sold 
at  the  rate  of  1  cent  per  zone,  with  an  initial  charge  of  3  cents  for  a  ride  of  3 
zones  or  less." 

In  his  testimony  before  the  Commission,  Mr.  Storrs  took  the  position  that 
the  zone  system  would  be  good  for  the  company  but  bad  for  the  community. 
At  pages  456  and  457  of  the  Proceedings,  he  discusses  this  matter  with  Com- 
missioner Sweet  as  follows: 

"Commissioner  Sweet :  Do  you  think  that  the  fares  charged  ought  to  be  in  proportion 
to  the  distance? 

"Mr.  Storrs:  You  are  getting  down  to  the  fundamental  theory  there,  on  which  the 
American  city  has  Iktii  dovelopod.  That  is  the  universal  fare  throughout  an  entire  area. 
Now,    wo  are  cumiiig   down   to    fundamentals. 

"Commissioner  Sweet;  Well,  on  the  steam  railroads,  from  city  to  city,  the  custom,  of 
course,  throughout  the  country  is  to  charge  according  to  the  number  of  miles,  at  so  much 
a  mile? 

"Mr.  Storrs :     Yes. 

"Commissioner   Sweet:     Is   that    feasible   on   the   electric    railways? 

"Mr.   Storrs:     Yes;  un(|ucsti«nably  it  can  be  made  feasible,  and  should  be  made   so. 

"Commissioner  Sweet:     It  can  Ix?  made  so? 

"Mr.  Storrs :     Yes. 

"Commissioner  Sweet;     Well,  what  would  the  effect  of  it  lie? 

"Mr.  Storrs:  Well,  we  would  naturally  hope  for  improvement  before  we  would  ask 
to  put  it  into  effect. 

"Commissioner  Sweet:  From  the  standpoint  of  the  railway,  do  you  think  it  would  result 
in  a  remedy? 


The  Zone  Fare  235 

"Mr.  Storrs :     Yes. 

"Commissioner  Sweet:  And  it  would  help  them  out  of  their  present  situation  to  a  very 
considerable  e.xtent? 

"Mr.  Storrs:     We  hope  so. 

"Commissioner  Sweet :  That  is,  assuming  that  people  paid  the  fare,  and  that  they  did  not 
lose  any  traffic  to  a  large  extent? 

"Mr.  Storrs  :     Yes. 

"Commissioner  Sweet :     What  would  be  the  effect,  based  upon   the  general  community  ? 

"Mr.  Storrs :  It  cannot  help  but  have  the  effect  of  gradually  drawing  in  all  of  the 
tenement  districts  to  the   inner  zone  of  the  city. 

"Commissioner  Sweet:     In  European  cities,  has  it  actually  worked  in  that  way? 

"Mr.  Storrs:  I  understand  so,  as  to  the  condition  of  the  inner  area  of  the  city.  That 
is  the  only  portion  that  is  served,  and,  conversely,  the  fact  that  it  is  congested  must  be  to  a 
certain  extent  due  to  the  fact  that  it  is  the  only  part  served. 

"Commissioner  Sweet:  Well,  in  reasoning  on  the  subject,  is  not  that  the  natural  con- 
clusion to  come  to? 

Mr.  Storrs:     Yes,  sir.     I  have  always  drawn  that  conclusion. 

"Commissioner  Sweet :  Then,  in  this  regard,  there  seems  to  be  a  direct  conflict  of  inter- 
ests between  the  general  community  and  the  railway  companies.  It  would  be  to  the  interest 
of  the  railway  companies  to  adopt  the  system  that  prevails  on  the  steam  railroads,  would  it 
not,  and  that  would  be  inherently  just,  would  it  not? 

"Mr.  Storrs:     It  would  seem  to  be  inherently  just  and  much  more  reasonable. 

"Commissioner  Sweet:     And  then  the  people  would  pay  for  just  what  they  get? 

"Mr.  Storrs :     Yes. 

"Commissioner  Sweet :  But  in  the  interest  of  the  proper  distribution  of  the  population 
and  to  prevent  the  congestion  in  the  centers  of  population,  the  other  system  has  been  adopted 
throughout  the   United   States  ? 

"Mr.  Storrs:     Yes,  sir;  the   fundamental  theory. 

"Commissioner  Sweet :  And  it  has  worked,  as  you  no  doubt  would  expect  it  to  work, 
and  has  produced  the  distribution  that  has  decided  advantages  from  many  standpoints? 

"Mr.  Storrs :     Yes,  sir." 

Here  we  have  a  rather  frank  admission  by  a  witness  for  the  companies,  and 
an  advocate  of  the  zone  system  as  a  means  of  their  financial  salvation,  that  the 
American  flat  fare  poHcy  has  been  built  up  on  a  correct  basis  so  far  as  social 
welfare  is  concerned.  Mr.  Storrs  and  several  other  witnesses,  when  questioned 
by  Commissioner  Gadsden,  readily  assented  to  the  proposition  that  the  electric 
railways  thus  far  have  carried  a  heavy  burden  of  community  development  in 
this  country.  In  substance  these  witnesses  agreed  that  now  it  is  time  for  the 
electric  railways  to  "cut  loose"  and  seek  first  their  own  salvation,  leaving  the 
community  to  solve  its  social  problems  by  other  means,  or  else  subsidize  the  rail- 
ways for  the  services  they  render  in  that  connection.  This  brings  out  clearly 
the  fact  that  street  railway  fares  cannot  be  treated  merely  from  the  point  of  view 
of  revenue  production ;  their  social  implications  and  consequences  must  be  given 
consideration.  The  witnesses  who  testified  with  respect  to  the  zone  fare  system 
were  pretty  well  agreed  that  such  a  system  is  more  equitable  as  between  the 
electric  railway  and  its  individual  patrons  than  the  uniform  flat  fare  system  can 
be.  This  strain  of  unanimity  was  based  upon  considerations  with  respect  to  the 
cost  of  the  service  and  the  value  of  the  service  to  the  individual  car  riders.  The 
deeper  we  go  into  the  subject,  the  more  complex  it  gets,  and  the  more  certain  we 
are  that  we  have  hit  the  fundamental  issues  imderlying  the  whole  local  transpor- 
tation problem.  What  were  the  street  railways  built  for — to  make  money  or  to 
serve  the  commimity?  What  shall  determine  their  fare  policies — the  financial 
exigencies  of  the  operating  corporations,  or  the  public  welfare?  Local  transpor- 
tation facilities  are  a  fundamental  part  of  the  city  plan.  Local  transportation 
charges  have,  or  may  have,  a  determining  influence  upon  the  efficacy  of  the  city 
plan  in  its  practical  working  out.     It  is  idle,  and  worse  than  idle,  to  attempt  to 


236  Electric  Railway  Problem 

solve  the  fare  problem  merely  from  the  point  of  view  of  street  railway  finance. 
That  is  one  of  the  fundamental  dangers  in  the  present  street  railway  situation. 
The  companies,  in  their  present  financial  distress,  are  turning  to  the  zone  system 
as  a  possible  means  of  getting  more  revenue.  The  state  commissions,  feeling 
little  or  no  responsibility  for  the  social  results  of  the  policies  they  adopt,  yield  to 
the  necessity  of  providing  the  companies  with  more  revenue  from  the  rates,  and 
give  great  weight  to  the  theoretical  analysis  of  the  cost  of  ser\-ice  and  its  scientific 
distribution  among  the  various  classes  of  car  riders.  To  the  extent  that  the  mun- 
icipalities have  been  eliminated  from  participation  in  rate  adjustments,  there  is 
nobody  left  in  the  game  to  represent  the  urban  community  interest.  What  is 
most  important  is  lost  sight  of ;  what  is  least  important  prevails.  From  the  com- 
panies' point  of  view  the  question  is:  Does  the  zone  system  produce  the  revenues 
required?  From  the  point  of  view  of  the  regulating  commissions,  the  question  is: 
Does  it  produce  the  revenues  by  an  equitable  distribution  of  the  cost  of  service 
among  those  who  use  the  service?  From  the  community's  point  of  view,  the 
question  is :  Does  the  zone  plan  produce  the  revenue  without  substantial  injustice 
to  the  individuals  who  pay  the  fares,  while  at  the  same  time  contributing  to  the 
public  welfare  through  the  exertion  of  a  proper  influence  upon  the  distribution  of 
population  and  the  total  direct  and  indirect  costs  of  transportation  service? 

Unfortunately,  American  experience  with  the  zone  fare  is  quite  limited,  and 
the  testimony  of  the  witnesses  on  this  subject,  though  quite  voluminous,  is  for  the 
most  part  rather  superficial.  This  is  a  case  where  even  unanimity  might  not  be 
convincing.  But  there  is  disagreement.  To  the  question  whether  the  zone  plan 
will  produce  the  revenues,  Mr.  Thomas  N.  McCarter,  of  the  Public  Service  Rail- 
way Company  would  reply :  "A  thousand  times,  no ! — At  least  not  in  New  Jersey." 
On  the  other  hand.  Mr.  Lucius  S.  Storrs  would  reply:  "The  results  are  very 
satisfying — at  least  in  Connecticut."  .And  Mr.  Walter  Jackson's  reply  would  be: 
"The  zone  system  produces  the  revenue  in  Great  Britain  and  Australia — why  not 
in  America?"     Meanwhile,  the  truth  waits  upon  experience. 

To  the  question  as  to  whether  the  zone  system  provides  for  an  equitable  dis- 
tribution of  the  cost  of  service.  General  Tripp,  among  others,  answers,  "Yes." 
His  testimony  on  this  point,  at  page  160  of  the  Proceedings,  is  as  follows : 

"Commissioner  Sweet :  Do  you  regard  the  present  iircvailiiig  system  of  charging  the 
same  amount   for  .short  hauls  and  long  hauls  as  just? 

"Gen.  Tripp:     No;  I  do  not  regard  it  as  just. 

"Commissioner   Sweet:     Is  it  good  business? 

"Gen.  Tripp:     It  is  not  good  business. 

"Commissioner  Sweet :     Well,  how   would  you  change   it  ? 

"Gen.  Tripp:  (If  course,  the  only  change  that  1  know  atxjut  would  be  a  zone  system, 
such  as  is  universally  used  almost  all  over  England  and  the  Continent. 

"Commissioner   Sweet:     How   is   it   working   there? 

"Gen.  Tripp:     Working  i>erfectly   well. 

"Commissioner  Sweet :  Will  you  describe  that  zone  iJystem,  so  we  will  understand  more 
fully   what   it   is? 

"Gen,  Tripp:  .\  zone  system  simply  consists  in  certain  zones.  After  you  pass  out  of 
one  zone  into  another,  you  pay  an  additional  fare.  The  fare  in  England,  in  the  shorter  zone, 
is  low.     I  just  do  not  rccill  wh.Tt  it  is,  but  it  is  less  than  live  cents  or  its  ttiuivalent. 

"Commissioner   Sweet  :     Yes. 

"Gen,  Tripp :     Rut   it  increases  as  you  go  out   into  the   suburbs. 

"Commissioner  Sweet:  Would  not  that  necessitate  a  great  deal  of  Ixjthcr  and  annoyance 
that    .'Nmericans   would   object    to? 


The  Zone  Fare  237 

"Gen.  Tripp:  That  is  the  objection.  It  is  not  based  on  sound  economics,  and  it  is  not 
just,  but  it  is  the  custom  in  this  country. 

"Commissioner  Sweet:     You  mean  the  present  system? 

"Gen.   Tripp :     Yes ;   the  present  system. 

"Commissioner  Sweet ;  Hut  I  am  speaking  of  the  zone  system,  and  I  am  asking  you 
whether  Americans  would  not  rather  object  to  paying  these  small  amounts  as  they  pass  from 
one   zone   into  another? 

"Gen.  Tripp :  Well,  I  don't  know.  They  are  becoming  more  or  less  educated  to  do  it 
on  interurban  lines,  and  I  have  heard  some  cities  have  recently  adopted  it.  I  do  not  know 
how  it  is  working.  My  impression  has  always  been  that  they  would  object,  but  I  have  never 
known  of  its  being  tried  in  a  large  community,  so  I  do  not  know  that  it  has  ever  been  proved 
that  they   would  object. 

"Commissioner  Sweet :    But  you  think  that  that  is  a  just  and  a  business  way  of  handling  it? 

"Gen.   Tripp :     Yes,   sir." 

But  here  we  have  to  make  a  distinction  between  the  simple  distance  tariff 
as  it  is  worked  out  in  British  cities  and  a  modified  zone  fare  schedule  such  as  the 
plan  originally  proposed  by  the  Public  Service  Railway  Company  of  New  Jersey, 
and  later  applied  with  considerable  modification  by  the  Connecticut  Company. 
With  respect  to  the  British  plan,  the  American  Electric  Railway  Association's 
Committee  on  Zone  Systems,  in  the  portion  of  its  report  which  I  have  already 
quoted,  alleges  that  it  is  "most  discriminatory  in  favor  of  the  short-haul  rider, 
because  cost  of  service  is  admittedly  not  directly  proportional  to  the  distance 
traveled."  The  same  point  of  view  is  taken,  though  somewhat  more  mildly,  by 
Dr.  Dugald  C.  Jackson.  In  his  testimony,  he  quoted  certain  conclusions  reached 
as  a  result  of  a  special  investigation  made  at  the  Massachusetts  Institute  of  Tech- 
nology a  few  years  ago.  One  of  these  conclusions,  which  appear  at  page  1431  of 
the  Proceedings,  is  as  follows : 

"To  meet  increasing  cost  of  service  and  to  properly  prepare  for  extensions  of  existing 
systems,  the  street  railways  in  the  United  States,  both  urban  and  suburban,  will  sooner  or 
later  be  forced  to  adopt  a  system  of  rates  based  more  nearly  on  the  length  of  the  haul.  A 
mileage  system  of  rates  is  probably  not  desirable   in  American  cities." 

Commenting  upon  the  conclusions  referred  to,  and  particularly  upon  the  one 
just  quoted,  Doctor  Jackson  says,  at  page  1432  of  the  Proceedings: 

"The  foregoing  conclusions  all  point  to  the  necessity  of  some  zone  plan  of  fares  for  our 
large  cities.  Where  it  is  pointed  out  in  the  conclusions  that  a  mileage  system  of  rates  is 
probably  not  desirable  in  American  cities,  it  is  the  intention  to  urge  the  fact  that  transporta- 
tion, like  other  branches  of  business,  has  a  certain  proportion  of  overhead  cost  which  is 
reasonably  independent  of  the  bulk  of  the  business,  and  that,  therefore,  the  short-haul  passen- 
gers may  be  expected  to  pay  a  larger  per-passenger-mile  apportionment  than  the  long-haul 
passengers,  and  that  the  zone  system  should  be  laid  out  recognizing  that  fact.  Zones  which 
might  have  been  based  on  a  3-cent  fare  under  pre-war  cost,  would,  today,  call  for  a  5-cent 
or  larger  fare. 

"Most  of  the  street  railways  of  the  United  States  have  wished  to  avert  the  introduction 
of  zone  fares,  partially  on  account  of  the  difficulty  of  adequate  auditing  of  the  fares  collected. 
In  the  European  cities  where  zone  fares  have  been  used  for  several  decades,  the  plan  has  been 
usually  founded  upon  a  straight  mileage  charge  without  consideration  of  the  stand-by  charges, 
and  measures   for  adequate  auditing  have  not  been  introduced." 

It  may  be  admitted  that  theoretically  the  cost  of  street  railway  service  is  not 
directly  proportional  to  the  length  of  ride,  but  ii:  my  opinion  there  is  very  little 
basis,  even  from  the  point  of  view  of  scientific  rate-making  on  the  cost  theory, 
for  the  assumption  that  a  minimum  charge,  considerably  in  excess  of  the  mileage, 
should  be  made  for  all  passengers,  no  matter  how  short  their  rides  may  be.  The 
subject  is  complex  and  difficult,  but  there  is  danger  in  trying  to  carry  over  into 
the  street  railway  business  from  other  utilities  the  theorj'  of  "readiness-to-serve" 
as  a  distinct  element  of  cost  entering  a  just  rate  chargeable  to  the  individual  con- 


238  Electric  Railway  Problem 

sumers  irrespective  of  the  actual  amount  of  the  service  taken  by  them.  In  other 
utilities — water  supply,  gas,  electric  light  and  power  and  the  telephone — the 
theoretical  justification  for  a  "readiness-to-serve"  charge  grows  out  of  the  fact 
that  each  consumer  has  a  fixed  physical  connection  between  the  premises  he  owns 
or  occupies  and  the  distribution  system  of  the  utility.  The  relation  between  the 
street  railways  and  their  patrons  is  quite  different.  The  New  Jersey  idea  of 
"soaking"  a  passenger  for  3  or  4  cents  as  a  "stand-by"  charge  every  time  he 
boards  a  car  is  almost  grotesque  as  an  application  of  a  scientific  theory  of  rates. 
It  is  as  if  the  "readiness-to-serve"charge  in  water  rates,  for  example,  were  to 
be  applied  every  time  a  consumer  goes  to  the  faucet  to  get  a  drink ;  or  in  gas  or 
electric  rates,  every  time  he  turns  on  the  light.  That  would  not  be  a  "stand-by," 
but  a  "get-busy"  charge.  If  the  street  railways  are  to  levy  a  stand-by  or  ready- 
to-serve  charge,  they  should  tackle  the  man  on  the  sidewalk  or  in  the  automobile 
or  the  woman  that  stays  at  home  when  she  might  use  the  street  car  to  go  shopping. 
It  may  be  that  a  proper  allocation  of  local  transportation  costs  would  involve  the 
levying  of  a  service  tax  upon  property  to  which  street  car  servMce  is  available, 
or  the  exaction  of  a  sort  of  membership  fee  in  the  Car  Riders  Club  from  the 
fellow's  who  ride  only  occasionally,  hut  this  is  an  entirely  different  matter  from 
attempting  to  modify  the  distance  tariff  by  imposing  a  disproportionate  charge 
upon  the  short-haul  rider.  In  my  opinion  the  theory  of  a  "stand-by"  charge  is 
not  properly  applicable  to  street  railway  rates  unless  it  is  applied  to  the  infrequent 
or  irregular  rider  as  such,  not  to  the  short-haul  rider  as  such.  Theoretically, 
it  would  be  entirely  feasible  to  require  every  car  rider  to  pay  a  "stand-by"  charge 
of  50  cents  or  $1.00  a  month,  or  a  certain  larger  amount  every  three  months, 
every  six  months  or  every  year.  Under  such  a  plan,  nobody  could  ride  unless 
he  had  paid  his  dues  and  could  show  his  receipt,  and  then  he  would  have  to  pay 
his  regular  fare  based  on  the  distance  traveled.  This  suggestion  seems  quite 
fantastic,  but  it  is  eminently  logical  as  compared  with  the  schemes  being  devised 
by  the  electric  railway  companies  to  justify  the  adoption  of  a  hybrid  zone  plan 
without  the  low  fare  for  the  short  ride.  In  general,  we  may  conclude  that  the 
straight  distance  tariff,  supplemented  by  a  scheme  of  stand-by  charges  for  the 
potential  or  occasional  riders,  would  satisfy  to  a  reasonable  extent  the  demands 
for  scientific  rate-making  on  the  cost  basis. 

The  third  question,  as  to  the  effect  of  the  zone  fare  upon  the  community 
as  a  whole,  is  still  harder  to  answer.  Secretary  Raker  expressed  himself  as  in 
favor  of  the  zone  system,  but  admitted  the  inijiortant  social  benefits  of  the  uni- 
form flat  fare.  He  finally  justified  his  position  by  alleging  that  the  zone  fare 
by  causing  congestion  would  knock  the  bottom  out  of  suburban  real  estate,  and 
then  the  people  who  had  rushed  into  the  central  district  to  avoid  the  higher  car 
fares  would  rush  back  again  to  take  advantage  of  the  slump  in  suburban  rents. 
.^t  page  1025  of  the  Proceedings,  Mr.  Baker  says : 

"I  have  always  IhUcvwI  in  the  zone  plan  of  chafKc.  I  think  that  the  payment  that  one 
makes  to  a  street  railroad  comiiany  oiiRhf  to  be  for  the  service  rendered  him,  as  near  as  it 
can  be.  I  used  to  arRiic  with  Mr.  Johnson  about  that  and  his  objection  to  it  was  that  you 
would  have  to  have  a  bookkeeper  for  each  passenper  on  the  street  car,  which  was  an  cxaRRer- 
atcd  but  ilUistrative  way  of  stating  the  difficulties.  I  do  not  sec  the  sliRhtcsf  reason  why  we 
should  not  have  on  the  street  railroads  in  this  country  a  zone  system  like  the  British  use  in 
their  motor  buses." 


The  Zone  Fare  239 

Mr.  Baker's  discussion  of  the  effect  of  the  zone  plan  upon  congestion  comes 
a  little  farther  on.  At  pages  1025  and  1026  of  the  Proceedings,  in  response  to 
questions  by  Commissioner  Sweet,  he  testifies  as  follows : 

"Commissioner  Sweet :  In  your  discussion  with  Mayor  Johnson  of  the  zone  system  did 
either  of  you  bring  up  the  question  of  distribution  of  population? 

"Secretary  Baker :     Very  constantly.     It  was  a  thing  we  had  in  mind  all  the  time. 

"Commissioner  Sweet :  Don't  you  think  the  zone  plan  would  work  rather  in  favor  of 
congestion  and  be  objectionable  on  that  ground,  quite  seriously? 

"Secretary  Baker:  Yes,  it  kills  the  traffic  on  both  sides  of  the  zone  line,  it  has  that 
effect,  and  I  think  it  does  have  the  effect  of  congesting  the  people  towards  the  cheaper  haul. 

"Commissioner   Sweet :     When   you   consider 

"Secretary  Baker:  But  that  accounts  for  itself  very  easily.  What  happens  then  is  that 
the  rent  which  the  landlord  gets  at  the  end  of  the  line  falls;  so  it  ultimately  goes  back  to 
the  land  value  after  all. 

"Commissioner  Sweet :  I  understand  that  under  the  European  system  the  higher  charge 
in  proportion  to  the  longer  trip  has  seriously  tended  towards  congestion  in  the  cities.  Our 
system  of  charge,  a  nickel  for  almost  any  ride  whatever  on  an  electric  railroad,  urban  or  in 
the  vicinity  of  a  city,  has  had  a  tendency,  I  think,  to  build  up  the  suburbs  of  cities  to  quite 
an  unsual  extent,  more  than  in  foreign  cities. 

"Secretary  Baker :     I  think  it  has. 

"Commissioner  Sweet :  .And  that  would  certainly  seem  to  be  in  the  interest  of  sanitation 
and  perhaps  good  morals  and  the  general  benefit  of  the  community,  would  it  not? 

"Secretary   Baker:     Yes,  there  are  advantages  on  that  side. 

"Commissioner  Sweet :  I  have  wondered  whether  the  advantages  there  were  such  that 
it  would  be  better  to  make  up  a  deficiency  if  necessary  by  general  taxation  and  charge  the 
low  rate  of   fare  to  encourage  people  to  build  and  own  homes  outside  the  cities. 

"Secretary  Baker :  You  may  be  interested  to  know  that  Mr.  Johnson  entertained  your 
view  so  strongly  that  he  regarded  the  ideal  way  of  street  railroad  operation  as  entirely  paid 
for  by  the  taxpayers  and  all  car  riding  free.  He  used  to  say  there  was  no  more  reason  why 
elevators  should  be  operated  free  in  buildings  than  that  street  railroads  should  be  operated 
free.     The  same  thing  ought  to  apply.     I  do  not  agree  with  that." 

Mr.  Baker  was  in  favor  of  retaining  the  5-cent  fare,  even  though  it  might 
prove  necessary  to  shorten  the  one- fare  zone.  At  page  1035  of  the  Proceedings, 
he  says: 

"I  have  never  been  able  to  get  the  difficulties  of  the  zone  system — I  think  if  you  start 
with  the  S-cent  fare,  if  that  is  the  necessary  fare,  and  you  charge  another  cent  for  riding  an 
additional  mile  beyond  the  profitable  limit,  it  is  perfectly  unobjectionable. 

"Commissioner  Meeker:     Do  you  think  the  effect  upon  congestion  is  negligible? 

"Secretary  Baker :     Negligible. 

"Commissioner  Meeker :  We  have  in  our  S-cent  fare  zones  the  greatest  congestion  of 
population  to  be  found  in  the  world,  in  New  York  City. 

"Secretary  Baker :  Yes.  The  immediate  effect  undoubtedly  would  be  to  cause  people 
to  move  in  the  tenements  in  the  cheap  fare  district.  The  next  effect  of  it,  however,  is  to 
decrease  the  rental  value  of  outlying  lands  and  then  people  find  they  can  rent  for  as  much 
less  out  there  than  they  could  downtown  as  the  difference  in  the  cost  of  the  street  railroad 
fare,  so  that  the  effect  of  it  is  to  disperse  the  population. 

"Commissioner  Meeker:  Does  it  not  also  have  the  effect  of  dispersing  industry?  That 
seems  to  be  the  experience  in  Europe. 

"Secretan.-  Baker :  Yes,  I  think  it  does,  although  the  European  experience  on  that  subject 
is  unreliable  because  the  habits  of  the  two  sets  of  people  are  different.  Their  laborers  all  live 
around  their   factories  and  workshops  and  ours  never  did." 

Dr.  Dugald  C.  Jackson  expressed  the  opinion  that  there  is  nothing  in  the 
congestion  argument  against  the  zone  system,  and  that  the  full  cost  of  street  rail- 
way service  should  be  collected  from  the  car  riders.  At  pages  1433  and  1434  of 
the  Proceedings,  he  says : 

"Voice  has  been  given  to  much  well-meant  but  incorrect  criticism  of  zone  fares  for 
American  cities.  This  has  generally  been  based  upon  an  allegation  that  zone  fares  would 
mcrease  the  concentration  of  population  in  tlie  cities.  My  study  has  satisfied  me  that  these 
premises  are  erroneous,  and  the  criticism  incorrect.  The  family  that  has  gone  to  the  suburbs 
for  the  purpose  of  obtaining  better  living  conditions,  as  a  rule,  is  able  to  pay  a  slight  increase 
of  fare  without  overthrowing  its  margin  of  advantages.    If  such  fares  are  not  increased  above 


240  Electric  Railway  Problem 

5  cents,  provided  the  distance  to  the  suburb  is  greater  than  the  passenger  can  be  carried 
for  S  cents,  then  the  loss  from  carrying  such  passengers  for  5  cents  must  be  borne  by  others. 
If  this  loss  is  assumed  by  the  state  or  by  the  city  and  the  suburban  villages,  the  suburban 
dwellers  will  ultimately  pay  more  than  the  extra  fare,  on  account  of  the  increase  of  taxes, 
or  from  the  apportioning  of  taxes  in  rent,  and  in  the  cost  of  the  various  articles  of  food  and 
clothing  purchased. 

"In  other  words,  when  one  pays  for  something  indirectly,  it  ultimately  costs  him  more 
than  if  he  had  paid  for  it  directly.  While  he  may  not  know^  that  he  is  paying  for  what  he  got 
at  less  than  cost,  he  actually  is,  and  is  paying  more  for  it." 

Mr.  W.  D.  George,  one  of  the  receivers  of  the  Pittsburgh  Railways  Coinpany, 
was  very  emphatic  in  his  contention  that  the  zone  plan  tends  to  congestion.  In 
discussing  the  new  rates  put  into  effect  when  the  Pittsburgh  zoning  experiment 
was  abandoned,  Mr.  George  says,  at  pages  310  and  311  of  the  Proceedings: 

"The  new  rate  of  fare  which  we  have  in  effect  is  more  of  a  flat  fare  than  any  fare  that 
they  have  ever  had  there,  in  that  we  are  giving  now  what  they  never  had  before— a  crosstown 
transfer  privilege.  Ten  cents  will  entitle  a  man  to  cross  the  downtown  section,  with  a  transfer 
— something  which  they  never  had  before. 

"We  put  that  in  operation  in  the  attempt  to  afford  that  freedom  of  travel  from  one 
section  of  the  town  to  the  other,  and  we  are  getting  away  from  this  zone  system  of  fares 
which,  to  my  mind,  works  towards  the  congestion  of  population,  and  it  has  a  tremendous  effect. 

"I  want  you  gentlemen  to  consider  what  any  discrimination  of  2  cents  in  railroad  fares 
will  mean  to  a  family  of,  say.  four  riders  a  day.  To  see  what  it  would  mean,  I  figured  it 
out  one  day.  as  a  real  estate  man,  and  I  figured  that  a  lot  that  was  just  inside  of  a  zone 
that  had  a  5-cent  fare  was  worth  about  $30  a  front  foot  more  than  the  lot  that  was  just 
outside  of  a  5-cent  zone,  in  a  7-cent  zone,  to  a  man  who  had  four  daily  riders  on  the  street 
cars.  He  could  afford  actually,  if  he  was  buying  a  30-foot  lot.  to  pay  $30  a  front  foot  more 
to  get  inside  that  zone.  .And  don't  you  think  they  will  get  in?  Why.  they  will  get  in,  and 
the  apartment  houses  will  get  in,  and  there  will  be  a  tendency  towards  congestion  in  these 
.American  cities  which  will  approach  the  situation  in  Glasgow  today,  and  if  you  have  been 
familiar  with  the  studies  which  have  In-en  made  of  housing  conditions  in  Glasgow,  they  will 
cure  you  of  any  notion  that  street  car  companies  should  be  built  up  for  the  purpose  of  raising 
revenue,  and  at  the  .same  time  working  against  the  proper  distribution  of  the  population  of 
a  city.  If  you  will  allow  me  to  regulate  rates  in  the  city  of  Pittsburgh,  I  can  move  the 
population  and  create  land  values  and  destroy  land  values." 

Again,  at  page  311  of  the  Proceedings,  Mr.  George  says: 

"I  do  not  lielieve  any  city  can  afford  to  see  a  system  of  zone  fares  built  up  in  it.  I  think 
it  would  Ix;  tremendously  destructive  to  the  right  sort  of  development  of  the  city.  *  *  ♦ 
Not  only  that,  but  it  would  be  destructive  of  business  locations  which  have  been  created  on 
a  flat  system  of   fares." 

It  appears  that  the  Indiana  Public  Service  Commission  has  been  somewhat 
unconventional  of  late,  as  it  has  not  considered  itself  bound  in  all  rate  cases  by 
purely  financial  considerations.  This  is  indicated  by  the  testimony  of  its  secretary, 
Mr.  Carl  H.  Mote,  who  discusses  the  zone  plan  at  pages  1100  and  1101  of  the 
Proceedings,  as  follows: 

'"Commissioner  Sweet:     Have  you  considered  the  possibility  of  going  to  the  zone  plan? 

"Mr.   Mote:     Yes.      •     •     •     *     \\\.  [i^vc  denied  a  petition  .isking   for  that. 

"Commi.isioncr  Sweet:     What  is  your  objection  to  tlic  zone  plan? 

"Mr.  Mote;  Because  of  the  tendency  to  cause  congestion,  the  social  objections  to  it. 
We  do  not  have  the  same  problems.  I  frankly  recognize,  like  a  city  like  New  York  or  Boston 
or  the  larger  cities  have.  There  I  would  think  the  zoning  system  would  be  inescapable,  but 
I  do  not  think  that  it  is  tnic  of  our  state,  1  do  not  think  it  applies  to  any  of  our  cities. 

"Commissioner  Sweet:     V\'hat   is  the  population  of  Indianapolis? 

"Mr.   Mote:     300.000. 

"Commissioner  Sweet:     How  many  square  miles  does  it  cover  about? 

"Mr,  Mote:     Well,  roughly,  100. 

"Commissioner  Sweet :  Were  it  not  for  the  objection  th.it  you  speak  of,  the  tendency 
to  congestion,  would  you   favor  the  zone  system  in   Indianapolis? 

"Mr.  Mote:     There  is  onr  i>tlier  reason,  and  that  is  that   people  have  built  their  homes 


The  Zone  Fare  241 

in  the  suburbs  upon  tlie  theory  that  they  are  going  to  be  able  to  ride  downtown  as  cheaply  by 
living  in  the  suburbs  as  it  they  lived  down  at  10th  street  or  11th  street  or  down  near  town, 
and  I  should  think  the  moral  eti'ects  of  a  change  to  the  zone  system  would  be  bad  in  our  city." 

Lieutenant  Colonel  Charles  W.  Kutz,  Chairman  of  the  Public  Utilities  Com- 
mission of  the  District  of  Columbia,  where  two  rival  street  railway  companies 
operate,  explains  at  pages  1039  and  1040  of  the  Proceedings  the  reasons  why  the 
zone  system  was  not  adopted  in  Washington.     He  says : 

"Then  the  suggestion  was  that  we  adopt  a  zone  system,  which  would  also  have  an 
equalizing  efifect  in  this  particular  case,  because  of  the  ten  suburban  lines  of  the  one  company 
as  against  the  two  of  the  other.  But  when  the  zone  system  was  suggested  some  months 
ago,  very  great  opposition  was  voiced  to  it. 

"The  District  of  Columbia  is  somewhat  different  from  the  average  city  in  the  country  in 
that  its  boundaries  were  fixed  a  great  many  years  ago,  and  probably  will  remain  unchanged 
for  a  great  many  years.  In  other  words,  it  is  not  an  expanding  community,  from  a  territorial 
standpoint. 

"Of  course,  all  property  values  within  the  District  have  for  many  years  been  based  on 
this  flat  rate  for  street  car  fare,  and  of  course  we  distribute  electric  light  to  all  parts  of  the 
city  on  the  same  rate  and  we  distribute  gas  to  all  parts  of  the  city  on  the  same  rate,  and  yet 
we  know  it  costs  more  to  deliver  gas  ten  miles  than  it  does  to  deliver  gas  one  mile.  Also, 
sociologically,  we  think  there  are  a  great  many  advantages  in  a  flat  rate  of   fare  within  the 

District  of  Columbia. 

******** 

"The  evidence  seems  to  indicate  that  a  zone  system  in  the  District  would  be  very  unpop- 
ular, and  I  believe  if  submitted  to  a  referendum  of  the  people,  their  preference  would  be 
expressed  for  a  flat  rate  of  fare  rather  than  the  zone  fare. 

"I  might  say  that  the  charge  for  transfers  is  not  a  popular  charge  in  the  community. 
Many  people,  individually  and  collectively,  have  expressed  the  opinion  that  an  increase  in  the 
flat  rate  of  fare  would  better  satisfy  the  public  than  a  charge  for  transfers." 

Mr.  Walter  Jackson  was  the  best  qualified  witness  before  the  Commission 
so  far  as  zoning  is  concerned,  as  he  had  spent  several  months  in  Great  Britain 
and  Ireland  making  an  intensive  study  of  the  zone  methods  in  use  there,  besides 
being  familiar  through  many  years  of  personal  observation  with  the  conditions 
prevailing  on  the  electric  railways  of  this  countrj\  He  advocated  the  introduction 
of  one-man  safety  cars  as  "by  all  odds  the  surest  road  to  decreased  costs  and  in- 
creased revenue,"  but  referred  to  the  zone  system  as  "a  second  way  of  more 
limited  application."  His  discussion  of  the  zone  fare  system  appears  at  pages 
1600  to  1608  of  the  Proceedings.  Two  of  his  general  conclusions  are  given  at 
pages  1601  and  1602,  as  follows : 

"The  first  thing  that  I  gathered  from  these  studies  was  that  the  true  zone  fare  inevitably 
brings  out  a  large  proportion  of  people  who  ride  one  mile  or  less ;  and  this  has  been  found 
to  apply  under  a  great  variety  of  topographical,  density  and  other  conditions  ranging  from 
the  tenement  house  condition  of  Glasgow  through  the  small-house  cities  of  England  to  the 
more  scattered  construction  of  the  newer  cities  of  .\ustralia.  This  indicates  clearly  that  the 
minimum  fare  must  be  one  that  will  attract  the  walker.  In  Great  Britain  this  minimum  fare 
is  usually  one  penny ;  in  Australia  with  conditions  closer  to  our  own,  it  is  more  likely  to  be 
ly2  pence  or  three  cents  for  an  initial  zone  up  to  1^  miles  or  so. 

"If  any  American  city  of  reasonably  compact  population  can  show  only  ten  to  twenty 
per  cent  of  its  riders  within  a  one-mile  ride,  it  is  obvious  that  it  could  do  something  with 
a  lower  fare  for  the  shorter  distance.  It  would  be  unwise  to  specify  any  particular  scale 
of  fares  for  universal  application.  In  many  towns,  there  might  be  but  few  situations  where 
the  additional  revenue  from  a  diflterential  fare  system  would  make  the  extra  cost  and  com- 
plication worth  while.  I  would  always  wish  first  to  exhaust  the  technical  resources  of  the 
art.  Ideal  places  for  the  zone  fare,  beqiinning  with  a  rate  to  attract  present  walkers,  are  such 
cities  as  Boston.  Providence,  New  York,  Philadelphia,  thereby  making  the  street  railway 
of  maximum  value  to  the  public.  I  just  mention  those  to  be  specific.  Cities  that  are  not  of 
that  type  are  San   Diego  and  East   St.  Louis. 

"The  second  thing  gathered  from  studies  of  the  zone  fare  was  that  there  is  little  or  no 
connection  between  the  zone  fare  and  congestion.  Zone  fares  are  found  in  almost  every  kind 
of  community.     The  character  of  housing  often  appears  to  be  a  national  characteristic,  as  the 


242  Electric  Railway  Problem 

tenements  of  French  cities  and  the  individual  homes  of  English  ones.  Furthermore,  the 
expansion  of  American  cities  has  been  promoted  largely  by  the  ease  of  securing  land,  there 
being  no  century-old  estates  to  interfere.  Where  a  city  has  had  a  zone  fare  from  the  begin- 
ning, it  must  be  obvious  that  the  higher  fare  on  the  outskirts  is  offset  in  some  measure  by 
the  lower  cost  of  land.  In  the  United  States,  contrariwise,  the  realty  man  has  fattened  upon 
the  expansion  of  the  electric  railways  far  beyond  the  true  needs  of  the  community.  The 
municipality  itself,  as  Dr.  W'hitten  has  pointed  out,  has  also  been  paying  a  bonus  to  the  realty 
operator  iri  overrapid  extensions  of  its  streets,  water  system  and  other  utilities.  In  any 
event,  it  is  noticeable  that  under  a  correct  zone  system  the  fare  is  not  absolutely  cumulative, 
so  that  the  further  a  man  lives  away  from  the  center,  the  less  his  fare  per  mile.  For  example, 
Australian  roads  make  a  concession  to  the  suburbanite  just  as  the  companies  and  the  municipal 
tramways  of  London  do." 

His  further  conclusions  are  found  at  pages  1607  and  1608,  where  he  says: 

"The  third  thing  gathered  from  studying  the  zone  fare  in  practice  was  the  usclessness 
of  comparing  track  mileage  to  population  for  the  purpose  of  comparing  the  zone  fare  versus 
the  universal  fare.  The  older  European  cities  show  a  comparatively  small  amount  of  tracks 
to  population,  whether  they  have  flat  fares  or  zone  fares.  The  new  American  cities  and  newr 
Australian  cities  show  liberal  trackage,  although  the  .Americans  have  flat  fares  and  the 
Australians  have  zone  fares.  All  in  all.  it  is  true  that  European  cities  have  too  little  track, 
whereas  American  cities  certainly  have  too  much,  because  formerly  competitive  railways  still 
have  their  tracks  in  place  although  they  have  long  been  consolidated.  A  reduction  in  track 
mileage  would  be  a  healthful  blood-letting  for  many  American  cities.  I  may  add  that  while 
British  cities  have  so  little  track  in  proportion  to  population,  it  does  not  appear  that  their 
operators  feel  the  need  for  much  more.  The  tendency  is  to  serve  the  suburbs  first  with 
buses  or  trackless  trolleys  and  to  refrain  from  putting  down  costly  track  until  the  population 
is  dense  enough  to  pay  for,  say,  a  10-minute  headway.  This  is  common  sense.  In  other 
words,  instead  of  having  that  development  out  in  East  St.  Louis  with  its  very  costly  track 
construction,  running  out  for  miles  and  miles,  because  there  was  too  much  optimism  or  too 
much  pressure  from  realty  developers,  you  would  put  down  as  the  Englishman  does  two  or 
three  buses  and  say:  'We  will  give  a  bus  service  every  30  minutes  and  if  the  population  out 
here  grows  we  will  put  on  some  more  buses  and  by  and  by  we  will  put  on  a  trackless  trolley 
or  perhaps  put  down  a  track  when  we  know  it  is  there.  We  are  not  going  to  take  a  chance 
on  building  something  that  is  going  to  be  a  dead  dog  on  our  hands  afterwards.' 

"The  fourth  thing  to  be  gathered  from  a  close  study  of  British  practice  is  that  the  success 
of  the  zone  fare  depends  as  much  upon  close  headways  as  upon  a  short  fare  for  a  short  ride. 
It  is  obvious  that  people  will  not  wait  ten  to  fifteen  minutes  in  order  to  ride  one-fourth  of 
a  mile  to  a  mile.  In  Glasgow,  where  the  minimum  fare  zone  is  l.IO  miles,_  fully  62  per  cent 
of  the  passengers  ro<le  within  that  distance  last  year,  and  it  is  a  long  city,  along  a  river 
valley;  and  it  must  be  clear  that  they  would  not  have  done  so  much  short  riding  if  the  car 
service  had  been  infre(|uent.  It  does  not  follow,  of  course,  that  the  cars  themselves  are  as 
good  as  our  own  in  comfort  and  upholstery.  Generally  they  arc  nut,  although  the  provision 
of  cross  seats  on  the  upper  decks  and  permission  to  smoke  there  arc  much  appreciated. 
Jitney  experience  in  this  country  indicates  that  people  tend  to  take  the  first  vehicle  that 
offers,  a  .•ihabby  auto  Ixing  often  preferred  to  a  finely  upholstered  car  because  the  jitney 
is  there  and  the  car  is  not. 

"The  fifth  thing  to  be  gathered  from  a  study  of  zone  fare  systems  was  that  they  are  not 
to  be  judged  in  connection  with  the  wages  paid  to  the  carmen  unless  we  were  to  use  the 
same  scale  of  fares.  .-Vs  a  matter  of  fact,  the  British  carman  today  is  earning  pre-war 
American  wages,  has  an  eight-hour  day  and  gets  certain  privileges  like  payment  for  reporting 
time,  unifdrms  free  and  vacations  that  make  the  platform  cost  just  as  dominant  as  here. 
On  this  new  basis  most  fares  are  still  one  penny  or  two  cents  minimum.  On  tlie  other  hand, 
the  zone  fare  in  .-Vustralia  has  been  applied  for  years  on  railways  which  are  paying  American 
wages.  No  matter  what  the  wages  are.  a  zone  system  can  be  worked  out  on  the  plan  of 
maximum  revenue  from  maximum  riders  as  against  the  plan  of  8,  9  and  10-cent  fares  for 
all  who  can  Ik-  compelled  to  pay  them." 

It  cannot  be  doubted  tti.it  the  iiiiifomi  flat  fare  policy  has  been  carried  to 
unreasonable  limits  on  some  .\nicrican  street  railway  systems.  In  some  cases, 
it  may  even  be  argued  that  this  policy  has  spread  the  urban  population  out  too 
much,  and  caused  a  scattered  and  unsymmetrical  development  which  is  expensive 
from  the  community  standpoint  without  doinp  anybody  except  certain  realty 
people  any  more  good  than  would  have  come  from  a  more  moderate  distribution 
of  the  people.  In  such  cases  the  uniform  fare  area  can  properly  be  curtailed.  On 
intcrurban  lines,  a  distance  tariff  is  obviously  proper.     Possibly  on  some  urban 


The  Zone  Fare  243 

systems  a  modified  zone  plan  may  be  adopted  with  advantage  to  the  street  railway 
and  to  the  community  at  large.  But  it  is  clearly  intolerable  that  our  American 
uniform  flat  fare  policy  should  be  swept  away  and  a  zone  system  substituted  for 
it  merely  as  an  expedient  for  getting  more  revenue  out  of  street  railway  service, 
without  first  getting  the  advice  in  each  particular  case  of  the  municipal  author- 
ities who  are  responsible  for  the  city  plan.  It  would  be  quite  unsafe  for  the 
electric  railways  to  look  to  a  distance  tariff,  whether  it  be  a  thoroughbred  with  a 
British  pedigree  or  a  mere  American  scrub,  to  pull  them  out  of  the  slough  into 
which  they  have  fallen. 


Chapter  XXX 
RELIEF  FROM  TAXATION  AND  OTHER  PUBLIC  BURDENS 

I  have  already  discussed,  in  Chapter  X\'I  of  this  report,  the  extent  of  the 
tax  burdens  levied  upon  the  electric  railway  industrv-  and  of  the  franchise  obliga- 
tion's requiring  the  electric  railways  to  make  special  contributions  to  the  cost  of 
government.  A  gre:it  deal  of  testimony  was  taken  by  the  Conunission  with  re- 
spect to  the  possibility  of  procuring  for  the  electric  railways  a  substantial  amount 
of  relief  through  the  abrogation  of  special  taxes,  paving  obligations,  etc.  This 
general  subject  was  attacked  along  several  ditlerent  lines.  Special  franchise  taxes, 
when  coupled  with  general  property  taxes,  were  denounced  as  a  form  of  double  tax- 
ation quite  inconsistent  with  the  theory  of  "equal  taxation"  advocated  by  Professor 
Bullock.  In  the  second  place,  street  railway  paving  charges  were  attacked  on  the 
theory  that  they  are  a  "relic  of  horse  car  days"  and  no  longer  appropriate,  and 
also  on  the  theory  that  the  street  railway  paving  ta.x  represents  a  discrimination 
in  favor  of  the  automobiles.  In  the  third  place,  some  of  the  witnesses  advo- 
cated the  temporary  or  permanent  exemption  of  the  street  railways  from  all  taxa- 
tion as  an  alternative  preferable  to  fare  increases ;  but  this  policy  was  strongly 
combatted  by  other  witnesses.  A  great  deal  of  emphasis  was  laid  upon  the  theory 
that  taxes,  paving  obligations  and  other  special  burdens  placed  upon  the  street 
railways  are  in  fact  elements  in  the  cost  of  serv'ice  which  are  automatically  trans- 
ferred to  the  car  riders;  but  on  the  contrary  it  was  pointed  out  by  some  of  the 
witnesses  that  special  forms  of  taxation  were  developed  as  a  means  of  compelling 
the  street  railway  companies  to  share  their  profits  with  the  public  during  the 
period  when  the  companies  were  believed  to  be  making  exorbitant  profits  out  of 
the  fixed  5-cent  fare. 

This  subject  of  "relief"  from  taxation  and  franchise  obligations  having  to 

do  with  the  occupation  of  the  public  streets  by  electric  railway  tracks  and  other 

fixtures  is  an  extremely  complicated  one.     The  policy  that  should  be   followed 

depends  upon  the  accepted  status  of  the  electric  railway  as  a  means  of  rendering 

public  service.     In  the  .\nnals  of  the  American  .\ca«lemy  of  Political  and  Social 

Science  for  March,  1913,  I  discussed  "Taxation  of  Public  Utilities."     This  was 

just  after  the  World  War  broke  out,  but  two  years  before  the  United  States  got 

into  it.     At  the  time,  business  in  general  was  rather  stagnant  in   this  country, 

and  this  condition  was  reflected  in  relatively  low  street  railway  earnings.     Prices 

were  still  nonual,  but  the  growth  of  traffic  had  been  temporarily  checked.     It  was 

shortly  after  the  first  national  utilities  conference  had  been  hold  in  Philadelphia, 

and  the  whole  subject  of  the  public  relations  of  public  utilities  was  unsettled.     In 

the  article  referred  to,  1  said: 

"If  a  piil)lic  utility  i.s  tii  Ik-  rcRanled  as  a  priN-atc  enterprise,  operated  primarily  for  profit, 
subject  to  the  ordinary  restrictions  imposed  upon  other  protit-scekinR  enterprises,  no  objection 
ran   be   raised   to   the   IcvyinK   of   taxes   uiuin    its   prniicrty   or  earnings   in   the   same   way   that 


Relief  from  Taxation  245 

similar  taxes  are  to  be  levied  on  the  property  or  earnings  of  other  private  undertakings.  On 
the  other  hand,  if  public  utilities  are  to  be  regarded  as  agencies  of  the  state  or  the  municipal- 
ity, performing  strictly  public  services  under  stringent  public  regulation,  the  levying  of  taxes 
upon  their  property  or  earnings  is  quite  another  matter.  At  this  moment  the  relations 
between  public  utilities  and  governmental  bodies  are  in  a  transition  stage,  and,  therefore,  it 
is  not  easy  to  formulate  a  rule  in  regard  to  the  taxation  of  utilities  that  will  be  universally 
recognized  as  correct  in  theory  or  practice.  In  ray  judgment,  however,  we  can  assume  that 
the  patent  and  inevitable  tendency  in  tlie  development  of  the  relations  between  the  utilities 
and  the  public  is  toward  the  recognition  and  full  establishment  of  the  agency  theory. 
******** 

"Even  if  we  assume  the  ultimate  establishment  of  the  public  agency  theory  in  universal 
practice,  we  shall  still  have  to  consider  just  what  that  means.  When  we  escape  from  the 
theory  that  public  utilities  are  luxuries  operated  for  profit,  we  start  off  on  a  long  road  with 
many  possible  stopping  places.  Many  public  services  are  even  now  rendered  free  to  those 
who  have  need  of  them.  While  it  is  a  rather  far  cry  from  the  assertion  that  public  utilities 
should  not  be  operated  for  profit  to  the  prophecy  that  some  time  they  will  be  operated  entirely 
at  the  expense  of  the  general  taxpayers,  the  road  from  one  point  to  the  other  in  public  policy 
is  a  direct  one.  At  the  present  time,  it  is  customary  to  say  that  public  utilities  ought  not  to 
be  operated  for  profit,  but  that  they  should  be  treated  as  self-sustaining  business  enterprises 
rendering  their  services  at  cost.  Yet,  in  practice,  while  the  rearguard  of  the  utilities  lingers 
in  the  realm  of  profitable  exploitation,  the  vanguard  has  reached  beyond  the  neutral  area  into 
the  field  of  governmental  subsidy.  Indeed,  it  requires  careful  analysis  to  determine  just 
what  it  takes  to  make  a  utility  fully  self-sustaining.  For  example,  while  the  writer  has 
strongly  opposed  any  system  of  profit-making  or  special  taxation  that  would  result  in  taking 
a  portion  of  the  earnings  of  the  utility  out  of  the  business,  he  has  with  equal  urgency  favored 
a  plan  by  which  public  utilities  should  be  made  to  pay  for  themslves  out  of  earnings.  In 
other  w'ords,  according  to  his  definition,  a  public  utility  is  fully  self-sustaining  only  in  case 
its  earnings  are  sufficient  to  pay  operating  expenses,  interest  on  investment  and  also  amor- 
tization charges.  This  definition  has  a  leaning  toward  conservatism.  It  is  based  upon  the 
theory  that  the  capital  invested  in  a  public  utility  should  be  retired  within  a  reasonable  time, 
partly  because  the  physical  property  may  become  obsolete  and  partly  because  a  utility  that 
has  paid  for  itself  will  be  in  a  better  position  to  render  increased  service  at  reduced  cost, 
in  accordance  with  the  inevitable  trend  of  public  need  as  time  goes  on. 
******** 

"We  may  mark  several  stages  in  public  utility  development  as  follows : 

"1.  Public  utilities  operated  for  profit  and,  in  case  of  private  ownership,  accompanied 
by  various  forms  of  taxation  and  partnership  intended  to  give  the  public  a  share  in  the  profits. 

"2.  Public  utilities  operated  at  cost,  including  in  cost  ordinary  ta.xes  and  interest,  and 
amortization  charges  sufficient  to  retire  the  investment  within  a  reasonable  fixed  period. 

"3.  Public  utilities  operated  at  cost,  including  in  cost  ordinary  taxes  and  interest  charges, 
but  no  amortization. 

"4.  Public  utilities  operated  at  cost,  including  in  cost  interest  charges,  but  excluding  both 
amortization  charges  and  general  taxes. 

"5.  Public  utilities  operated  at  cost,  with  the  help  of  subsidies  from  taxation  to  take 
care  of  interest  charges. 

"6.  Public  utilities  operated  according  to  a  fixed  standard  of  rates  and  service,  with 
deficits  in  operating  expenses  made  up  out  of  taxation. 

"7.  Public  utilities  operated  at  the  expense  of  the  taxpayers,  all  service  being  rendered 
free  of  charge. 

"The  public  agency  theory  is  controlling  in  all  of  the  stages  just  enumerated  except  the 
first.  This  first  stage  may  be  regarded  as  a  'left-over.'  It  is  a  relic  of  the  past.  At  the  same 
time,  some  individual  utilities  are  so  surrounded  by  tradition  and  so  fortified  by  contracts  and 
judicial  decisions  that  no  one  can  foresee  how  long  they  may  linger  in  this  first  stage.  So 
far  and  so  long  as  public  utilities  continue  to  be  operated  on  a  speculative  basis  in  accordance 
with  the  ancient  traditions,  taxation  may  be  regarded  as  a  legitimate  means  of  securing  public 
reventie  and  also  as  an  instrument  for  shrinking  the  values  of  special  privileges  that  have 
slipped  out  of  public  control  in  past  years  through  the  improvidence  or  corruption  of  public 
officials.  Taxation  should  certainly  be  regarded  as  one  of  the  most  eflfective  weapons  the 
state  has  for  subduing  the  pride  and  independence  of  the  perpetual  franchise  barons.  Relief 
from  various  forms  of  taxation  may  be  used  properly  and  effectively  as  a  means  of  inducing 
public  utility  franchise  holders  to  accept  a  readjustment  of  their  contractual  rights  with  the 
public,  wherever  such  a  readjustment  seems  to  be  of  vital  public  necessity." 

With  respect  to  the  taxation  of  public  utility  real  estate,  special   franchise 
values,  personal  property  and  corporate  franchises,  I  said : 

"One  of  the  chief  points  at  which  the  agency  theory  has  been  limited  by  the  trend  of 
court  decisions  is  in  the  matter  of  the  value  of  land  upon  which  public  service  corporations 


246  Electric  Railway  Problem 

arc  entitled  to  a  fair  return.  As  the  law  now  stands,  the  private  owners  of  a  public  utility 
are  entitled  to  the  l)cnetit  ot  the  increment  in  land  values.  One  of  the  tax  reform  programs 
that  is  receiving  wide  support  calls  for  the  gradual  increase  of  the  tax  on  land  values  and 
the  gradual  elimination  of  other  taxes.  This  policy,  if  carried  through  to  the  final  limit, 
would  have  the  effect  of  taking  away  all  or  most  of  the  selling  value  of  land,  and  would 
therefore  deprive  public  utility  owners,  by  means  of  taxation,  of  the  increment  in  land  value 
in  just  the  same  way  as  it  would  deprive  other  land  owners  of  such  increment.  If  the 
gradual  stiffening  of  the  land  tax  is  to  be  adopted  as  a  permanent  public  policy,  there  cer- 
tainly is  no  reason  why  the  private  owners  of  public  utilities  should  be  exempted  from  its 
effects.  Therefore,  it  becomes  important  to  consider  just  what  is  the  effect  of  the  taxation 
of  land  devoted  to  public  use  in  connection  with  a  public  utility.  Under  monopoly  conditions, 
if  the  rate  charged  for  the  service  is  a  fixed  sum,  such  as  the  5-ccnt  street  car  fare,  it  is 
obvious  that  the  exemption  of  public  utility  land  from  taxation  would  redound  to  the  benefit 
of  the  owners  of  the  public  utility  and  not  to  its  patrons.  If.  instead  of  a  predetermined, 
fixed  rate  for  the  service,  a  corporation  is  permitted  to  charge  'all  the  traffic  will  bear,'  then, 
al.so.  the  exemption  of  the  company's  land  from  taxation  would  result  in  a  direct  benefit 
to  the  owners  rather  than  to  the  patrons  of  the  utility.  If,  however,  the  utility  is  subject 
to  continuing  regulation,  on  the  theory  that  it  will  Ik  allowed  to  earn  a  fair  return  upon  a 
fair  present  value  of  the  property  and  no  more,  then  the  exemption  from  taxation  of  land 
occupied  by  the  utility  would  result  in  a  reduction  of  rates  or  an  improvement  of  service,  and 
in  either  case  would  redound  to  the  iK-nefit  of  the  utility's  patrons,  and  would  not  confer 
any  particular  advantages  upon  the  owners  of  the  utility.  This  result  follows  from  the  fact 
that  under  the  system  of  continuous  regulation  all  taxes  arc  made  a  part  of  operating  expenses. 
Therefore,  it  would  appear  that  in  so  far  as  public  utilities  are  to  be  subject  to  constant  and 
effective  regulation  in  the  matter  of  rates  and  charges,  the  correct  policy  would  l)e  to  exempt 
their  lands  from  taxation,  on  the  same  theory  that  any  other  lands  devoted  to  public  use  are 
so  exempted.  The  fact  that  the  owners  of  the  utilities  are  considered  to  be  entitled  to  the 
incretnent  in  land  values  has  no  bearing  upon  the  subject,  for  the  taxation  or  exemption  of 
the  particular  lands  owned  by  the  public  utilities  would,  under  conditions  of  perfect  regulation, 
be  a  matter  of  interest  to  the  consumers  on  the  one  hand  and  the  general  taxpayers  on  the 
other,  but  not  to  the  owners  of  the  utility  as  such. 

"What  has  just  been  said  in  regard  to  the  land  tax  applies  with  efjual  force  to  the  special 
franchise  or  easement  tax  so  far  as  this  tax  applies  to  intangibles.  The  special  franchise  tax 
of  New  York,  however,  defines  the  intangible  right  to  use  the  street  as  land,  and  the  tracks, 
poles,  wires,  pipes  and  other  fixtures  in  the  street  as  improvements  upon  land,  analogous  to 
the  buildings  on  land  not  situated  within  street  limits.  The  taxatfon  of  buildings  and  street 
fixtures  devoted  to  public  use  by  a  public  utility  has  all  of  the  disadvantages  of  the  taxation 
of  improvements  generally,  except  that  in  cases  where  the  utility  is  not  subject  to  continuous 
public  regulation  as  to  rates  the  taxation  of  these  portions  of  the  company's  property  cannot 
be  shifted  to  the  shoulders  of  the  consumers.  It  would  seem,  therefore,  that  the  special  fran- 
chise tax,  as  applied  cither  to  intangibles  or  to  tangibles,  is  of  no  value  as  a  restrictive  measure 
except  in  the  case  of  public  utilities  which  are  not  subject  to  public  regulation  or  which  have 
their  rates  established  by  contract.  Under  all  other  circumstances,  the  tax  upon  public  utility 
real  estate,  whether  in  the  streets  or  not,  is  to  be  considered  merely  as  a  revenue  measure. 
If  the  occupation  of  land  and  the  use  of  buildings  and  other  improvements  upon  land  are 
considered  as  a  part  of  the  legitimate  cost  of  a  self-sustaining  business,  then  public  utilities 
may  be  reiiuircd  to  contribute  their  share  to  the  public  treasury  to  the  same  extent  that  other 
occupiers  of  land  and  buildings  arc  required  to  contribute.  Exemption  from  ordinary  real 
estate  taxes  will  gradually  Ix-  brought  about  as  public  utility  scr%'iccs  come  to  be  recognized 
as  more  and  more  public  in  character. 

"The  personal  property  tax.  the  corporate  franchise  tax,  and  the  tax  on  gross  or  net 
earnings,  as  a|)plicd  to  public  utilities,  are  to  be  regarded  as  relics  of  the  time  when  public 
service  corporations,  in  spite  of  their  name,  were  not  regarded  as  agencies  performing 
public  fimctions.  Thc^e  kinds  of  taxes  cannot  be  justified  except  as  they  apply  to  public 
utilities  still  lingering  in  the  speculative  profit-seeking  stage.  To  the  extent  that  privately 
owned  utilities  are  brought  under  effective  public  regulation,  these  taxes  become  as  illogical 
as  they  would  be  if  applied  to  municipal  water  works,  docks,  markets  and  lighting  plants." 

Passing  on  to  the  group  of  taxes  and  public  cliarges  which  represent  legiti- 
mate items  of  operating  cost,  I  continued : 

"This  group  includes  the  obligation  to  pave  and  repair  streets  (or  in  lieu  thereof  the 
paving  commutation  tax),  sprinkling  and  snow  removal  charges,  license  fees,  pole  taxes, 
bridge  tolls,  and  so  forth.  The  theory  of  these  taxes  and  charges  is  cither  that  the  public 
titililv  has  the  special  use  of  certain  public  property  to  the  disadvantage  of  other  users  and 
should  therefore  he  required  to  pay  an  ecpializing  tax  or  rental,  or  that  in  the  course  of  its 
operations  a  public  utility  actually  destroys  portions  of  the  street  which  it  ought  to  replace, 
or  compels  the  general  municipal  authorities  to  incur  expenses  which  the  utility  ought  to 
stand.     In  so  far  as  it  can  lie  shown  that  the  presence  of  street  railway  tracks  in  a   street 


Relief  from  Taxation  247 

destroys  the  pavement  or  requires  the  widening  of  the  roadway  for  the  accommodation  of 
general  traflic,  the  additional  costs  involved  may  properly  be  charged  to  the  street  railway 
if  that  utility  is  to  be  self-sustaining.  In  like  manner,  as  the  operation  of  cars  increases  the 
dust  nuisance,  a  part  of  the  cost  of  oiling  or  sprinkling  the  streets  may  properly  be  charged  to 
the  street  railway.  The  same  reasoning  applies  to  the  removal  of  snow  and  ice.  Furthermore, 
in  all  cases,  the  .street  railway  or  other  utility  should  be  charged  with  the  actual  damages 
to  persons  or  property  caused  by  the  construction  or  operation  of  the  utility  in  the  streets. 
The  erection  of  poles  and  wires  naturally  interferes  with  and  damages  to  a  certain  extent 
the  shade  trees  along  the  streets,  and  the  laying  of  conduits  or  water  or  gas  pipes  may  also 
damage  trees  and  injure  pavements.  Whether  these  various  extra  expnses  and  costs  shall 
be  paid  directly  by  the  utility,  or  whether  they  shall  be  paid  in  the  form  of  commutation  taxes, 
is  immaterial  to  this  discussion.  In  either  case,  they  form  a  legitimate  part  of  the  operating 
expenses  and  cost  of  service  of  the  utility.  What  forms  they  shall  take  is  a  question  of 
public  expediency  and  public  policy  in  each  state  or  city." 

My  general  conclusions  five  years  ago  were  couched  in  the  following  terms: 

"1.  In  so  far  as  public  utilities  remain  on  a  speculative  basis,  and  continue  in  the 
enjoyment  of  special  privileges  protected  by  judicial  decisions  and  contractual  rights,  ta.xa- 
tion  may  be  resorted  to  botli  as  a  revenue  measure  and  as  a  weapon  for  regaining  public 
control  over  such  utilities. 

"2.  In  so  far  as  privately  owned  public  utilities  are  subject  to  adequate  continuous 
public  regulation  as  to  service  and  rates,  the  principles  of  ta.xation  as  applied  to  them  should 
be  the  same  as  the  principles  of  taxation  and  profit-making  applied  to  publicly  owned  utilities. 

"3.  Whatever  revenue  public  bodies  may  derive  from  public  utility  taxes  or  contributions, 
except  to  the  extent  that  such  taxes  and  contributions  may  be  regarded  as  a  part  of  the 
actual  and  legitimate  cost  of  service,  should  be  used  as  a  fund  for  amortizing,  first,  franchise 
and  other  intangible  values  and,  second,  the  capital  investment  in  the  physical  property  of  the 
utilities. 

"4.  As  the  public  agency  theory  of  public  utility  operation  comes  to  be  more  widely 
recognized  and  more  fully  established,  the  tendency  will  undoubtedly  be  to  diminish  and 
finally  eliminate  public  utility  taxes  and  contributions  and,  per  contra,  to  subsidize  public 
utilities  out  of  taxation  to  the  end  that  a  higher  standard  of  service  may  be  rendered  at  a 
fixed  or  diminishing  charge  to  the  public." 

The  exigencies  finally  created  by  the  World  War.  to  my  mind,  have  em- 
phasized what  was  already  obvious  to  close  observers  before  the  war  started,  and 
have  brought  matters  to  a  crisis  that  demands  the  immediate  formulation  of  public 
policy  with  respect  to  the  regulation  of  electric  railways  and  the  imposition  of 
taxes  and  other  public  burdens  upon  them.  With  reference  to  the  testimony 
before  the  Commission,  the  subject  may  be  discussed  under  several  heads :  ( 1 ) 
the  theory  of  equal  taxation;  (2)  the  effect  of  taxes  upon  the  fares  paid  by  the 
car  riders;  (3)  the  extent  to  which  paving  and  miscellaneous  charges  are  legiti- 
mate operating  expenses;  and  (4)  exemption  from  taxation  as  a  temporary  emer- 
gency measure. 

In  Chapter  X\T,  I  quoted  Professor  Bullock  at  some  length,  where  he 
advocates  equal  taxation,  and  analyzes  various  forms  of  street  railway  taxes  and 
imposts  from  that  point  of  view.  Upon  the  general  theory  that  street  railways 
should  be  taxed  the  same  as  "anybody  else,"  Ex-President  Taft's  testimony  at 
pages  19  and  20  of  the  Proceedings  undoubtedly  represents  the  general  trend  of 
intelligent  but  conservative  public  opinion  on  this  subject.     He  says : 

"I  never  have  been  able  to  see  why  street  railway  companies  should  be  taxed  by  any 
other  rule  than  that  under  which  other  invested  capital  is  taxed.  You  can  tax  them  by  income, 
you  can  tax  them  by  a  percentage  of  the  amount  invested.  Those  are  the  two  methods : 
and  1  think  that  simplifies  the  methods. 

"What  you  are  going  to  find,  if  you  have  this  percentage  tax,  is  that  the  value  of  the 
street  railways  will  be  taxed  at  a  higher  rate,  I  mean  the  property  of  the  street  railways  will 
be  taxed  at  a  higher  assessment  than  the  real  estate  of  the  ordinary  taxpayer;  and  perhaps, 
therefore,  it  is  a  fairer  method  to  tax  by  income.  I  suppose  you  could  not  tax  by  income 
only.     You  would  have  to  have  both  systems  of  ta.xation. 

"Commissioner  Wehle :     Your  thought  on  this  subject  has  suggested  to  me  that  possibly. 


248  Electric  Railway  Problem 

in  view  of  the  fact  that  you  regard  the  street  railway  service  as,  in  a  way,  similar  to  the 
service  of  conducting  a  public  road 

"Mr.  Taft:  1  only  mention  that  as  an  argument  in  favor  of  taxation  to  meet  the  deficit, 
if  it  be  inevitable,  oi  running  suitable  street  railways. 

"Commissioner  W'chle :  The  thought  was  suggested  to  me  that  possibly  you  would  view 
any  tax  that  goes  beyond  the  necessity  of  meeting  the  expense  of  the  state  with  reference 
to  the  property  itself  as  poor  public  policy.     Is  that  your  view? 

"Mr.  Taft:  Well,  no;  because  I  think  those  who  get  any  profit  out  of  it  ought  to  pay 
the  same  taxation  that  men  who  make  a  profit  out  of  other  business  pay. 

"Commissioner  Wehle :  When  you  come  to  analyze  the  nickel  or  the  7  cents  that  goes 
into  the  conductor's  hands,  and  sec  what  it  pays  for.  does  it  siem  to  you  that  the  element 
of  taxation  that  is  represented  in  that  fare  should  go  beyond  paying  for  the  conducting  of  the 
property  itself,  as  it  affects  the  state  or  the  municipality? 

"Mr.  Taft:  I  confess  that  if  a  man  owns  stock  in  a  street  railway  and  the  stock  pays 
him,  I  do  not  see  why  he  should  not  pay  taxes  on  that  income,  or  on  the  value  of  the  stock, 
just  as  if  he  had  an  investment  anywhere  else. 

"Commissioner  Wehle :  That  suggests  taxing  the  stock  or  the  income,  rather  than  the 
property  itself? 

"Mr.  Taft:  Yes.  it  docs;  and  I  think  the  greater  uniformity  you  make  in  taxation  the 
more  likely  you  are  to  reach  justice,  and  therefore  if  you  treat  .shares  of  stock  in  street  rail- 
ways just  as  you  do  shares  of  stock  in  a  manufacturing  corporation,  or  in  any  kind  of  an 
enterprise.  I  think  you  are  more  likely  to  do  justice;  and  you  create  a  simplicity  which  is  more 
likely  to  lead  to  ju.stice  or  a  just  operation. 

"Commissioner  Wehle :  That  is.  by  making  the  taxation  come  upon  the  shareholder 
or  the  bondholder,  who  obtains  income  out  of  the  property,  rather  than  on  the  property  or 
the  franchise  itself,  you  would  think  was  the  direction  in  which  to  go  in  the  matter  of 
taxing  public  utilities. 

"Mr.  Taft:  You  arc  there  confronted  with  a  lot  of  questions  of  expediency  in  taxation — 
the  ability  to  find  the  bonds  and  tax  them,  or  the  inability  to  find  the  bonds  and  tax  them, 
is  one  thing.  You  have  got  the  railroad  right  in  front  of  you.  You  have  the  wires,  you  have 
the  electric  power  plant,  and  with  some  experience  in  levying  taxes.  I  do  not  think  that 
clearness  of  view  that  the  state  has  of  the  actual  property  ought  to  be  given  up  as  an 
advantage.  I  think  it  ought  to  l>e  reconciled,  as  it  seems  to  me  it  might  be.  with  treating 
that  property  just  as  you  treat  any  property  in  corporate  ownership.     **»»•' 

General  Tripp  and  Doctor  Conway,  testifying  on  hchalf  of  the  .American 
Electric  Railway  Association,  both  expressed  the  opinion  that  exemption  from 
tax  burdens  and  special  franchise  obligations  would  not  alone  afford  the  electric 
railways  suflficient  relief  in  the  present  crisis.  At  page  157  of  the  Proceedings, 
General  Tripp,  on  cross  examination  by  Commissioner  Sweet,  reafifirmed  his 
belief  that  the  elimination  of  taxes,  direct  and  indirect,  would  not  afford  "a  proper 
and  perpetual  solution"  of  the  problem.  At  pages  160  and  161,  his  testimony 
with  respect  to  property  and  franchise  taxes  is  as  follows : 

"Commissioner  Sweet:  How  about  general  taxes?  Do  you  think  that  the  street  railway 
companies  ought  to  lie  taxed  on  their  physical  property? 

"Gen.  Tripp:  Under  the  present  theory  of  relationships,  there  is  no  reason  why  they 
should  not  be  taxed. 

"Commissioner  Sweet :  Is  there  any  consideration,  do  you  think,  which  should  be  taken 
of  the  value  of  their  franchises? 

"Gen.  Tripp:      For  purposes  of  taxation? 

"Commissioner  Sweet :     Yes. 

"Gen.  Tripp  :     Xo,  sir. 

"Commissioner  Sweet:     Merely  the  physical  properties? 

"Gen.  Tripp:     Yes.  sir. 

"Commissioner  Sweet :  That  should  be  assessed  on  the  .same  general  basis  as  other 
properties  owned  by  private  individuals? 

"Gen.  Tripp:     Yes.  sir. 

"Commissioner  Gadsden :  General,  on  the  present  basis,  do  you  think  the  present 
franchises  have  any  value  on  which  to  base  taxation? 

"Gen.  Tripp  :     No.  sir. 

"Commissioner  .">weet  :     Tliev  are  rather  negative,  arc  they  not  ? 

"Gen.  Tripp :     Precisely.     They  are  decidedly  negative." 

The  question  of  the  effect  of  street  railway  taxes  and  paving  obligations  on 
fares  raises  several  points  of  interest.     Many  of  the  witnesses  discussed  these 


Relief  from  Taxation  249 

items  of  street  railway  cost  as  being  merely  indirect  burdens  on  the  car  riders. 
Whether  or  not  they  are  such  depends  on  whether  or  not  the  companies  are  in  a 
position  to  pass  them  along  to  the  public.  It  is  the  same  as  it  is  with  wages  or 
other  items  of  operating  expense  or  of  cost  of  capital.  If  there  is  a  perfect  ad- 
justment of  fares  to  the  cost  of  service,  either  through  unrestricted  and  continuous 
regulation,  or  through  an  automatic  adjustment  brought  about  under  service-at- 
cost  contracts,  the  entire  tax  burden  falls  upon  the  car  riders,  and  the  amount  of 
taxes  and  other  imposts  levied  upon  the  street  railways  is  a  matter  of  relative 
indifference  to  the  companies.  On  the  other  hand,  so  long  as  fares  are  directly 
fixed  by  contract  or  custom,  or  so  long  as  regulation  is  incomplete  or  not  quickly 
responsive  to  changes  in  the  cost  of  service,  any  increase  in  taxes  or  other  public 
charges  will  fall,  at  least  in  part  and  for  the  time  being,  upon  the  companies.  It 
is  to  be  presumed  that  in  the  long  run  fares  will  be  adjusted  to  take  all  these  costs 
into  account,  except  to  the  extent  that  public  policy  calls  upon  the  taxpayers  for  a 
share  of  the  cost  of  transportation  service.  From  the  point  of  view  of  the  com- 
panies, the  adoption  of  a  serv-ice-at-cost  program  solves  the  tax  problem  except 
to  the  extent  that  the  inclusion  of  taxes  in  the  cost  of  service  tends  to  make  it 
doubtful  whether  the  full  cost  can  be  collected  from  the  fare  payers.  Professor 
Bullock,  in  one  of  the  paragraphs  already  quoted  from  his  testimony,  suggests 
that  "before  you  reduce  the  ordinary  taxes  levied  on  property,  you  should  raise 
your  fares  to  the  maximum  point  that  is  practicable,  looking  at  the  matter  from 
the  revenue  result."  It  is  reasonably  clear  from  the  evidence  that  in  the  larger 
cities  Professor  Bullock's  suggestion  of  "charging  all  the  traffic  will  bear"  before 
reducing  ordinary  taxes,  if  carried  through  relentlessly,  w-ill  yield  enough  revenue 
to  pay  the  taxes,  certainly  where  jitney  competition  has  been  closely  curtailed  or 
eliminated.  Apparently,  Mr.  Newman  was  filled  with  optimism  along  these  lines 
when  he  testified  that  service-at-cost  was  a  big  enough  program,  without  getting 
it  complicated  by  an  insistence  upon  relief  from  taxation.  After  admitting  to 
Commissioner  Sweet  that  taxation  and  paving  obligations  had  imposed  a  "tremen- 
dous" burden  upon  the  companies,  Mr.  Newman's  testimony,  at  pages  571  and 
572  of  the  Proceedings,  proceeds  as  follows: 

"Commissioner  Sweet :  And  what  is  your  view  with  regard  to  the  future  of  those  bur- 
dens? Should  they  be  removed  under  the  service-at-cost  plan?  Do  you  think  it  would 
be  wise  and  the  proper  thing  from  every  standpoint  for  the  general  public  to  relinquish 
voluntarily  whatever  advantage  it  might  have  obtained  by  reason  of  such  paving  and  taxation? 

"Mr.  Newman :  I  would  answer  that  in  this  way :  The  idea  of  service-at-cost  based 
upon  a  valuation  is  such  a  tremendous  question  in  itself  that  when  you  attempt  to  complicate 
that  with  these  other  questions  you  will  be  getting  nothing  accomplished.  Now  I  prefer  not 
to  bring  up  the  question  of  taxes  and  of  paving  and  to  let  that  go  along  as  part  of  the  future 
obligations  of  the  company,  because  it  makes  no  difference  whether  you  do  the  paving  or  the 
city  does  the  paving,  provided  you  are  getting  a  return  on  your  investment  and  provided 
the  public  will  pay  the  increased  fare  to  justify  that  investment.  That  is  almost  mathematics, 
is  it  not? 

"Commissioner  Sweet :  Yes.  The  result,  however,  would  be  more  certain,  would  it  not, 
and  more  satisfactory  to  investors  if  the  burdens  that  I  have  been  speaking  of  were  removed 
so  that  the  total  amount  necessary  to  earn  would  be  less?  That  would  mean  that  the  fares 
would  be  somewhat  less,  would  it  not? 

"Mr.  Newman :     Yes. 

"Commissioner  Sweet :  And  with  a  lower  fare  you  are  more  certain  to  hold  up  your 
patronage  and  the  whole  thing  would  move  more  smoothly,  would  it  not? 

"Mr.  Newman  :  Yes,  but  I  am  afraid  if  we  tried  to  be  too  much  hog  we  might  not 
get  anything. 


250  Electric  Railway  Problem 

"Commissioner  Sweet :  You  do  not  think  there  would  be  any  hog  about  demanding  or 
trying  to  get  absolute  justice,  do  you? 

"Mr.  Newman;  Not  at  all,  but  when  you  remove  the  paving  and  taxes  you  are  throwing 
a  burden  hack  on  the  people  that  has  been  on  the  street  railroads  and  then  asking  them  to 
pay  increased  faros,  and  1  think  you  are  complicating  the  question  so  you  cannot  present  it 
in  a  concise  and  clear  manner  and  cannot  get  relief.  I  am  afraid  to  tackle  too  many  phases 
of  this  problem.  It  is  unfair  in  the  light  of  today's  operations  to  pay  for  paving  l)ecause 
we  all  know  the  city  paves  every  street  with  rails  on  before  any  others  are  paved,  and  in 
New  Orleans  we  pay  more  ta.xes  than  the  steam  railroads  together,  and  the  same  is  true  in 
Birmingham.  Now  if  you  cut  off  those  big  taxes  you  are  transferring  your  troubles  back 
to  the  administration.  In  the  City  of  New  Orleans  they  cannot  do  without  these  street  rail- 
road taxes.  In  the  City  of  Birmingham  they  cannot  do  without  these  street  railroad  taxes. 
.\nd  that  is  where  this  thing  is  going  to  come  back  home  to  the  city,  they  are  going  to  choke 
these  companies  to  the  point  of  receivership  and  poor  service  and  then  the  companies  are  in 
shape  to  go  into  court  and  contest  the  taxable  value  and  get  a  reduction  on  this  franchise 
ta.x,  and  that  is  going  to  be  a  boomerang  to  the  cities  who  cannot  afford  to  cut  off  this  tax. 
I  do  not  believe  in  complicating  the  question  with  this  tax  problem  and  the  paving  problem 
and  starting  more  antagonism  to  the  street  railroads,  because  I  believe  we  can  get  a  fare 
which  will  return  us  a  fair  rate  on  our  investment  and  at  the  same  time  take  care  of  the 
paving  and  the  taxes  without  having  to  go  back  to  the  city  and  complicate  the  problem 
further." 

Mr.  Luther  R.  Nash,  of  the  Stone  and  Webster  organization,  testified  at 
length  about  sei^ice-at-cost  franchises.  His  testimony  as  to  the  policy  embodied 
in  these  franchises  with  respect  to  franchise  taxes  is  found  at  page  470  of  the 
Proceedings,  as  follows : 

"Mr.  Warren:  What  do  these  franchises  provide,  if  there  is  any  usual  provision  in  them, 
with  respect  to  franchise  taxes  and  what  in  your  opinion  should  be  the  provision  regarding 
franchise  taxes? 

"Mr.  Nash:  There  are  only  two  or  three  of  the  dozen,  approximately,  that  I  recall  that 
provide  specifically  for  a  tax  which  could  l)e  called  a  franchise  tax  or  a  rental.  In  fact  the 
only  two  that  I  recall  at  the  moment  are  Montreal  and  Cincinnati,  in  which  substantial  sums 
are  provided  to  be  paid  aniuially  as  a  price  for  doing  business  on  the  city  streets.  In  both 
those  cases  the  percentage  of  the  gross  earnings,  if  I  remember  rightly,  is  in  excess  of  four 
or  five  per  cent ;  in  one  case  it  is  (Considerably  higher  than  that. 

"I  do  not  at  all  approve  of  that  kind  of  a  tax.  Theoretically  a  tax  on  a  franchise  ought 
to  be  a  tax  on  the  right  to  earn  a  profit  in  excess  of  that  which  investors  could  earn  in 
ordinary  industrial  or  commercial  enterprises.  Under  a  service-at-cost  plan  there  is  no 
excess  profit.  The  profit  is  just  the  bare  amount  which  theoretically  the  investor  could  earn 
somewhere  cl.se.  So  that  the  opportunity  for  rendering  a  public  service  has  no  special  value 
on  which  a  tax  should  be  levied.  So  that  I  think  taxation  of  public  utilities  should  be  limited 
to  the  ordinary  ad  Talorein  taxes  which  are  paid  by  other  industrial  and  commercial  industries, 
plus  also  such  license  fees  as  are  paid  by  other  kinds  of  business;  in  other  words,  the  same 
kind  of  taxes  which  other  industries  pay  and  no  more. 

"Mr.  Warren:  In  other  words,  I  supiiose  the  effect  of  the  franchise  tax,  if  it  is  levied, 
is  to  add  just  that  much  more  to  the  cost  of  service  to  the  car  rider. 

"Mr.  Nash:  Yes,  it  is  passed  along  directly  to  the  car  rider,  which  means  that  amount 
of  taxes  is  paid  by  a  certain  group  of  citizens  instead  of  being  distributed  uniformly  over 
the  entire  list  of  tax  payers,  as  it  should  be." 

Mr.  W.  C.  Culkins,  at  that  time  Director  of  Street  Railroads  of  Cincinnati, 
explained  that  the  franchise  tax  under  the  new  service-at-cost  franchise  there  is 
fixed  at  the  flat  yearly  sum  of  $350,000.  His  explanation  of  this  payment,  and 
of  the  attitude  of  the  people  of  Cincinnati  towards  it,  is  found  at  page  497  of  the 
Proceedings,  as  follows : 

"That  is  .supposed  to  take  the  place  of  the  paving  obligations.  They  are  not  required  to 
pave.     That  goes  into  the  public  service  fund. 

"The  Chairman:  If  you  excluded  the  franchise  tax  from  the  operating  cost,  you  would 
be  able  tn  reduce  your   fare? 

"Mr  Culkins:  We  would  not  be  able  to  reduce  it,  but  we  would  be  able  to  hold  it  where 
it  is,  without  any  (piestion. 

"The  Chairman:     Has  any  consideration  l>cen  given  to  that  subject? 

"Mr.  Culkins:  Well,  there  was  discussion  at  the  time  the  franchise  was  issued,  hut  it 
was  not  seriously  discussed,  because   it   has   Ix-en   there   so   long   that   no   power  could   have 


Relief  from  Taxation  251 

convinced  tlie  people  of  Cincinnati  that  to  remove  that  tax  would  not  have  been  taking  the 
money  out  of  their  pockets  and  presenting  it  to  the  traction  company.  The  city's  financial 
system  was  built  around  it.  We  have  the  present  limitation  of  ta.xes  in  Ohio,  and  the  cities 
are  all  bankrupt.  The  taking  away  of  $350,000  was  a  matter  that  the  council  would  not  have 
agreed  to  in  any  event. 

"Commissioner  Sweet:  If  they  had  the  option  of  paying  7  cents  for  a  ride,  or  simply 
paying  this  $350,000  in  the  form  of  a  general  tax,  which  would  be  more  satisfactory? 

"Mr.  Culkins :  I  think,  Mr.  Chairman,  that  the  car  riders,  if  you  ever  get  them  up  to  it, 
would  begin  to  then  understand  it  for  the  first  time.  Of  course,  there  is  no  option  in  it. 
It  is  a  part  of  the  ordinance  now." 

In  the  Montreal  service-at-cost  franchise,  referred  to  by  Mr.  Nash,  the  annual 
franchise  tax  or  street  rental  payment  is  the  flat  sum  of  $500,000.  Prior  to  1918, 
this  payment  to  the  city  took  the  form  of  a  graduated  ta.x  upon  the  Montreal 
Tramways  Company's  gross  receipts.  When  the  Montreal  contract  was  being 
drafted,  the  attention  of  the  Tramways  Commission  was  called  to  the  fact  that 
this  annual  payment  to  the  city  would  be  reflected  in  higher  fares,  but  the  chief 
city  attorney,  who  was  a  member  of  the  Commission,  said  that  the  city  regarded 
this  item  in  the  nature  of  a  reimbursement  for  municipal  expenses  caused  by  the 
presence  of  the  electric  railway  tracks  and  equipment  in  the  streets.  This  Mon- 
treal payment,  however,  is  not  in  lieu  of  paving  obligations. 

A  good  deal  was  said  by  the  witnesses  about  the  exemptions  enjoyed  by  the 
Cleveland  Railway  Company  under  the  Tayler  franchise,  and  this  is  often  re- 
ferred to  by  street  railway  men  as  one  of  the  explanations  of  the  low  fares  in 
Cleveland.  There  seems  to  be  considerable  misapprehension  about  the  extent 
and  significance  of  these  exemptions.  Mr.  John  J.  Stanley,  President  of  the 
Cleveland  Railway  Company,  referred  to  this  matter  at  page  606  of  the  Pro- 
ceedings, as  follows : 

"You  know,  the  city  of  Cleveland  does  a  great  many  things  for  the  railway.  We  operate 
over  eight  bridges.  One  of  those  bridges  cost  $5,000,000.  Now,  we  do  not  pay  a  cent  for 
rental  in  going  over  that  bridge,  and  at  each  end  of  the  bridge  they  have  subways,  and,  as  I 
say,  that  one  particular  bridge  cost  $5,000,000.     Now,  we  do  not  have  to  repave." 

Mr.  Stanley  then  called  attention  to  the  fact  that  many  of  the  extensions 
built  during  the  past  five  or  six  years  have  been  paid  for  by  real  estate  men.  In 
regard  to  street  sprinkling  in  Cleveland,  Mr.  Stanley  said,  at  page  607  of  the 
Proceedings : 

"At  one  time,  we  sprinkled  the  streets  at  a  cost  of  thirty  or  forty  thousand  dollars. 
Then,  the  city  saw  it  was  a  burden  to  the  car  riders,  and  they  said,  "Now,  you  flush  the 
streets  for  us.  and  we  will  pay  you  for  flushing  them.'  So  they  relieved  us  of  sprinkling. 
We  flushed  the  streets,  and  we  are  getting  out  of  that  anywhere  from  fifteen  to  twenty 
thousand  dollars  a  year." 

Secretary  of  War  Baker,  formerly  City  Attorney  and  later  Mayor  of  Cleve- 
land, explained  the  matter  of  the  Cleveland  Railway's  taxes  and  paving  obliga- 
tions in  some  detail.  At  pages  1019  and  1020  of  the  Proceedings,  he  testified 
as  follows : 

"Commissioner  Sweet:     The  street  railroads  of  Cleveland  are  taxed? 
"Secretary  Baker :     Yes. 

"Commissioner  Sweet :  They  pay  regular  city  and  county  and  municipal  taxes  upon  their 
physical  property? 

"Secretary  Baker :     Yes. 

"Commissioner  Sweet:     Is  the  francliise  taxed? 

"Secretary   Baker :     No. 

"Commissioner   Sweet:     Is  the  income  taxed? 

"Secretary  Baker :     No.     It  may  be  under  Federal  law,  but  not  local. 


252  Electric  Railway  Problem 

"Commissioner  Sweet :  Are  they  required  to  do  paving  between  the  tracks  and  for  a 
short  distance  outside? 

"Secretary  Baker :  They  are  required  on  all  new  paving,  that  is.  on  all  streets  not 
previously  paved,  where  they  make  extensions,  or  in  a  street  in  which  they  have  tracks  which 
has  not  been  previously  paved,  they  are  required  to  pave  between  the  rails  on  each  track  and 
the  strip  outside  and  are  required  to  keep  up  the  pavement  and  they  make  any  repairs;  but 
in  the  case  of  repaving  they  are  not  required  to  pay  the  cost  of  repaving." 

In  connection  with  the  Cleveland  situation  attention  should  be  called  to  the 
fact  that  although  the  company  does  not  have  to  repave,  it  is  required  to  lay  the 
pavement  originally  and  is  also  required  to  maintain  it.  Therefore,  the  original 
cost  of  paving  is  found  in  the  capital  account,  and  paving  repairs  appear  in  the 
maintenance  expenses.  In  fact,  the  company  spent  during  1918  no  less  than 
$274,694.49  for  paving  maintenance,  as  compared,  for  example,  with  $151,541.35 
spent  by  the  Public  Service  Railway  Company  of  New  Jersey  in  the  same  period. 
On  the  other  hand,  the  Cleveland  comi)any  spent  only  $45,S2S.36  for  cleaning  and 
sanding  track  and  $12,184.62  for  removal  of  snow  and  ice,  as  compared  with 
$86,425.70  and  $45,848.08  spent  for  these  two  items,  respectively,  by  the  Newr 
Jersey  company.  The  three  items  together  amounted  to  $332,707.47  in  Cleve- 
land, as  compared  with  $283,815.13  in  New  Jersey.  The  Cleveland  mileage  was 
385.3,  as  compared  with  849  miles  on  the  New  Jersey  system,  including  about 
600  miles  in  paved  streets. 

The  taxes  levied  against  the  Cleveland  coinpany  in  1918  amounted  to 
$720,413.14,  as  follows: 

Real  and   Personal   Property    $420,000.00 

Ohio    Excise    '. 149.192..S0 

Ohio  Utilities  Commission    3.606.58 

U.  S.  Income 123,541.40 

U.  S.  Internal    Revenue    135.00 

U.  S.  Capital    Stock     14,712.85 

U.  S.  War    6.832.81 

U.  S.  Bond   Interest    2,392.00 

Total    Taxes    $720,413.14 

These  taxes  amounted  to  2.0535  cents  per  car  mile,  or  5.79  per  cent  of  the  gross 
earnings.  The  taxes  levied  against  the  Public  Service  Railway  Company  in  1918 
amounted  to  $1,644,398.82  as  follows: 

State   Franchise   Tax   on   Capital    Stock $  713.99 

State   Franchise  Tax   on   Gross   Earnings 547.756.57 

Taxes  on  Real  Estate  &  Personal  Property 662,518.08 

591-  Tax  on  Gross  Earnings  (Local)   233,068.96 

Car    Licenses 1 7.77^.33 

Franchise  Tax    (Local)    17.46.3.54 

Federal    Income   Tax    149.032.57 

Federal   ICxcisc  Tax  on  Capital  Stock 5. .538.50 

Federal   Excess   Profits  Tax    10,5.?3.28 

Total    $1,644,398.82 

These  taxes  are  the  equivalent  of  3.088  cents  per  car  mile  or  8.28  per  cent  of 
the  company's  gross  earnings.  I'rom  these  figures,  it  appears  that  the  taxes  levied 
against  the  Public  Service  Railway  are  nearly  fifty  per  cent  higher  than  the 
Cleveland  Railway  taxes  under  the  Taylcr  franchise. 

Hon.  Lewis  Nixon,  at  that  time  Public  Service  Commissioner  for  the  First 
District  of  New  York,  favored  the  elimination  of  street  railway  taxes  and  paving 


Relief  from  Taxation  253 

requirements,  but  thought  this  poHcy  could  not  well  be  adopted  while  the  fixed 
5-cent  fare  is  retained.     At  page  1292  of  the  Proceedings,  he  says : 

"Since  this  is  a  public  service  I  am  under  tlie  conclusion  that  both  paving  requirements 
and  taxes  sliould  be  done  away  with.  Now  understand,  that,  like  the  Hquor  ta.x,  means  a 
tremendous  sacrifice  to  the  government  in  itself,  and  the  government  of  the  city  has  not  any 
too  much  money  now;  hence  it  would  be  combated.  This  is  a  public  service.  The  streets 
belong  to  the  people  for  walking  on  them  or  driving  on  them  or  for  travel  on  these  cars. 
The  man  that  drives  and  walks,  certainly  the  man  that  walks,  pays  no  special  tax.  The 
automobiles  pay  their  tax  to  the  state ;  they  are  all  equally  wearing  upon  tlie  street,  but  the 
streets  are  lor  the  purposes  of  the  city.  We  have  made  our  bridges  free,  and  it  seems  to  me 
that  proper  consideration  of  the  burdens  which  are  to  be  placed  upon  these  companies  will 
require  an  assumption  of  the  fact  that  taxes  in  general  and  the  fixing  and  repairing  of  the 
streets  should  not  be  paid  by  them,  because  we  must  not  lose  sight  of  one  fact,  that  no  matter 
what  it  costs,  the  people  are  going  to  pay  it  in  the  long  run. 

"The  Chairman :  Do  you  favor  eliminating  assessments  and  taxations  when  the  com- 
pany is  operating  under  a  fixed  charge? 

"Mr.  Nixon:  No,  not  at  all.  As  long  as  the  S-cent  fare  remains  fixed  we  must  I  think 
put  the  taxes  on  them." 

With  respect  to  the  appropriateness  of  paving  charges  considerable  dif- 
ferences of  opinion  developed.  In  so  far  as  original  paving  costs  are  concerned, 
if  borne  by  the  companies  they  are  capitalized  and  affect  the  cost  of  service  only 
as  they  increase  the  total  cost  of  capital.  Paving  repairs  are  a  matter  of  main- 
tenance, and  repaving  is  properly  a  matter  of  depreciation  reserve.  The  presence 
of  street  railway  tracks  in  a  public  street  makes  paving  practically  necessary  if  the 
entire  roadway  surface  is  to  be  available  for  use  by  vehicles  generally.  Where 
paving  is  required  for  other  reasons,  the  cost  of  it  is  probably  enhanced  to  a  slight 
extent  by  the  presence  of  the  rails.  Where  pavements  are  in  existence  when 
the  tracks  are  laid,  the  cutting  and  restoration  of  the  pavements  are  obviously 
a  part  of  the  cost  of  construction  of  the  railway.  Mr.  Harlow  C.  Clark  stated 
that  about  ten  per  cent  of  the  capitalization  of  the  Rhode  Island  Company  was 
based  on  paving  construction  costs  which  the  coniipany  had  been  compelled  to 
assume.  From  the  street  railway  appraisals  which  I  have  examined,  it  appears 
that  paving  generally  ranges  between  five  and  ten  per  cent  of  the  entire  reproduc- 
tion cost  new  of  street  railway  properties.  Some  witnesses  regarded  paving 
charges  as  logical  in  their  origin,  on  the  ground  that  street  car  horses  with  their 
iron  shoes  used  to  wear  out  the  pavements ;  but  contended  that  these  charges  are 
now  out  of  date,  alleging  that  electric  cars  do  not  materially  affect  the  pavements. 
It  may  perhaps  be  said  that  the  bankers,  the  electric  railway  operators  and  the 
lawyers  were  more  or  less  agreed  that  the  electric  street  car  should  be  acquitted 
of  any  serious  offense  against  the  pavements,  while  the  engineers,  the  city  of- 
ficials and  some  of  the  regulatory  men  spoke  out  for  conviction  of  offenses  rang- 
ing all  the  way  from  assault  and  batterj'  to  murder  in  the  first  degree.  Mr.  Lucius 
S.  Storrs  laid  especial  emphasis  upon  the  injustice  involved  in  giving  the  new 
competitors  of  the  street  railway  the  free  use  of  pavement  laid  at  street  railway 
expense.     At  pages  442  and  443  of  the  Proceedings,  Mr.  Storrs  says : 

"I  would  like  to  emphasize,  if  I  may,  this  point,  the  one  phase  of  the  combination  of 
competition  and  imposts  which  is  so  hard  upon  us,  and  that  is  that  of  the  motor  truck.  I 
think  we  will  all  acknowledge  that  the  one  thing  that  wears  out  the  city  pavement  most  is 
the  highly  developed  motor  tnick.  I  happen  to  recall  now,  passing  in  front  of  my  house 
which  is  on  one  of  the  principal  city  streets  leading  through  the  city  of  New  Haven,  frequent 
fleets  of  trucks  which  pass  by  there,  going  at  as  high  a  rate  of  speed  as  they  can  and  escape 
on,  and  at  night-time,  unfortunately,  there  are  no  traffic  policemen  out  there  to  stop  them. 
The   result   is  that  the  pavement   through  there   is   being   torn   up.      The   wooden   blocks  are 


254  Electric  Railway  Problem 

being  torn  out  of  the  pavement.  When  it  rains  the  wooden  blocks  are  sucked  out  of  the 
pavement  by  these  trucks,  and,  unfortunately,  the  poor  electric  railway  company  has  paid 
for  19  feet  out  of  a  total  of  40  feet  of  the  pavement. 

"Mr.  Warren  :  The  street  railway  company  has  paid  for  19  out  of  a  total  of  40  feet 
of  the  pavement? 

"Mr.  Storrs  :  Yes,  sir;  and  that  is  true  throughout  the  country,  wherever  the  right  of 
way  has  been  given  to  that  competitor.  Of  course,  in  this  case,  a  long-distance  motor  truck 
would  not  be  a  particular  competitor.  The  right  of  way  has  Ixen  provided  very  largely  at 
the  expense  of  the  riders  on  the  cars,  and  that  is  being  torn  up  and  destroyed  by  a  form  of 
transportation  that  pays  nothing  whatever  towards  the  maintenance  and  upkeep  of  that 
highway." 

Further  on,  at  page  444  of  the  Proceedings,  Mr.  Storrs  and  Mr.  Warren  dis- 
cussed the  relative  rights  of  the  general  tax  payers  and  the  car  riders,  and  gave 
the  impression  that  they  had  the  matter  analyzed  down  to  a  very  simple  question. 
The  discussion  follows : 

"Mr.  Warren  :  These  imposts  which  you  have  described,  such  as  paving,  bridges,  street 
widening,  street  cleaning,  and  other  requirements  of  that  sort  through  the  street  railways  on 
the  car  riders,  really  all  analyze  down,  do  they  not.  to  a  question  of  the  ex[)edieTicy  of  relieving 
the  general  taxpayer  through  an  indirect  tax  upon  the  car  rider? 

"Mr.  Storrs:  .'\bsoluteIy.  There  is  no  question  about  that.  That  has  to  be  recognized 
cither  in  an  increasing  rate  of  fare  or  a  decreasing  facility,  or  deteriorating  facility. 

"Mr.  Warren:  .^nd  while  the  street  railway  was  supposedly  prosperous,  it  seemed  an 
easy  way  to  increase  municipal  revenue? 

"Mr.  Storrs:    Yes.  sir. 

"Mr.  Warren ;  Rut  now  it  becomes  a  very  acute  question  as  to  whether  the  people 
who  have  the  property  shall  pay  for  these  various  burdens,  or  whether  the  people  whose 
interests  force  them  to  ride  on  the  street  cars  shall  pay? 

"Mr.  .'^torrs  :     Yes.  sir. 

"Mr.  Warren:     That  is  all  there  is  to  the  question,  is  it  not? 

"Mr.  Storrs :     Absolutely,  as  far  as  those  imposts  are  concerned." 

At  this  point.  Commissioner  Meeker  raised  the  question  as  to  the  possihle  dam- 
age done  by  cars  to  jjavemcnts,  and  Mr.  Storrs  was  led  to  make  a  slight  admis- 
sion at  page  444  of  the  Proceedings,  as  follows : 

"Commissioner  Meeker :  Mr.  Storrs,  it  is  true,  is  it  not,  that  the  street  railways  do  wear 
out  the  surface  of  the  street,  to  a  limited  extent,  next  to  the  rail? 

"Mr.  Storrs:     Next  to  the  rail  for  a  distance  of  5  or  6  inches. 

"Commissioner  Meeker :  Would  you  advocate  the  exempting  of  the  street  railways  en- 
tirely from  any  charge  for  paving  the  streets,  because  of  the  insignificance  of  the  area  that 
the  street  railway  traffic  actually  affects? 

"Mr.  Storrs:  I  think  not  particularly  on  that  basis,  hut  upon  the  theor\'  that  cummunities 
are  giving  to  other  means  of  transportation  a  thoroughly  improved  highway,  and  they  cer- 
tainly should  be  willing  to  take  up  the  relatively  insignificant  burden  that  that  might  tie,  but 
which  is  a  very  large  burden,  of  course,  in  the  total  paving  costs." 

Mr.  Roger  W.  Babson  was  questioned  about  the  implications  of  his  sug- 
gestion that  certain  restrictions  on  the  street  railways  should  be  removed,  so  as 
to  allow  thern  freedom  to  compete  with  the  automobiles  and  jitneys.  At  page 
1057  of  the  Proceedings  appears  the  following: 

"The  Chairman:  .\re  you  willing  to  suggest  that  where  there  are  automobiles  and  no 
jitney  service,  the  laws  giving  the  commissions  the  right  to  fix  just  and  reasonable  rates 
should  be  repealed? 

"Mr.  Rabson  :  Not  for  the  first  thing,  ho;  T  would  not  say  that.  I  would  say  that  the 
first  step  in  such  conimunilics  would  be  to  relieve  the  roads  of  taxation  and  paving  and 
various  other  forms  of  persecutic>n.     That  is  the  first  step.'' 

A  little  further  on,  Chairman  Klmquist  asked  Mr.  Babson  what  be  referred 
to  as  "persecutions."  The  answer  is  given  at  pages  1057  and  1058  of  the  Pro- 
ceedings, as  follows: 

"Mr.  Babson:  I  mean  these  questions  alxiut  the  traffic,  for  instance;  in  some  cities 
where  they  have  to  pay  for  a  portion  of  the  traffic  officers,  for  example.     Also,  I  think  this 


Relief  from  Taxation  255 

matter  of  paving  between  the  rails,  at  the  present  time,  has  absolutely  no  excuse  whatever; 
because  in  a  great  many  cities  it  is  the  only  part  of  the  street  that  is  used  by  the  automobiles. 
I  took  a  trip  yesterday  from  Boston  out,  and  it  was  a  double  track  road,  and  the  only  place 
where  the  automobiles  could  run  with  any  degree  of  comfort  was  on  the  paving  which  was 
put  in  by  the  street  railways.  The  boulevard  on  each  side  of  this  paving  was  very  rutty 
and  very  bad,  and  no  automobile  could  run  in  it  with  any  comfort. 

"The  Chairman  :  Now  you  have  described  traffic  conditions  and  the  paving.  What  other 
persecutions  have  you  in  mind? 

"Mr.  Babson;  I  should  say  the  general  taxation.  In  Massachusetts  we  have,  I  think, 
three  forms :  We  have  the  property  ta.x  and  we  have  the  excise  ta.x  and  we  have  the 
franchise  tax. 

"The  Chairman  :  Do  you  regard  as  persecution  most  of  these  efforts  by  which  the  public 
seeks  to  impose  charges  or  burdens  upon  the  street  railway  companies? 

"Mr.  Babson  :  Not  when  they  had  a  monopoly.  I  believe  in  the  taxation  of  monopolies, 
absolutely.  If  I  had  charge  of  the  taxing  of  this  Government,  I  would  raise  every  cent  by 
the  taxation  of  monopolies,  and  land  values,  and  natural  resources.  I  would  take  off  income 
taxes,  and  take  off  all  taxation  on  enterprise  and  effort.  I  should  raise  my  money  from  the 
taxation  of  monopolies  and  natural  resources  and  land  values,  and  sp  forth.  But  when  that 
monopoly  has  gone  by,  and  when  the  street  car  business  is  no  different  from  the  dry  goods 
business,  or  the  restaurant  business,  or  any  other  business  in  town,  which  is  the  condition 
it  is  in  in  most  of  the  communities  today,  I  should  relieve  it  from  those  burdens." 

When  we  turn  to  the  testimony  of  a  man  who  has  been  a  city  engineer  and 
a  city  manager,  we  get  quite  a  different  result.  On  this  matter  of  the  justice  of 
the  paving  charge.  Mr.  Gaylord  C.  Cummin  gives  the  following  testimony  at  pages 
46  and  47  of  the  Proceedings : 

"Commissioner  Sweet :  What  do  you  say  about  paving  between  the  tracks  and  for  a 
foot  or  so  outside? 

"Mr.  Cummin:  The  cost  of  paving  between  the  tracks  and  for  a  foot  or  two  outside  is 
an  unjust  burden  on  the  street  railroad  companies  at  present.  Our  street  paving  was  started 
in  this  country  when  we  had  horse  cars,  and  the  horses  did  wear  out  the  pavement,  and  that 
is  the  reason  it  started  in  that  way ;  and  it  has  been  put  in  every  franchise,  or  almost  every 
franchise  ever  since,  because  the  street  railroads  could  not  get  out  of  it.  and  they  just  had  to 
submit  to  it.  There  is  an  undue  burden,  the  maintenance  of  it ;  and  any  extra  cost  due  to 
the  track  .should  be  paid  by  the  street  railroad;  that  is  perfectly  proper;  but  the  pavement 
itself  should  not. 

"Commissioner  Wehle :  You  mean  that  part  of  the  cost  of  maintenance  that  is  not  due 
to  the  wear  and  tear  of  other  vehicles? 

"Mr.  Cummin:  In  fact,  the  most  of  the  cost  of  maintenance  of  the  pavement  between 
the  car  tracks  is  due  to  the  rails  and  operation  over  them.  They  have  to  be  cut  into  fairly 
frequently — a  joint  goes  down,  and  it  w-ill  break  up  the  pavement  for  a  little  distance  around, 
soft  spots  develop  in  the  roadbed,  and  it  will  result  in  raises  and  depressions  and  so  forth, 
and  the  big  bulk  of  your  maintenance  is  maintenance  that  is  fairly  well  traceable  to  the 
street  railroad.     The  maintenance  is  a  proper  charge  against  the  street  railroad. 

"Commissioner  Sweet:     But  the  original  construction  is  not? 

"Mr.  Cummin :  The  original  pavement,  except  that  part  of  it  which  may  be  an  extra,  due 
to  the  cost  of  paving  around  the  rails,  and  things  of  that  kind,  if  it  should  exist,  should  not 
be  paid  by  the  railroads.  The  extra  cost,  of  course,  that  is  necessitated  by  reason  of  the 
pavement  being  laid  around  the  rails,  should  be  paid  by  the  road. 

"Commissioner  Sweet :  Even  at  that,  hearing  in  mind  the  fact  that  the  public  is  so 
deeply  interested  in  having  the  advantage  of  the  street  railroad  there,  is  there  any  unfairness 
in  having  the  public  pay  for  all  the  paving? 

"Mr.  Cummin:  If  they  want  to;  but  I  think  if  they  pay  the  maintenance  as  well — I  do 
not  believe  it  is  going  to  be  a  practical  operating  proposition,  because  a  large  part  of  that 
maintenance  may  have  to  be  done  by  the  track  men  of  the  street  railroad,  the  men  who  are 
taking  care  of  the  track." 

Further  on  Mr.  Cummin  expressed  the  opinion  that  a  portion  of  the  con- 
struction cost  of  the  paving  in  and  about  the  tracks  ought  not  to  be  charged  to 
the  street  railway  companies ;  and  in  some  cases  certain  other  charges  against  the 
companies  have  been  too  high.     At  page  48,  he  says : 

"There  are  two  parts  in  the  paving  to  the  street  railroad.  One  of  them  is  absolutely 
charged  against  the  street  railroad,  and  that  is  the  cost  of  preparing  the  roadbed  and  putting 
in  the  new  track  and  ties,  and  concreting  in  the  ties.  They  concrete  them  in,  getting  up  to 
the  point   where  the   surface   is  to  go  on.     That   is   perfectly  all   right.     That   is   chargeable 


256  Electric  Railway  Problem 

actually  to  tlie  company.  Then  the  rest  of  it  is  generally  charged  for  at  just  the  same  price 
as  for  the  rest  of  the  paving  job.  per  square  yard.  In  most  cases  the  contractor  makes  no 
difference  for  the  paving  between  the  rails  and  a  foot  outside  as  compared  with  the  rest  of 
the  paving. 

"Commissioner  Sweet :  Is  the  paving  requirement  of  a  privately  owned  street  railroad 
company  universal   in  this  countr>-,  or  does  that  vary? 

"Mr.  Cummin:  As  far  as  I  know,  I  have  not  been  in  any  city  yet  where  it  was  not 
required,  and  in  my  experience  I  have  never  seen  any  franchise  where  it  was  not  required. 

"Commissioner  Sweet:     So  that  as   far  as  you  I<now  it  is  a  uniform  requirement? 

"Mr.  Cummin:  Yes;  and  that  is  an  unjust  burden.  That  is  something  that  can  be  taken 
off.  I  think  the  same  thing  occurs  on  some  bridge  rentals.  In  some  cases  they  have  not 
been  rentals,  but  they  have  paid  a  lump  sum,  I  think,  in  some  cases,  and  that  has  been  too  big. 

"I  think  it  proper  that  a  street  railroad  should  compensate  for  e.xtra  cost  in  making  that 
bridge  strong  enough  to  carry  the  additional  loads  put  on  it  by  the  street  railroad  company. 
It  perhaps  should  pay  a  small  additional  rent,  but  I  think  in  some  instances  the  amount  required 
to  be  paid  has  been  unreasonable." 

Lieutenant  Colonel  Charles  W.  Kutz,  Chairman  of  the  Public  Utilities  Com- 
mission of  the  District  of  Columbia,  was  so  much  impressed  with  the  difficulty 
of  relieving  the  companies  of  the  responsibility  for  paving  repairs  so  long  as 
they  own  the  tracks  that  he  suggested  municipal  ownership  of  the  roadbed  and 
undivided  numicipal  responsibility  for  its  construction  and  maintenance.  His 
testimony  on  this  point  is  found  at  page  1040  of  the  Proceedings,  as  follows : 

"I  would  like  to  say  just  one  word  about  the  question  of  paving,  which  the  Secretary  of 
War  brought  up  this  morning,  because  from  an  engineering  standpoint  I  see  great  difficulties 
in  a  divided  responsibility  for  the  paving  between  the  rails  and  over  the  ties. 

"The  damage  to  the  paving  between  the  rails  and  for  two  feet  outside  the  outer  rail  is 
not  caused  by  the  traffic  on  the  street  to  anything  like  the  extent  that  it  is  caused  by  the 
character  of  the  foundations  under  the  rails. 

"If  the  rails  are  on  ties,  and  those  ties  are  not  properly  tamped,  they  are  going  to  heave 
up  the  best  pavement  that  can  be  laid. 

"If  the  rails  are  on  cast  iron  yokes  imbedded  in  concrete,  and  those  concrete  foundations 
under  the  yokes  are  not  adequate,  so  that  the  rails  settled,  they  will  break  up  the  best  con- 
crete and  asphalt  pavement  that  can  be  put  down. 

"If  you  have  the  railway  company  responsible  for  the  foundation  under  the  rails,  and 
the  city  responsible  for  the  paving,  there  is  going  to  be  a  constant  source  of  trouble  and 
difficulty.  So  the  sugge.stion  has  Ix'cn  made  that  if  the  companies  are  to  be  relieved  from 
the  cost  of  paving  and  maintaining  the  pavement  between  the  rails,  it  would  be  l>ettcr  to  go 
one  step  farther  and  let  the  city  acquire  title  to  the  roadbed,  that  is.  the  rails  and  their 
foundations,  leasing  them  to  private  operating  companies.  In  other  words,  it  would  be 
municipal  ownership  of  the  roadbed,  but  with  private  operation  of  the  railway  company." 

Interstate  Commerce  Commissioner  Eastman  also  called  attention  to  the  fact 
that  electric  railway  tracks  affect  the  pavements.  Conmiission  Sweet  brought 
up  the  analog)'  of  fire  hydrant  service  paid  for  by  the  tax  payers.  The  following 
question  and  answer  appear  at  pages  2082  and  2083  of  the  Proceedings : 

"Commissioner  .Sweet  :  Looking  at  it  ns  a  matter  of  justice  between  one  part  of  the 
community  and  another,  is  not  the  same  kind  of  a  question  involved  in  the  paving  between 
the  tracks  of  street  railroads,  as  practiced  at  the  present  time?  Are  we  not  cx,icting  from 
the  car  rider  a  service  that  ought  to  be  performed  by  the  entire  community? 

"Commissioner  Eastman:  T  think  you  are.  There  is  something  to  be  said  on  the  other 
side  of  that  question,  because  while  the  situation  is  not  now  as  it  was  when  the  practice 
originated  :  that  is  to  say.  it  originated  at  a  time  when  horse  cars  used  to  wear  down  the 
pavement,  at  the  same  time  I  think  it  is  true  that  the  presence  of  street  railway  tracks  in  the 
street  increases  the  expense  of  pavins.  The  paving  is  apt  to  wear  out  quicker  in  streets 
where  there  arc  street  railway  tr:icks  than  where  they  are  absent.  So  that  the  presence  of 
the  street  railwav  tracks  in  the  street  di>es  impose  some  extra  burden  uni>n  the  paving  cost. 
It  is  verv  difficult  to  measure  that,  and  under  present  conditions,  faced  by  the  plight  of  the 
street  railways  at  the  present  time.  I  think  it  is  entirelv  desirable  that  that  expense  should  be 
met  by  the  entire  community,  rather  than  by  the  car  riders." 

Commissioner  Eastman  evidently  recognized  an  emergency  as  a  result  of 
which  policies  might  properly  be  adopted  which  under  other  conditions  would  be 


Relief  from  Taxation  257 

of  doubtful  propriety.  Chairman  Richard  T.  f-Iiggins,  of  the  Connecticut  Public 
Utilities  Commission,  also  recognized  an  emergency,  and  advocated  not  only  the 
permanent  elimination  of  paving  assessments  and  other  special  burdens  imposed 
on  the  electric  railways,  but  also  the  temporary  elimination  of  street  railway 
taxes.  Mr.  Francis  H.  Sisson  also  expressed  the  view  that  in  many  cases  the 
companies  might  be  saved  by  this  kind  of  relief.  At  page  325  of  the  Proceedings 
the  following  testimony  is  found : 

"Commissioner  Sweet :  In  regard  to  ta.xation,  you  said  you  thought  certain  forms  of 
indirect  ta.xation,  like  paving  between  the  tracks,  bridge  tolls,  bridge  repairs  and  that  sort  of 
thing,  all  of  which  are  now  borne  by  the  street  railway  companies,  in  many  instances  that 
should  be  avoided,  that  that  is  a  bad  practice. 

"Mr.  Sisson  :  Well.  I  think  it  imposes  undue  hardships  upon  the  transit  lines  in  many 
cases,  and  it  might  mean  the  difference  between  solvency  and  insolvency  in  many  cases. 
It  seems  to  me  that  when  these  lines  are  operating  so  near  the  danger  line  as  they  are,  the 
community  might  very  well  afford  to  undertake  those  improvements  at  its  own  expense, 
rather  than  force  the  issue  against  the  lines.  Of  course,  that  situation  would  vary  in  differ- 
ent communities.     It  is  very  hard  to  generalize  about  that." 

When  Mr.  Henry  L.  Doherty  appeared  before  the  Commission,  Chairman 
Elmquist  asked  him  for  suggestions  as  to  what  the  Commission  might  do  to  help 
the  situation.     At  pages  409  and  410  of  the  Proceedings,  Mr.  Doherty  says : 

"We  have  lots  of  obligations  forced  on  us  now  that  are  relics  of  the  past,  and  we  cannot 
get  rid  of  them.  I  cannot  think  of  all  of  tliem  sitting  here.  But  every  possible  relief  which 
can  be  given  to  the  street  railways  and  transferred  from  a  specific  charge  against  them  to 
either  the  property  holders  or  the  general  fund  should  be  done.  Because  even  if  a  man  has 
an  automobile  and  does  not  use  the  street  railway,  he  wants  it  there,  it  is  an  asset  there  to 
him.  It  is  there  ready  to  serve  the  needs  of  his  premises  with  a  m.essenger  boy  or  anything 
else  that  comes  along,  and  in  a  way  you  could  almost  justify  a  subsidy  for  a  railway  rather  than 
have  it  shut  down.  Even  if  the  people  did  not  use  it  enough  to  pay  for  it,  it  would  still  be 
a  municipal  necessity.  One  of  my  first  thoughts  would  be  to  take  off  every  load  that  can 
possibly  be  taken  off  of  the  street  railway  company.'' 

Dr.  Thomas  Conway  was  not  very  optimistic  of  the  results,  but  he  thought 
that  the  first  step  toward  a  solution  of  the  street  railway  problem  should  be  the 
lifting  of  the  burdens.     At  page  952  of  the  Proceedings,  he  says: 

"I  sat  here  this  morning  and  listened  to  various  gentlemen  express  their  views  on  taxes 
— paving,  for  instance.  My  belief  is  that,  taking  the  companies  as  a  whole,  all  the  things 
that  you  can  suggest  of  relieving  them  of  taxes  and  of  paving  requirements  and  all  of  the 
other  obligations  which  represent  an  indirect  tax  on  the  car  rider,  a  necessary  addition  to 
his  fare,  will  not  meet  the  situation  by  offsetting  these  increased  costs ;  but  all  of  that,  if  given 
to  them,  still  means  for  many  properties  a  rate  of  fare  which  is  almost  prohibitive,  as  a 
practical  question. 

"Therefore,  as  I  see  it  from  the  Commission's  point  of  view,  you  start  by  these  abatements 
as  a  necessary  element,  because  without  them  there  will  be  hundreds  of  electric  railways  that 
will  have  to  go  to  the  junk  heap,  unless  they  are  to  be  taken  over  and  operated  by  the 
public,  who  bear  the  deficit  through  taxation." 

Professor  Bullock  was  strongly  opposed  to  the  adoption  of  a  periuanent 
policy  of  tax  exemption  with  respect  to  street  railways.  He  even  favored  the 
payment  of  regular  taxes  by  municipally  owned  utilities.  But  he  conceded  the 
existence  of  an  emergency  that  would  justify  the  complete  abolition,  for  a  period 
of  years,  of  the  property  tax  as  applied  to  street  railways.  As  coming  from  the 
most  eminent  authority  on  taxation  who  appeared  before  the  Commission,  Profes- 
sor Bullock's  final  suggestions  are  entitled  to  very  careful  consideration.  At 
pages  653  and  654  of  the  Proceedings,  he  testifies  as  follows : 

"Commissioner  Sweet :  Do  you  think  there  would  be  any  impropriety,  anything  wrong 
or  unreasonable  in  the  total  remission  of  taxes  for  a  limited  period? 


258  Electric  Railway  Problem 

"Mr.  Bullock :  1  do  not.  I  think  it  will  come  to  that  in  many  cases,  or  else  it  will  be 
made  up  in  some  other  way.  We  may  go  through  the  form  of  levying  taxes  and  then  make 
up  a  deficit.  That  is  what  we  are  doing  in  Massachusetts.  *  *  *  *  It  is  whipping  the 
devil  around  the  stump.  »  »  »  *  What  is  involved  is  giving  a  subsidy  to  an  industry 
that  faces  ruin.  •  »  *  *  I  think  that  undoubtedly  the  adjustment  of  all  these  inequalities 
in  taxation  will  take  time.  Where  the  situation  is  bad  enough,  however,  the  adjustment 
might  be  quickly  reached  and  a  recommendation  from  the  Commission  would  be  helpful. 
Moreover,  a  recomimiidatiun  of  liigher  rates  to  he  paid  by  car  riders  would  have  more  force 
in  it  were  it  accompanied  with  a  recommendation  that  unequal  charges  be  done  away  with. 
Whether  your  Commission  went  on  the  theory  that  the  time  had  not  come  to  take  off  ordinary 
taxes  and  recommended  that  ordinarj-  property  taxes  be  left,  but  that  taxes  in  excess  of 
what  ordinary  property  pays  should  be  remitted  and  other  charges  cut  down,  such  a  recom- 
mendation would  help  very  much  a  recommendation  for  higher  rates. 

"The  street  car  rider  will  object,  and  justly,  to  higher  rates  that  enable  the  continuance 
of  taxes  which  under  a  scheme  of  public  regulation  amounts  to  a  special  ta.x  on  the  trans- 
portation industry  and  which  he  pays  for  the  benefit  of  property  owners.  It  is  hard  to  raise 
the  fares.  .'\  street  car  fare  is  not  like  your  gas  bill  that  you  have  once  a  month  ;  you  have 
your  bill  presented  to  you  twice  a  day,  six  or  seven  days  in  the  week,  and  the  increase  comes 
to  you,  the  fact  of  the  increase  is  very  obvious,  it  is  rubbed  into  the  street  car  riders  twice 
ever)'  day.  And  a  recommendation  w:ould  come  with  greater  weight,  it  seems  to  me,  if  it  were 
accompanied  with  a  very  strong  recommendation  for  the  abolition  of  unequal  taxes." 

Fuilher  along,  Professor  Bullock  was  questioned  about  the  possible  abolition 
of  all  taxes  under  a  service-at-cost  plan  and  about  the  adoption  of  a  net  income 
tax  as  a  pennanent  policy.     His  answers  are  given  at  pages  660  to  662,  as  follows : 

"Mr.  Warren:  Is  it  not  at  least  a  debatable  question  whether  if  a  service-at-cost  plan 
or  some  other  form  of  partnership  between  the  corporation  and  the  municipality  were 
adopted,  whether  under  those  circumstances  the  property  should  be  taxed? 

"Mr.  Bullock:  It  is  perhaps  debatable.  I  believe  that  under  normal  conditions  the 
property  of  municipal  industries  ought   to  be  taxed. 

"Commissioner  Meeker:     Municijially  owned   industries? 

"Mr.  Bullock:  Ves,  and  of  course,  in  England  that  is  done.  If  the  city  municipalizes  its 
gas  works  it  pays  the  national  income  tax.  The  exchequer  does  not  lose  thereby  and  the 
real  estate  is  supposed  to  Ix-  taxed  for  local  taxation  like  other  things.  •  *  *  *'  Exempt- 
ing the  property  of  public  industries  from  taxation  can  Ix-  carried  only  a  certain  distance 
without  producing  conditions  which  lead  to  a  reversal  of  policy.  In  Europe  the  property  of 
municipal  and  state  industries  is  not  uniformly  taxed.  In  this  country  it  sometimes  is.  Our 
Federal  forest  reserves,  for  instance,  are  not  taxed,  but  a  part  of  the  revenue  is  given  to 
the  counties  in  which  they  are  located. 

"Mr.  Warren:  So  that  in  the  English  system  the  car  rider  or  gas  consumer  pays  a 
proper  proportion  of  tax  ? 

"Mr.  Bullock:     Pays  a  proper  proportion  of  tax. 

"Mr.   Warren:     Whether  it  is  municipally  or  privately  owned? 

"Mr.  Bullock:     Whether  it  is  municipally  or  privately  owned. 

"Mr.  Warren :  And  you  see  no  distinction  between  the  principle  of  taxation  which 
ought  to  apply,  whether  the  plant   is  publicly  or  privately  owned? 

"Mr.  Bullock:  I  do  not.  Under  proper  conditions  the  city— well,  there  is  an  absolute 
limit  to  the  amount  of  property  that  you  can  withdraw  from  taxation.  The  Prussian  rail- 
roads were  taxed  locally,  and  they  had  to  be.  They  never  would  have  lM?en  nationalized 
otherwise.  If  our  government  takes  over  the  railroads  it  has  to  have  the  consent  to  tax  them, 
and  the  proper  condition  is  one  in  which  industries  of  this  character,  if  owned  by  the 
municipality,  have  charged  against  them  their  due  share  of  all  taxes. 

"Commissioner  Meeker:  •  »  •  *  You  spoke  of  the  property  tax  being  rescinded  in 
favor  of  a  net  income  tax  for  the  time  being.  Would  it  not  be  better  to  adopt  the  taxation 
of  net  income  as  a  permanent  policy? 

***t**** 

"Mr.  Bullock:  1  doubt  if  it  would.  At  least  so  far  as  all  the  real  estate  is  concerned. 
Real  estate  cannot  be  taxed  on  its  net  income  for  local  purposes. 

■'Commissioner  Meeker:     But  what  real  estate  does  the  street  railway  company  own? 

"Mr.  Bullock:  Well,  it  has  its  power  houses  and  h;iriis  .md  electric  railway  rights  of 
way  which  they  own  in  a  good  manv  cases.  The  real  estate  element  with  the  electric  railway 
is  not  as  important  an  element  as  with  steam  railways,  but  still  it  is  an  element.  I  should  say 
such  real  estate  as  they  own  should  not  be  exempted  from  the  properlv  tax  under  any  con- 
dition. Their  other  property,  their  cars  and  other  things  might  very  well  Ix-  exempted  from 
taxation  and  yon  might  verv  well  have  an  income  tax  on  the  railroads  and  then  a  real  estate 
tax  on  their  real  estate.  Now,  that  solution  might  be  a  very  goc>d  ultimate  solution.  To 
illustrate,  in  other 


Relief  from  Taxation  259 

"Mr.   Warren:     Under  normal  conditions? 

"Mr.    Bullock:      Yes. 

"Mr.  Warren:  You  are  not  proposing  to  modify  what  you  said  about  the  possible  exemp- 
tion in  view  of  the  peculiar  conditions? 

"Mr.  Bullock:  My  income  tax  suggestion  which  I  make  on  the  last  page  of  the  brief 
has  reference  to  an  immediate  measure  of  relief.  To  suspend  the  property  tax  for  five  or  ten 
vears  and  impose  a  tax  on  the  net  income  would  give  a  very  large  amount  of  relief,  and  it  is 
fairly  justified  if  the  emergency  is  as  great  as  I  think  it  is  in  many  cases. 

"Commissioner  Meeker ;     But  you  think  it  should  not  be  adopted  as  a  permanent  policy — 

"Mr.   Bullock :     I   think  it  should  not  be  adopted  as  a  permanent  policy. 

"Commissioner  Meeker:     Except  as  you  have  indicated,  in  a   modified   form? 

"Mr.  Bullock :     In  a  modified  form." 

The  confusion  of  testimony  with  respect  to  street  railway  taxation  and  other 
public  charges  only  emphasizes  the  fact  that  first  of  all  we  need  a  policy.  Then 
emergency  measures  can  be  adopted  that  are  consistent  with  it;  but  until  we  have 
settled  the  great  debate  as  to  the  ownership  and  operation  of  the  electric  railways, 
temporary  expedients  are  likely  to  prove  both  futile  and  full  of  danger.  While 
the  electric  railways  remain  in  private  hands,  the  granting  of  substantial  relief 
through  the  lifting  of  franchise  burdens  or  the  lightening  of  taxation  will  neces- 
sarily be  a  slow  and  painful  process.  Governments  everywhere  need  money.  To 
give  up  familiar  and  established  sources  of  revenue  is  like  having  one's  teeth 
pulled.  No  doubt,  under  great  pressure  and  in  connection  with  an  entirely  new 
deal  such  as  a  service-at-cost  arrangement,  it  will  be  possible  here  and  there  to 
remove  some  of  the  burdens.  Yet  it  is  not  clear  that  any  uniform  rule  of  exemp- 
tion can  be  carried  out  or  even  recommended  except  in  terms  of  a  definite  and 
comprehensive  policy  for  the  permanent  readjustment  of  the  public  relations  of 
the  electric  railway  industry.  Where  unjust  burdens  exist,  as  a  matter  of  course 
they  ought  to  be  lifted.  But  the  sweeping  statements  sometimes  made  with  re- 
spect to  the  overtaxation  and  the  overburdening  of  the  street  railway  com- 
panies are  by  no  means  uniformly  true.  It  would  be  easy  to  recoinmend  exemp- 
tion from  taxation  if  the  municipalities  were  not  in  serious  need  of  the  money 
or  if  the  direct  tax  payers  did  not  have  their  backs  against  the  wall  just  like 
'"other  people."  The  city  of  Detroit  which  has  recently  voted  $15,000,000  of 
general  bonds  to  be  used  in  building  a  municipal  street  railway  system  adopted  a 
municipal  ownership  amendment  to  its  charter  in  1913  and  later  adopted  a  new 
charter  with  a  municipal  ownership  chapter  embodied  in  it.  This  chapter  pro- 
vides for  the  construction  or  acquisition  of  a  unified  municipal  street  railway 
system  and  requires  that  the  municipal  railway  shall  pay  taxes  just  as  if  it  were 
privately  owned.  It  is  not  to  be  expected  that  the  voters  will  willingly  grant 
exemptions  to  private  companies  which  they  deny  to  themselves.  It  can  easily  be 
argued  that  from  the  point  of  view  of  public  welfare  complete  or  partial  exemp- 
tion of  the  street  railways  from  taxation,  paving  obligations  and  other  public 
charges  is  preferable  to  radical  fare  increases,  but  this  preference  cannot  readily 
become  eflfective  while  local  transportation  service  continues  to  be  furnished  by 
private  agencies  actuated  by  desire  for  profit.  When  local  transportation  be- 
comes a  recognized  factor  of  the  city  or  the  state  plan,  then  we  can  begin  to  talk 
more  effectively  about  the  social  aspects  of  street  railway  taxes  and  street  railway 
fares. 


Chapter  XXXI 
EFFICIENCY  IN  MANAGEMENT  AND  ECONOMIES  IN  OPERATION 

Those  who  advocate  the  continuance  of  the  policy  of  private  ownership  and 
operation  of  the  electric  railways,  even  under  the  adverse  conditions  that  now  beset 
the  local  transportation  industry,  find  their  principal  support  in  the  assumption 
that  private  management  is  more  efficient  and  that  private  operation  is  more 
economical  than  public.  Xone  can  dispute  that  the  past  two  or  three  years  have 
been  an  appropriate  time  for  the  searching  of  hearts  in  the  electric  railway  busi- 
ness. Is  it  a  fact,  or  is  it  not,  that  up  to  the  present  time  the  industry  has  been 
efficiently  and  economically  managed?  The  record  proves  conclusively  that  the 
financial  management  of  the  industry,  at  least  in  its  relation  to  capitalization  and 
fixed  charges,  has  left  much  to  be  desired.  The  operating  men  have  been  handi- 
capped in  several  ways.  Eirst,  they  have  been  subject  to  the  control  of  the  finan- 
ciers and  speculators  who  have  mismanaged  the  capital  account.  Second,  they 
have  been  subject  to  a  more  or  less  intermittent  and  arbitrary  control  by  public 
authorities  through  franchise  requirements,  state  and  local  legislation  and  the 
orders  of  public  service  commissions.  Third,  they  have  undoubtedly  suffered  in 
some  measure  from  the  paralyzing  effects  of  monopoly.  Under  all  the  conditions 
it  would  not  be  surprising  to  find  that  street  railway  management  had  been  ex- 
ceptionally inetTicient  as  compared  with  other  (private  industries  of  somewhat 
similar  magnitude.  If  the  rule  that  freedom  of  initiative  and  definiteness  of 
responsibility  are  essential  in  producing  efficient  luanagement  and  economical 
operation  is  a  sound  one,  then  it  would  not  be  difficult  to  prove  that  street  rail- 
way managers  generally  have  not  been  in  a  position  to  develop  efficiency  and 
economy  to  their  full  possible  extent. 

Before  going  further  in  the  discussion,  it  is  desirable  to  consider  the  interest 
of  the  public  in  economy  and  efficiency  in  the  operation  of  local  transportation 
systems.  It  is  ea.sy  to  .say  that  economy  and  efficiency  mean  low  cost  of  service 
and  that  low  cost  means  low  fares ;  but  such  a  statement  does  not  give  a  complete 
picture  of  the  situation.  Investors,  where  their  interests  have  free  plav,  undoubt- 
edly secure  benefits  from  economy  of  operation :  and  also  from  efficiency  in  opera- 
tion, where  efficiency  means  no  more  than  a  high-sounding  or  far-seeing  economy. 
It  is  possible  that  economies  may  be  short-sighted  and  take  the  form  of  parsimony. 
Such  economies  are  not  beneficial  in  the  long  run  even  to  the  investors.  On  the 
other  hand,  efficiency  may  take  the  form  of  more  service,  better  service  or  more 
costly  service  at  the  same  rates,  and  such  efficiency  is  not  directly  beneficial  to 
the  investors,  although  it  may  be  of  indirect  benefit  to  them  in  the  long  nm. 
From  the  point  of  view  of  the  public,  economies  that  actually  reduce  the 
cost  of  service  without  curtailing  the  amount  or  the  quality  of  service,  if  such 

260 


Operating  Economies  261 

economies  are  reflected  in  the  fares  or  in  a  share  of  profits  turned  into 
the  public  treasurj',  are  beneficial ;  and  efficiency  that  means  more  service 
or  better  service  for  the  same  money  is  of  course  beneficial ;  but  economies 
that  mean  a  curtailment  in  the  quantity  of  service  or  a  deterioration  in  its  quality 
are  not  beneficial  to  the  public.  Efficiency,  if  it  adds  to  the  public  convenience, 
is  beneficial ;  otherwise  not.  The  distinction  between  the  public  interest  and  the 
interest  of  the  investors  in  economical  and  efficient  operation  is  real,  though  some- 
what elusive.  At  certain  points  the  public  and  the  investors  have  a  common  in- 
terest;  at  other  points  their  interests  are  antagonistic.  Accordingly,  when  we 
are  considering  efficiency  in  management  and  economies  in  operation  in  the  street 
railway  business,  we  cannot  assume  that  this  efficiency  and  these  economies  are 
necessarily  something  to  be  desired.  Each  factor  entering  into  the  problem  of 
efficiency  and  each  particular  element  of  possible  economy  is  to  be  judged  on  its 
merits  in  connection  with  its  double  relation  to  the  rights  of  the  investor  and 
the  rights  of  the  public. 

In  general,  it  may  be  said  that  the  witnesses  for  the  American  Electric  Rail- 
way Association  assumed  the  general  existence  of  good  management  in  the  in- 
dustry and  although  some  of  them  called  attention  to  economies  that  might  be 
eftected,  the  general  trend  of  the  testimony  presented  on  behalf  of  the  Associa- 
tion was  to  the  effect  that  the  street  railway  companies  are  primarily  the  victims 
of  conditions  and  circumstances  outside  of  their  control.  With  respect  to  the 
efficiency  of  their  management,  Mr.  Francis  H.  Sisson,  speaking  from  the  point 
of  view  of  the  investment  banker,  gives  rather  emphatic  and  sweeping  commen- 
dation. At  pages  326  and  327  of  the  Proceedings,  he  gives  the  following  testi- 
mony : 

"Commissioner  Sweet :  In  your  judgment,  are  the  street  railway  companies  at  the  present 
time  being  managed  efficiently? 

"Mr.  Sisson;  On  the  whole,  I  think  they  are.  We,  as  bankers,  have  just  finished  a 
very  searching  and  thorough  examination  of  the  New  York  transit  lines,  entirely  impartial 
and  quite  critical,  and  the  reports  that  we  get  are  most  reassuring  that,  so  far  as  the  manage- 
ment is  concerned,  it  is  just  as  nearly  efficient  as  it  can  humanly  be  made,  and  tliat  I  think  is 
true  of  most  of  the  high-grade  lines  throughout  the  country. 

"Cccimissioner  Sweet :  We  had  evidence  yesterday  from  Mr.  George,  one  of  the  re- 
ceivers of  the  Pittsburgh  Railways  Company  that,  after  taking  charge  of  the  property,  they 
reached  the  conclusion  that  the  management  had  been  both  honest  and  capable. 

"Mr,  Sisson:  Yes;  I  think  that  is  broadly  true  throughout  the  country,  of  the  lines 
with   which  I  am  familiar. 

"Commissioner  Sweet:  Have  you  any  direct  information  on  that  point  from  the  receivers 
of  other  companies,  or  in  any  other  manner? 

"Mr.  Sisson :  Yes ;  particularly  in  New  York  City  and  Brooklyn,  where  that  is  the 
opinion  of  the  receivers  of  all  the  companies  there,  I  think  I  am  safe  in  saying,  and  better 
than  that,  it  is  the  direct  finding  of  capable  engineers  who  have  made  this  analysis  for  the 
benefit  of  the  security  holders. 

"Commissioner  Sweet :  I  assume  that  there  may  be  instances  of  incompetency,  and  pos- 
sibly of  dishonesty,  in  some  particular  localities. 

"Mr.   Sisson :     Undoubtedly. 

"Commissioner  Sweet:  What  is  your  judgment  in  regard  to  the  business  as  a  whole, 
whether  it  is  managed  with  honesty  and  ability,  and  with  an  earnest  desire  to  promote  the 
interests  of  the  general  public,  as  well  as  of  the  investors. 

"Mr.  Sisson:  I  think,  from  a  very  careful  study  of  the  situation,  that  it  ranks  above 
the  average  business  in  all  those  particulars. 

"Commissioner  Sweet:     You  do? 

"Mr.  Sisson:  I  do.  I  might  say  in  that  connection,  because  of  the  necessities  of  their 
situation." 


262  Electric  Railway  Problem 

On  the  other  hand,  certain  of  the  witnesses  testifying  on  behalf  of  the  general 
public  took  the  position  that  in  the  past  street  railway  companies  generally  have 
been  badly  managed  and  that  with  a  proper  spirit  of  initiative  and  enterprise  they 
could  go  a  long  way  toward  solving  their  own  problems  in  the  present  crisis  with- 
out asking  any  favors  from  the  public.  For  example,  Mr.  Morris  L.  Cooke,  of 
Philadelphia,  as  already  noted  in  Chapter  XXII  of  this  report,  took  the  position 
that  "our  street  railroads  constitute,  broadly  speaking,  the  most  completely  dis- 
credited feature  in  the  administration  of  a  city."  It  is  clear  from  Mr.  Cooke's 
further  testimony  that  he  meant  to  indict  them  for  mismanagement.  At  page 
1689  of  the  Proceedings,  he  says : 

"Because  the  profits  have  been  made  throuRh  financing  these  properties  rather  than 
through  operating  them  as  public  services,  the  valuation  factor  has,  from  the  first,  been  over- 
emphasized. In  fact,  up  to  a  recent  date,  one  hardly  ever  heard  of  the  cfficiency-of-operation 
factor." 

In  referring  to  the  activities  of  the  national  utility  associations,  including  the 

American  Electric  Railway  Association,  he  says,  at  page  1690  of  the  Proceedings: 

"Those  who  .seek  to  uphold  any  measure,  device  or  system  which  will  run  counter  to  that 
which  has  received  official  sanction  by  these  associations,  are  subjected  to  a  relentless  and 
usually  (|uite  effective  pressure.  There  has  been  established  an  essential  solidarity  in  these 
industries  which  is  freciuently  anti-social,  if  not  illegal,  and  which  discourages  initiative  and 
enshrouds  the  whole  utility  world  in  a  maze  of  autocracy,  secrecy  and  ultimate  inefficiency." 

Again,  at  page  1693  of  the  Proceedings,  Mr.  Cooke  says : 

"It  is  futile  to  lift  the  handicaps  under  which  this  industry  suffers,  unless  it  l>e  preliminary 
to  making  constructive  suggestions  which  are  not  only  possible  of  execution,  but  which  give 
promise  of  relief.  I  am  convinced  that  any  program  for  the  rehabilitation  of  those  proper- 
ties to  be  successful  must  have  efficient  operation  as  its  primary  plank. 

"After  all,  it  is  much  more  fundatnental  to  ask  how  these  projierties  are  to  be  operated 
than  who  is  to  operate  thorn." 

At  page  1694  of  the  Proceedings,  he  alleges  that  "there  is  almost  no  cost  keeping 
on  .American  street  railways."  "What  is  even  more  astounding,"  he  adds,  "is  that 
most  street  railway  men  consider  it  impossible  to  secure  costs."  At  page  1694 
of  the  Proceedings,  he  says: 

"Of  course,  after  operating  effectiveness  has  l>cen  substituted  for  the  financial  and 
pseudo-financial  incentives  which  have  heretofore  obtained,  there  is  gradually  developed 
throughout  the  system  and  in  all  departments  a  genuine  science  in  management.  Pick-up, 
gains,  economies  and  new  ways  of  increasing  efficiency  Ix-come  the  rule.  The  inanagement 
incomes  imbued  throughout  with  the  spirit  of  progress,  and  men  who  look  upon  the  industry 
as  static  and  use  mcthcMls  without  present  day  value  are  eliminated. 

"It  is  .Ts  futile  to  make  constant  demands  for  increased  fares  in  the  absence  of  some 
genuine  and  enlightened  effort  toward  more  efficient  management  as  it  is  for  labor  to  con- 
stantly demand  shorter  hours  and  increased  wages  without  making  provision  for  increased 
productioTi.  Carried  In-yond  a  certain  point  it  is  C(iuivalent  to  the  effort  to  create  something 
out  of  nothing." 

In  closing  his  formal  statement,  Mr.  Cooke  says  at  page  1696  of  the  Pro- 
ceedings : 

"There  is  in  my  opinion  no  ultimate  solution  except  we  can  get  it  on  to  a  basis  of  a 
contract  that  is  continually  advantageous  to  both  parties,  and  the  shorter  the  term  of  that 
contract  and  the  easier  it  is  for  cither  side  to  change  it,  the  Ix-tter  it  woidd  Ix-.  in  my  opinion." 

Chairman  Elmquist  then  asked  Mr.  Cooke  what  elements  should  be  includc<l  in 
tlie  contract,  '{"he  portion  of  his  reply  relating  to  management  is  found  at  page 
16^)7  of  the  Proceedinirs.  as  follows: 


Operating  Economies  263 

"Starting  in  with  good  management,  understand  I  am  not  interested  in  working  out  any 
problem  unless  you  have  good  management  or  there  has  been  some  evidence  that  the  company 
is  not  only  willing  to  put  in  good  management  but  knows  what  good  management  is.  I  dare- 
say that  nine  out  of  ten  men  in  this  industry  in  the  management  are  firmly  convinced  that  they 
have  now  good  management  and,  unless  you  can  change  that  point  of  view,  then  I  think 
it  is  perfectly  hopeless. 

"My  idea  of  management  is  that  it  is  something  that  is  not  static;  that  the  better  manage- 
ment you  have  today  the  larger  the  opportunities  for  improvement  just  ahead  of  you.  In 
other  words,  the  industrial  establishments  with  which  I  am  familiar  that  are  already  on  the 
best  plane  of  management  are  the  ones  that  are  looking  forward  most  to  the  improvements 
and  economies  and  forward  steps  of  the  future.  It  is  the  man  that  is  down  at  the  heels 
that  thinks  management  is  static." 

Mr.  John  A.  Beeler,  transportation  engineer,  though  not  an  economist,  may 
properly  be  described  as  a  professor  of  street  railway  economies.  His  long  ex- 
perience as  manager  of  the  Denver  Tramways  Company  and  his  recent  country- 
wide and  successful  practice  as  a  consulting  engineer  primarily  interested  in  de- 
vising means  for  improving  street  railway  service,  increasing  street  railway  rev- 
enues and  effecting  street  railway  economies  gives  him  exceptional  qualifications 
for  expert  testimony  along  these  lines.  He  maintains  that  the  question  of  oper- 
ating economies  is  paramount.  Referring  to  them  at  page  166+  of  the  Proceed- 
ings, he  says : 

"They  are  many,  and  most  of  them  can  be  applied  to  every  company,  regardless  of  the 
fetish  of  local  conditions." 

At  pages  1674  and  1675  of  the  Proceedings,  he  summarizes  his  proposed 
remedies  for  the  present  evil  plight  of  the  electric  railway  industry.  Most  of  his 
suggestions  fall  within  the  scope  of  our  discussion  in  this  section.     He  says : 

"To  enable  the  street  railways  to  get  out  of  the  serious  situation  in  which  they  now  are 
the  following  can  be  done : 

"Reduce  ta.xation  to  place  the  street  railways  on  a  par  with  other  industries. 
"Employ  operating  economies  such  as : 

Better  and  faster  schedules 

Reduction  of  layovers 

Improvement   of   routing 

Abandonment  of  non-essential  service 

Standardization  of  equipment  ' 

Saving  of  power 

Eliminate  waste 
"Obtain  the  cooperation  of  the  authorities  and  the  public  in  the  following : 

Installation  of  loading  platforms 

Cooperation  of  the  police 

Regulation  of  street  traffic 

Control  of  parking 

Elimination  of  steam  railroad  grade  crossings 

Regulation  of  jitney  and  bus  competition 

Staggered  hours  of  business 

Skipstops 

"Employ  methods  to  increase  the  gross  receipts,  as 
Encourage  short-haul  riding 
Shorten  headways 

Replace   insolence   and  inattention   with   courtesy 
Drill  employes  in  principles  of  salesmanship 
Reroute  to  increase  business 
Use  the  safety  car  and  more  attractive  cars  generally. 

"A  raise  in  fare  by  itself,  without  employing  methods  to  induce  and  encourage  profitable 
riding,  or  without  employing  more  efficient  methods  of  operation,  will  fail. 

"Automobile  and  bus  transportation  is  far  less  economical  than  efficient  electric  railway 
service.  By  the  adoption  of  the  remedies  proposed,  good  street  car  transportation  will  be 
retained  and  the  industry  made  self-supporting." 


264  Electric  Railway  Problem 

The  extent  to  wliich  these  several  suggestions  promise  relief  must  now  be 
considered.  Discussing  the  importance  of  the  "schedules'*  in  street  railway 
operation,  Mr.  Beeler,  at  pages  1664  and  1665  of  the  Proceedings,  says: 

"The  most  important  items  in  any  company's  operations  are: 

( 1 )  Frequency 

(2)  Regularity 

(3)  Speed 

W'itli  these  items  right  almost  any  company  will  succeed.  They  have  such  a  far-reaching 
effect  on  the  operations  that  many  an  otherwise  good  concern  has  gone  on  the  rocks  on 
account  of  poor  schedules. 

"What  an  increase  of  one  mile  per  hour  will  do  in  the  operations  of  the  average  company 
is  perhaps  the  most  potent  illustration  that  can  be  had.  A  company  with  an  average  schedule 
speed  of  8.4  miles  per  hour,  which  is  practically  the  average  of  street  railways  in  the  United 
States,  as  near  as  can  be  obtained,  is  represented  by  A,  while  B  has  been  speeded  up  to  9.4 
miles  per  hour.     Note  well  the  difference  : 

A  B 

Speed,    miles   per   hour 8.4  9.4 

Earnings  per  car   mile 40c  40c 

Earnings   per  car  hour $3.36  $3.76 

Expenses  per  car  hour $2.52  $2.52 

Operating  ratio   75%  67% 

With  the  same  identical  car  mile  earnings  this  increase  in  speed  alone  will  come  within  one 
point  of  making  an  average  company  self-sustaining,  as  it  has  t)een  shown  already  that  with 
an  operating  ratio  of  66  per  cent  sufficient  will  remain  to  provide  proper  replacement  charges 
and  return  si.x  per  cent  on  the  investment. 

"The  acceleration  and  braking  should  be  increased.  The  average  road  will  show  about 
1.5  miles  per  hour  per  second,  while  2.5  will  provide  much  speedier  operation,  increasing 
schedules  say  10  per  cent.  The  duration  of  stops  will  also  automatically  be  shortened  as 
passengers  get  used  to  good  operation.  They  invariably  prefer  it  to  the  slow,  halting, 
undecided  movements  now  prevalent  on  so  many  roads." 

The  proof  of  the  pudding  is  in  the  eating.  The  Cleveland  Railway  Company 
stands  out  conspicuously  on  account  of  its  demonstrated  ability  to  earn  the  stand- 
ard return  upon  the  investment  during  the  war  period  while  continuing  to  main- 
tain its  property  without  going  above  the  five-cent  cash  fare  with  a  transfer  charge. 
That  the  striking  relative  success  achieved  in  Cleveland  was  due  in  part  at  least 
to  economies  in  operation  brought  about  through  public  cooperation  is  amply 
proven  by  the  testimony.  On  this  particular  point  Mr.  Heeler,  upon  cross-examin- 
ation by  Mr.  Warren  at  pages  16S5  and  1686  of  the  Proceedings,  says: 

"Mr.  Warren:  You  spoke  of  Cleveland  as  giving  better  service,  I  think,  at  around  5 
cents  than  many  if  not  most  of  the  companies  that  have  raised  their  fares.  Are  the  conditions 
in  Cleveland  materially  different  from  those  in  many  cities  as  regards  the  length  of  haul,  not 
possible  haul  but   actual  haul  ? 

"Mr.  Beeler:  I  think  that  is  about  the  average  condition  obtaining  there.  Cleveland 
was  one  of  the  first  cities  to  adopt  the  elimination  of  untieces.sary  stops  and  by  so  doing  they 
speeded  up  their  schedules,  and  Cleveland  today  gets  a  higher  scheduled  .speed  than  most  of 
the  average  cities.  At  the  same  time  they  rehabilitated  and  put  mi  attractive  equipment  and 
the  result  is  that  their  car  hour  earnings  are  much  higher  than  the  average;  their  car  mile 
earnings  are  alxiut  the  average. 

"Mr.  Warren:       Is  there  a  direct  relation  between  the  speed  and  the  operating  expense? 

"Mr.   Beeler:     There  is. 

"Mr.  Warren:  If  you  increase  your  speed  25  per  cent  is  that  the  same  as  reducing  your 
operating  expenses  25  per  cent? 

"Mr.  Beeler:  Not  the  same,  but  it  has  a  very  marked  influence.  Take  an  average  line 
that  is  earning  40  cents  a  car  mile  and  making  a  speed  of  8  miles  per  hour,  it  will  l)e  earning 
$3.20  an  hour.  Take  another  line  that  is  earning  40  cents  a  car  mile  with  the  same  kind 
of  equipmrnl  and  making  10  miles  per  hour,  it  will  U'  eaniing  $4.(X)  jK-r  hour.  Now,  the 
expenses  are  practically  the  same,  almost  the  same.  The  way  si)eed  is  made  is  by  better 
.icceleraliiin  and  faster  braking,  eliminating  the  stops  and  delays,  and  that  all  has  a  tendency 
to  reduce  the  operating  ratio,  for  the  reason  that  your  wages  are  paid  on  the  hourly  basis. 
Practicallv  all  the  income  of  a  street   railwav  coes  out  on  an  hoiirlv  liasis  nr  on  .t  time  tasis 


Operating  Economies  265 

and  the  receipts  come  in  on  a  mileage  basis,  for  it  is  transportation  that  is  being  sold.  Now, 
the  more  miles  that  we  can  get  out  of  a  street  car  the  less  the  operating  ratio  and  the  less 
the  ratio  cf   fixed  charges  and   everything  else. 

"Mr.   Warren:       Cleveland  has  a  very  high 

"Mr.   Bceler :     It   has  a   high   scheduled   speed. 

"Mr.  Warren  :  And  that  was  produced  almost  entirely,  was  it  not,  through  the  coopera- 
tion  between   the   city   and   the   company  ? 

"Mr.  Beeler :  That  was  brought  about  very  largely  through  the  efforts  of  Mr.  Peter 
Witt,  who  was  at  that  time  a  city  transit  commissioner.  He  had  made  a  study  of  the  situa- 
tion;  the  schedules  were  slow  and  he  eliminated  all  of  wliat  he  considered  unnecessary  stops 
and  puts  the  stops  further  apart  generally  throughout  the  city  and  the  speed  was  increased 
something  like  a  mile  and  a  half  per  hour.  Not  only  did  that  increase  the  receipts  per  car 
hciur.  but  it  also  increased  the  receipts  per  car  mile,  because  it  popularized  the  service  and 
more  people  rode. 

"Mr.  Warren:     But  he  also  incidentally  cleared  the  track  too.  did  he  not? 

"Mr.  Beeler:  He  cleared  the  track  and  secured  the  cooperation  of  the  police  at  street 
intersections  and   in  even-  other  way  possible. 

"Mr.  Warren :  Much  of  that  e.x'cept  with  cooperation  from  the  municipal  authorities 
would  have  been  beyond  the  power  of  the  company  to  bring  about,  would  it  not? 

"Mr.  Beeler:  The  cooperation  with  the  authorities  to  obtain  the  full  result  is  absolutely 
necessary,  yes,  sir." 

At  page  1165  of  the  Proceedings,  Mr.  Beeler  discusses  the  importance  of 
"layovers,"  as  follows : 

"The  elimination  of  excessive  layovers  is  most  important.  The  ratio  of  layover  time  to 
actual  running  time  varies  from  to  2  to  25  per  cent.  Long  layovers  are  given  frequently  as  a 
concession  to  labor  when,  if  the  nature  of  the  resultant  trouble  were  fully  understood,  labor 
would  not  want  them. 

"As  an  example,  apply  the  extremes  to  two  systems  each  earning  40  cents  per  car  mile 
and  making  a  running  speed  not  including  layovers  of  9.33  miles  per  hour.  The  line  with  the 
2  per  cent  layover  will  earn  $3.67  per  car  hour,  while  that  with  the  25  per  cent  layover  will 
bring  in  but  $2.79.  .^fter  paying  the  trainmen  at  the  rate  of  $1.10  per  car  hour  there  remain 
respectively  $2.57  and  $1.69.  The  long  layover  is  a  great  handicap.  The  other  line  has  50 
per  cent  more  of  its  receipts  left  after  paying  wages.  The  only  feature  that  is  swift  about 
a  road  with  long  layovers  is  the  rapidity  with  which  it  approaches  the  receiver." 

At  pages  1665  and  1666,  upon  the  subject  of  "routing,"  Mr.  Beeler  says: 

"It  is  of  the  utmost  importance  that  the  lines  provide  the  shortest,  quickest  and  most 
convenient  routes.  Many  cities  today  maintain  routes  and  service  designed  for  traffic  condi- 
tions of  a  generation  ago.  This  subject  deserves  the  closest  scrutiny.  Rerouting  coming 
under  my  observation  has  worked  wonders  in  bettering  service  for  the  public,  and  at  the  same 
time  saving  money   for  the  company. 

"Through-routing  to  eliminate  overlapping  service  frequently  proves  a  tremendous  force 
in  reducing  both  expense  and  congestion,  as  both  are  synonymous.  Short-lining  and  turn- 
back service  wHll  frequently  enable  a  company  to  accommodate  twice  as  many  people  during 
the  rush  as  where  all  cars  are  run  through  irrespective  of  the  length  of  line." 

The  Philadelphia  Rapid  Transit  Company  shares  with  the  Cleveland  Rail- 
way Company  the  honors  of  having  maintained  a  relatively  low  fare  and  a  pros- 
perous financial  condition  during  the  present  crisis.  What  rerouting  and  faster 
schedules  accomplished  in  Philadelphia  was  brought  out  by  the  testimony  of 
Mr.  Coleman  J.  Joyce,  representing  Mr.  Thomas  E.  Mitten.  The  Stotesburv'- 
Mitten  management  took  charge  in  Philadelphia  in  1910.  At  pages  1526  and 
1527,  the  following  question  and  answer  appear: 

"Commissioner  Mahon  :  *  *  *  *  Pliiladelphia  was  considered  at  that  time,  as  v.c  call 
it  in  the  railroad  world,  an  overrailroaded  town  when  Mr.  Mitten  went  in,  and  it  was  all 
readjusted,  was  it  not? 

"Mr.  Joyce:  Yes.  sir;  there  was  a  very  complete  readjustment  of  the  running  of  the 
cars.  Where  cars  came  downtown  from  the  north  and  turned  and  made  various  tortuous 
routes  through  the  business  district  through  the  heavy  traffic,  they  were  routed  through  from 
north  to  south  and  their  routes  were  straightened  out  so  as  to  improve  the  headway  and  the 
speed  of  the  cars  and  to  lessen  delays  of  traffic.  That,  I  think,  everybody  in  Philadelphia 
now  regards  as  a  very  beneficial  change,  both  to  the  service  and  to  the  community. 


266  Electric  Railway  Problem 

"Commissioner  Mahon :  Undoubtedly ;  I  am  not  criticizing  that.  The  point  I  %vanted  to 
show  is  you  cheapened  the  cost  ot  operation  to  a  greater  extent  possibly  than  any  other  rail- 
road in  the  country." 

Further  on,  at  pages  1536  to  1538,  Mr.  Joyce  again  testifies  on  this  same 
general  subject,  as  follows: 

"I  have  already  referred  to  the  rerouting  of  the  cars.  No  small  proportion  of  the  success 
of  the  management  may  be  attributed  to  the  daily  study  of  traffic  statistics  and  the  consequent 
routing  of  cars  to  more  fully  and  economically  serve  the  public. 

"At  the  time  of  the  incoming  of  the  nianagoment,  in  1910,  little  or  nothing  had  been 
done  in  the  way  of  rerouting  cars  so  as  to  take  advantage  of  unified  operation.  There  were 
92  separate  routes  upon  the  system,  many  of  which  were  originally  established  by  the  different 
operating  companies  in  competition  resulting  in  waste  and  duplication  of  service. 

■■.\ftcr  the  rerouting  of  the  cars,  there  are  76  routes,  which  comprise  the  system  as  now 
operated. 

"The  changes  have  been  made  as  rapidly  as  the  confidence  of  the  public  and  the  coopera- 
tion of  the  employes  would  i)ermit,  the  most  recent  change  being  the  consolidation  of 
two  lines  made  within  the  last  month,  and  resulting,  we  contidently  expect,  in  a  saving  to 
the  company  of  more  than  $60.1X)0  a  year;  and  this  combination  of  two  lines  resulting  in  the 
setting  back,  in  the  language  of  the  men,  the  setting  back  of  some  thirty  or  more  trainmen; 
setting  them  back  in  priority;  and  in  spite  of  this,  instead  of  opposition  on  the  part  of  the 
men  to  that  measure  of  economy,  the  Superintendent  of  Transportation  had  a  complimentary 
expression  from  the  men  operating  those  two  lines  upon  the  economies  effected  and  the 
common  sense  of  joining  those  two  lines  into  one.  Not  only  that,  but  the  joining  of  the 
two  lines  has  resulted  in  improved  income,  increased  riding  and  a  lietter  gross  on  that  one 
single   than  on  the  two  lines  as    formerly  operated. 

"The  passenger  receipts  per  car  hour  have  increased  from  $2.19  in  1910  to  $3.48  in  1918. 

"Passenger  receipts  per  car  mile  have  increased  from  27  cents  in  I9I0  to  38  cents  in  1918. 

"Much  light  is  thrown  upon  these  comparative  results  by  the  fact  that  the  average  speed 
in  miles  per  hour  for  the  system  has  increased  from  8.08  miles  per  hour  in  1910,  to  9.06  in 
1918.  This  increase  in  speed  has  tx^en  accompli.shed  through  improvement  in  various  factors, 
as,  for  example,  reduction  in  the  number  of  stops,  the  cutting  down  of  the  time  consumed 
at  each  stop,  through  the  introductimi  of  the  nearside  and  the  center  e.xit  doors  and  the 
equipping  of  all  cars  with   door-operating  and  time-saving   devices. 

"Prior  to  1911,  the  time-table  department  was  operating  many  lines  upon  all-day  solid 
tables,  meaning  that  a  line  having  l)een  designated  as  a  five-minute  line,  the  cars  would  be 
sclieduled  for  a  five-minute  headway  all  the  time  with  perhaps  trips  for  the  morning  and 
evening  rushes ;  but  in  the  main  the  schedules  were  not  based  upon  authentic  checks  to 
determine  the  varying  riding  characteristics  of  each  line  at  the  different  hours  of  the  day. 
The  elimination  of  wasted  effort  in  the  .schedule  under  the  present  management  has  included 
a  very  close  adjustment  of  car  schedule  to  the  traffic  of  the  lino,  and  on  soiue  lines  the 
headways  are  scheduled  to  change  as  often  as  five  or  six  times  in  the  24  hours,  with  entirely 
new  schedules  for  Saturdays,  for  Sundays  and  for  holidays,  t)ased  upon  traffic  observations 
which  were  made  in  several  ways  by  special  slips  turned  in  by  the  conductors  showing  the 
maximum  numln-r  of  rides  on  the  car  each  trip,  by  trained  observers  placed  at  strategical 
ob.servalion  points  along  the  line,  who  report  the  numl)er  of  passengers  boarding,  the  numl)er 
alighting  and  the  number  of  passengers  on  the  car  at  these  points ;  analytical  studies  of  the 
transfers  issued  and  collected  at  dominating  points ;  and  by  these  and  other  means  the  riding 
characteristics  of  each  line,  for  each  hour  of  the  day,  for  different  days  of  the  week  and 
for  different  seasons  of  the  year  are  determined  and  are  checked  from  time  to  time. 

"The  car  service  is  then  scheduled  to  put  the  cars  upon  the  lines  when  and  where  the 
riding  public  needs  them.  .\  typical  line  would  show  a  definite  headway  from  the  early 
morning  hours,  this  headway  becoming  more  frei|uent  to  meet  the  morning  rush,  then  becom- 
ing longer  to  a  mininnnn  for  the  hours  of,  say,  between  ten  and  twelve  in  the  middle  of  the 
day.  and  then  becoming  more  freipient,  the  intervals  lietween  the  cars  reaching  their  greatest 
frequency  at  the  peak  of  the  evening  rush,  and  then  tapering  off  again  until  seven,  when 
there  is  a  slight  increase  to  take  care  of  the  theatre  and  after-dinner  traffic;  again  becoming 
less  freipicnt   from.  say.  twelve  to  one  at  night,  and    falling   into  the  'Owl.'  all-night  service. 

"Traffic  analysis  is.  of  course,  not  iK'Culiar  to  Philadelphia,  but  the  maintenance  and 
accuracy  of  these  studies  are  perhaps  unique,  as  is  also  the  success  attained  by  the  present 
tiine-table  ex|K-rts  in  dividing  the  car  runs  into  car  hours  to  meet  the  desires  of  the  majority 
of  the  trainmen. 

"Here  is  where  cooperation  again  comes  in.  Each  new  schechile,  t>efore  it  becomes 
effective,  is  submitted  to  the  Cooperative  Committee  men  from  the  depot  concerned,  and  is 
subject  to  scrutiny  by  the  Iraiiniien  involved,  the  declared  policy  of  the  department  being 
that  the  cars  must  be  placed  upon  the  streets  exactly  in  accordance  with  the  needs  of  the 
traveling  public,  but  the  division  of  the  car  runs  into  crews  and  crew  runs  is  accomplished 
to  meet,  sn  far  as  possible,  the  convenience  of  the  men,  who,  it  may  Ik-  said,  now  fully  appre- 


Operating  Economies  267 

ciate  that  increase  in  their  wages  is  closely  affihated   with  the   success  of   the   management, 
in  fitting  the  car  service  to  the  traffic  without  what  we  call  wasted  effort." 

Mr.  Walter  A.  Draper,  Vice-President  of  the  Cincinnati  Traction  Company, 
testified  that  his  company  expected  to  save  about  $100,000  a  year  by  rerouting. 
This  appears  at  page  512  of  the  Proceedings. 

The  possibility  of  aflfecting  considerable  economies  through  the  adoption  of 
the  skip-stop  plan  was  discussed  by  a  number  of  witnesses.  In  this  connection, 
public  convenience  should  be  given  special  consideration.  In  small  towns  or  on 
light-trafiic  lines,  the  skip-stop  may  hurt  the  service  without  producing  much 
economy.  If  headways  are  infrequent,  people  do  not  enjoy  walking  to  the  next 
corner  to  take  the  car  and  seeing  it  go  by  while  they  are  on  the  way.  In  this 
connection,  it  should  be  remembered,  also,  that  it  is  the  saving  of  actual  stops,  not 
of  theoretical  ones,  ihat  produces  economy  of  power  and  promotes  better  speed. 
It  is  in  the  big  cities  where  traffic  is  comparatively  dense  that  the  greatest  econ- 
omies can  be  secured  by  the  skip-stop.  On  this  point,  Mr.  Gaylord  C.  Cummin 
testifies  at  page  53  of  the  Proceedings,  where  he  says: 

"In  the  smaller  cities  the  skip-stop  saves  nothing.  *  *  *  *  In  the  larger  cities  I  am  not 
familiar  with  the  actual  figures,  but  I  should  say  that  there  was  a  possibility  that  it  did  save 
something.  That  is,  it  might  enable  them  to  take  out  a  car  or  so  on  a  line  at  certain  times, 
by  increasing  the  speed  at  which  they  can  get  over  the  route.  In  a  town  of  30,000  or  40,(X)0 
or  50,000  people  it  does  not  do  it.  You  have  to  deal  in  car  units,  and  you  do  not  save  enough 
time  to  get  rid  of  one  car.  If  you  are  running  fifteen  cars  at  a  time,  you  can  not  cut  it 
to   fourteen." 

At  page  1538  of  the  Proceedings,  Mr.  Joyce  describes  the  results  of  the  skip- 
stop  policy  in  Philadelphia,  as  follows : 

"The  skip-stop  was  installed  in  cooperation  with  the  Federal  Fuel  Administration,  in 
order  to  conserve  coal  by  reducing  the  number  of  stops,  upon  the  theory  that  the  electrical 
energy  consumed  in  the  acceleration  or  starting  of  a  car  is  greater  than  that  required  to  keep 
the  car  in   motion  after  having  gained   momentum. 

"The  application  of  the  skip-stop  plan  has  resulted  in  reducing  the  number  of  stops  in 
the  city  by  more  than  1,700  out  of  a  total  of  something  less  than  six  thousand.  It  is  difficult, 
if  not  impossible,  to  estimate  the  total  savings  from  this  plan,  but  a  definite  saving  of  more 
than  $100,000  in  payrolls  due  to  the  conservation  of  the  time  of  the  operating  crews,  and  a 
saving  of  $3(X),(X)0  per  annum  in  electrical  current  has  been  demonstrated  beyond  doubt.  By 
comparison  of  the  per-car-mile  cost  of  operation  for  a  calendar  month  before  the  skip-stop 
was  installed  with  the  same  cost  for  a  like  period  after  the  installation,  the  company's  engi- 
neers estimated  a  saving  of  1.7  cents  per  car  mile,  or  a  total  saving  of  $1,318,000  per  annum; 
and  they  estimated  an  ultimate  saving  of  approximately  $100,000  per  annum  additional  due 
to  releasing  equipment  from  service." 

Mr.  Beeler  laid  considerable  einphasis  on  the  location  of   the  car  stops  as 

aflfecting  speed.     At  page  1668  of  the  Proceedings,  he  says : 

"The  location  of  car  stops  is  of  prime  importance.  They  should  be  so  placed  that  a 
standing  car  will  not  interfere  with  other  cars  or  general  street  traffic,  and  where  lines  branch 
off  they  should  be  placed  so  as  not  to  block  the  ;iiain  line.  The  exact  location  of  each  stopping 
place  should  always  be  indicated  plainly  by  a  sign,  so  that  passengers  will  not  delay  the  car 
movement  unnecessarily  by  walking  to  the  car  after  it  has  stopped.  A  walk  of  a  car  length 
adds  in  excess  of  eight  seconds  to  the  regular  stopping  time,  reducing  the  car's  earnings 
proportionately." 

In  discussing  the  various  possible  ways  of  cooperation  between  the  public 
authorities  and  the  street  railways,  Mr.  Beeler  states  the  advantages  of  the  skip- 
stop  without  making  any  qualification  as  to  the  size  of  the  town.  At  page  1668 
of  the  Proceedings,  he  says : 

"Another  kind  of  team-work  is  the  application  of  the  skip-stop  by  which  the  practice 
of  stopping  at  every  street  intersection  is  abandoned  in   favor  of  spacing  the  stops    farther 


268  Electric  Railway  Problem 

apart  and  in  accordance  with  traffic  conditions.  Instead  of  imposing  a  hardship  on  the  public, 
the  decrease  in  the  number  of  stops  insures  a  quicker  journey  and  more  comfortable  riding. 
At  the  same  time  the  reduction  in  starts  and  stops  leads  to  a  considerable  saving  in  power. 
It  is  significant  that  one  of  the  first  steps  of  the  Fuel  Administration  was  to  urge  electric 
railways  to  install  the  skip-stop  wherever  practicable." 

Other  measures  of  cooperation  by  which  the  regularity  and  speed  of  street 
car  service  can  be  increased  are  suggested  by  Mr.  Beeler  at  pages  1668  and  1669 
of  the  Proceedings,  where  he  says : 

"First  and  by  far  the  most  important  step  is  to  secure  the  cooperation  of  the  local 
authorities  in  all  matters  pertaining  to  faster  operation  on  the  streets,  not  by  increasing  the 
maximum  speed,  but  by  reducing  delays  and  removing  causes  of  congestion  along  the  tracks. 

"Loading  platforms  should  be  placed  at  all  heavy  loading  and  unloading  points  where 
street  width  permits.  They  concentrate  passengers  at  the  proper  point  ready  for  quick 
loading,  reduce  the  height  of  the  step  into  the  car,  save  time,  i)rovide  a  safe,  comfortable 
place  for  the  patrons  to  stand,  prevent  accidents,  and  permit  the  general  street  traffic  to 
proceed  without  delay,  thus  mightily  relieving  congestion.  Few  people  would  guess  that 
the  humble  loading  platform  has  a  direct  tjearing  on  the  rate  of  fare,  but  by  enabling  the 
car  to  make  better  time  operating  e.xpenscs  are  kept  down.  Where  raised  platforms  are 
impossible  the  next  best  substitute  is  the  so-called  marked  .safety  zone;  but  for  efficiency, 
safety  and  comfort   it  does  not  begin  to  compare  with  the  loading  platform. 

"Traffic  officers  should  always  give  precedence  to  the  street  cars  over  all  other  classes  of 
traffic,  as  they  carry  twenty  to  one  by  all  other  means.  By  traffic  I  do  not  mean  fire  depart- 
ments or  police  patrols  or  ambulances,  but  general  traffic. 

"The  police  should  a.ssist  in  keeping  tracks  clear  from  trucks  and  other  vehicles.  The 
left-hand  turn  for  all  vehicles  should  be  prohibited  at  congested  intersections,  such  as  15th 
and  New  York  .-\vcnuc  in  Washington  or  42nd  .Street  and  5th  .Avenue  in  New  York.  The 
rule  of  one-way  traffic  on  narrow  and  congested  streets  should  he  enforced. 

"Parking  of  automobiles  should  he  regulated  so  that  traffic  will  not  be  forced  on  the  car 
tracks  or  otherwise  interfere  with  the  free  operation  of  the  street  cars  in  the  congested 
districts. 

"Double  berthing  of  street  cars  should  he  the  rule  in  all  congested  locations  so  as  to 
save  unnecessary  stops. 

"The  abolition  of  all  steam  railroad  grade  crossings  is  also  an  item  of  great  importance 
to  speed  and  safety." 

The  cost  of  power  to  the  street  railways  may  be  reduced  in  various  ways. 
The  effect  of  the  skip-stop  has  already  been  referred  to.  The  use  of  lighter 
equipment  will  be  discussed  later  on.  Other  possible  power  economies  are  dis- 
cussed by  Mr.  Beeler  at  page  1667,  where  be  says: 

"If  we  go  hack  to  the  power  stations,  frequently  it  is  found  that  they  are  generating 
power  at  a  higher  cost  than  if  the  electricity  for  a  locality  were  obtained  from  a  single  central 
generating  plant  that  provides  the  whole  community  with  power  and  light  as  well  as  the 
railway.  Hut  assuming  that  the  railway  is  generating  power,  this  branch  of  the  business 
presents  a    fertile   field   for  economies,  among   which   may   be   mentioned  the   following : 

"Con.solidation  of  power  plants,  shutting  down  less  efficient  ones   when  demand  permits. 

"Economies  in  central  station  generation,  including  both  the  steam  and  electrical  plant, 
handling  of  coal  and  ashes,  and  the  many  details  that  go  with  a  generating  plant. 

"Purchase  of  part  of  the  power  if  necessary. 

"Ixediirtion  of  di>;trihution  losses,  proper  feeder  system,  track  bonding  and  negative 
return,  autoniatic   substations,  etc. 

"Thermostat   regulation  to  cut  out  heat  automatically   in  crowded  and   overwarnied  cars. 

"Klimination  of  the  use  of  power  as  far  as  possible  in  shops  and  el.sewhere  during  the 
transportation  peak.     Keep  work  and   freight  cars  off  the  line  at  such  times. 

"A  great  field  for  saving  is  the  conservation  of  power  at  the  car  itself.  The  installation 
of  an  efficient  checking  device  will  reduce  excessive  power  consumption  to  a  minimum.  To 
my  pcrs<inal  knowledge  as  high  a  saving  as  25  per  cent  of  the  power  used  to  propel  the  cars 
was  effected  by  such  a  means.  ,\s  the  combined  fuel  bill  of  the  electric  railways  is  not  far 
from  SO  millions  of  dollars  annnnllv  a  20  per  cent  saving,  which  could  Ix-  obtained,  would 
release  a  large  amount  of   fuel  which  could  Ik-  diverted  to  other  essential  u.ses." 

In  relation  to  possible  .savings  in  the  generation  and  use  of  power,  Mr.  Wal- 
ter Jackson  says,  at  page  1593  of  the  Proceedings: 

"A  great  deal  has  been  done  in  making  our  power  plants  and  distributing  .systems 
efficient.     \ery   recently   there   has   come   the  automatic   substation   which   will   be   a   boon   to 


Operating  Economies  269 

interurban  railways  especially  in  cutting  down  the  cost  of  attendants,  in  saving  copper,  in 
giving  a  higher  voltage,  which  means  better  schedules,  so  that  we  may  say  that  in  the 
generating  and  distributing  end  electric  railways  are  very  efficient.  It  is  a  curious  fact, 
however,  that  in  the  use  of  that  power  electric  railways  are  not  as  efficient  as  they  might  be. 
Within  the  same  schedules  it  is  possible  for  motormen  to  show  a  variation  of  25  to  50  per 
cent  in  the  use  of  power.  There  is  no  way  of  making  the  motorman  efficient  in  the  use  of 
power  except  first  by  personal  instruction  and  then  by  the  use  of  some  instrument  that  will 
check  the  correct  use  of  energy  for  a  given  service.  Such  instruments  have  been  used  abroad 
for  a  period  of  some  fifteen  years,  and  1  would  say  that  in  Great  Britain  and  on  the  Continent 
the  majority  of  cars  have  been  equipped  with  devices  of  that  sort.  In  the  United  States  that 
development  has  come  later  and  today  we  find  that  not  more  than  20  per  cent  of  the  cars 
in  the  United  States  are  equipped  with  a  power  checking  device." 

It  is  noteworthy  that  Mr.  Beeler  puts  the  number  of  cars  equipped  with  a 
power  checking  device  at  not  over  five  per  cent  of  the  total. 

Mr.  Henry  G.  Bradlee,  of  Stone  &  Webster,  after  discussing  the  possible 
savings  in  the  cost  of  electric  railway  power  through  the  combination  of  street 
railway  and  lighting  plants  and  through  the  development  of  central  power  plants 
at  the  mines,  concluded  his  discussion  of  this  matter  with  the  following  statement, 
which  appears  at  page  224  of  the  Proceedings : 

"But  the  saving  in  power  will  not  go  very  far  in  the  street  railway  situation.  Power, 
after  all.  is  not  a  very  large  percentage  of  your  total  expense." 

One  of  the  great  economies  effected  in  Cleveland  and  Detroit  has  been  the 
use  of  trailers.  Discussing  the  fine  spirit  of  cooperation  between  the  city  author- 
ities and  the  street  railway  under  the  Tayler  plan  in  Cleveland,  Secretary  Baker, 
at  page  1033  of  the  Proceedings,  says : 

".\nother  conspicuous  illustration  of  it  was  the  reintroduction  of  the  trailer  car.  Cleve- 
land is  especially  adapted  to  the  use  of  trailer  cars,  and  of  course  it  cuts  the  expense  of 
operation  practically  in  half;  you  can  operate  a  car  and  a  trailer  for  one  and  a  half  times 
the  cost  of  operating  the  main  car,  and  the  car  itself  is  not  so  expensive.  There  was  a 
tremendous  objection  against  trailer  cars  all  over  the  United  States ;  they  were  characterized 
as  murderous  things.  And  yet  an  effective  and  safe  trailer  car  was  used  and  worked  with 
the  consent  of  the  city,  and  the  city  adopted  it  at  once." 

With  respect  to  the  advantages  that  would  result  from  the  standardization 
of  equipment,  Mr.  Beeler  speaks  with  great  emphasis  at  pages  1666  and  1667,  as 
follows : 

"Because  adequate  allowances  for  replacement  were  not  provided  from  earnings,  many 
electric  railways  operate  today  with  dingy,  dilapidated  equipment  that  actually  repels  custom. 
These  cars  are  usually  much  heavier  than  necessary.  They  pound  the  track  and  paving  to 
pieces,  while  their  excessive  demands  for  power  eat  up  the  coal  pile.  In  operating  such  cars 
an  indifferent  motorman  can  waste  readily  several  dollars  a  day  for  power  alone.  Yet  only 
5  per  cent  or  less  of  the  cars  in  the  United  States  are  equipped  with  devices  to  check  up  the 
motorman's  skill  and  assist  him  in  becoming  efficient.  The  older,  heavier  cars  are  costly 
to  run,  and  to  maintain.  They  must  be  replaced  by  far  lighter,  faster  and  more  accessible 
cars  with   full  automatic  equipment  before  the   full  degree  of  success  is  had. 

"Standardization  of  equipment  and  a  complete  change  in  manufacturing  methods  must 
come.  Cars  must  be  turned  out  ready  to  run  like  automobiles,  in  large  quantities,  and  at 
a  fraction  of  the  present  costs.  They  must  be  light  and  attractive.  Cross  seats  should  always 
be  employed,  as  comfort  is  a  prime  requisite,  and  to  sit  with  one's  feet  in  the  passageway 
with  nothing  to  look  at  but  a  jam  of  passengers  gives  the  patron  a  bad  impression  of  the 
management.  I  think  one  of  the  most  important  things  is  attractive,  economical  rolling  stock. 
******** 

"Two  or  three  car  types  will  be  sufficient  to  meet  the  varying  conditions  throughout  the 
country.  Car  trust  certificates  will  then  be  attractive  to  the  investor,  especially  when  he 
knows  that  the  car  has    full   value   on   other  lines. 

"\\'here  older  rolling  stock  is  in  use  it  should  be  segregated  by  types  and  the  service 
made  as  nearly  uniform  by  lines  or  districts  served  as  possible,  so  that  the  cars  will  not  nni 
hit-or-miss  in  heterogeneous  bunches.  The  motor  characteristics  and  speed  should  be  classi- 
fied with  care  and  cars  used  on  lines  where  they  best  fit  the  schedule  requirements. 


270  Electric  Railway  Problem 

"I  have  in  mind  an  actual  illustration  on  a  line  that  was  about  ten  miles  long  where  a 
dozen  different  types  of  cquipinent  were  used.  Some  of  the  cars  on  that  line  had  a  maximum 
speed  of  considcral)ly  over  30  miles  an  hour,  3i  or  35  miles  an  hour;  others  had  a  speed  of 
18  miles;  and  they  were  all  making  the  full  length  of  the  line,  so  you  can  imagine  what  kind 
of  schedule  economy  you  got  on  a  line  of  that  kind.  They  invariably  ran  in  bunches  with 
the  slower  car  leading  the  procession. 

"Often  a  change  in  the  gear  ratio  will  make  faster  schedules  possible.  .^11  equipment 
should  he  kept  clean  and  w^ell  painted,  brilliantly  lighted,  and  wear  an  inviting  look. 

"The  use  of  specially  constructed  light-weight  trailer  cars  in  rush  hours  and  other  periods 
of  heavy  traffic  has  proved  of  immense  value  in  augmenting  the  service  with  a  minimum  of 
expense.  Such  cars  will  aid  to  give  more  service  at  less  cost.  The  light  weight  saves 
power  and  wear  and  tear." 

Another  mode  of  eflfecting  economies  is  through  a  reduction  in  accident  ex- 
pense. The  striking  results  obtained  by  the  Philadelphia  Rapid  Transit  Company 
in  this  line  are  stated  by  Mr.  Joyce  at  page  1539,  as  follows: 

"For  the  eight  years  ending  1910,  that  is,  prior  to  the  Mitten  management.  6.08  per  cent 
of  the  gross  earnings  of  the  company  was  spent  for  accident  claims  and  as  a  result  of 
accidents,  and  there  was  an  unpaid  liability  not  estimated  involved  in  a  total  of  4.953  unsettled 
suits  at  December  31,  1910.  With  the  introduction  of  modern  equipment  and  the  equipping 
of  the  cars  with  every  known  safety  device  a  cru,sade  was  undertaken  to  reduce  the  number 
of  accidents  and  particularly  accidents  to  children.  A  special  bureau  was  created  under  the 
direction  of  a  capable  young  woman  who  soon  became  known  throughout  the  city  as  'Miss 
Safety  First.'  Both  school  authorities  and  the  Police  Department  rendered  cheerful  and 
enthusiastic  cooperation,  A  system  of  lectures  to  school  children  on  safety  devices  was 
devised  and  executed  and  more  than  100,(XX)  children  are  addressed  annually  on  safety.  This 
young  woman  goes  about  from  school  to  school,  assembles  the  children  in  their  assembly 
rooms  and  lectures  to  them  on  safety  precautions.  She  organizes  the  boys  into  safety-first 
scouts,  and  drills  them  so  that  at  the  letting  out  of  school  each  boy  in  that  scout  squad  knows 
a  certain  point  at  which  he  is  expected  to  station  himself  to  protect  his  fellow  school  children 
in  crossing  the   streets. 

"During  the  eight-year  period  of  this  management  the  accident  cost  was  reduced  from 
6.08  per  cent  in  1910  to  3.4  per  cent  of  gross  earnings  in  1918,  and  the  number  of  pending 
suits   was  decreased   from  4,953  to  2.S24  at   December  31,   1918. 

"This  reduction  in  accident  costs  represents  a  saving  of  $5,392,000.  While  the  police 
reports  for  1918  show  an  increase  of  1,980  street  accidents  over  1911.  the  records  of  the 
Philadelphia  Rapid  Transit  Company  shows  a  decrease  of  752  trolley  car  accidents  in  the 
same  period. 

"In  1911  there  was  one  accident  for  every  18,640  passengers  carried,  while  in  1918  the 
ratio  was  one  accident  to  every  41,622. 

"The  crusade  against  accidents  amongst  children  during  the  past  four  years  resulted  in 
a  showing  of  32  fewer  deaths  from  accident  to  children  as  compared  with  the  preceding 
four   years." 

At  pages  1539  and  1540  of  the  Proceedings,  Mr.  Joyce  explains  the  Phila- 
delphia Rapid  Transit  Company's  fire  insurance  policy,  by  which  large  savings 
are  now  being  efltected.     He  says: 

"Under  the  head  of  Fire  Insurance  I  have  a  memorandum  to  note  that  the  company  in 
1910  carried  $18,500,000  of  fire  insurance  at  a  premium  of  50  cents  ix-r  hundred.  Adequate 
and  efTective  inspection  has  reduced  this  cost  to  25  cents  per  hundred  and  in  this  way  a 
saving  of  $25,(KX)  per  anniun  net  after  paying  the  cost  of  inspection  was  accomplished  and 
many  collateral  iK'ncfits  derived  from  the  regular  and  careful  in.spection  of  the  property. 
I'rom  1911  to  1918  over  $<>00,000  was  (laid  in  premiums  to  insurance  companies,  and  the 
company   received   in  return   less  than  $60.0(X)   for   fire   losses. 

"At  December  31,  1918.  the  company  assumed  i3  per  cent  of  its  fire  risk  A  careful 
survey  of  the  property  demonstrated  that  the  greatest  possible  loss  that  could  be  sustained 
in  one  fire  would  not  exceed  $250,0(K1.  The  insurance  fund  discontinued  in  1910  to  aid  the 
company  in  meeting  obligations  has  been  reestablished  with  assets  of  over  a  million  dollars." 

In  response  to  questions  by  Commissioner  W'ehle,  Mr.  Joyce  stated  that  the 
subject  of  frcigln-carrying  by  street  railways  was  being  carefully  studied  by  the 
Philadelphia  Rapid  Transit  Company  as  a  possible  source  of  additional  revenue. 


Operating  Economies  271 

With  respect  to  other  methods  of   developing  revenues  or  effecting  economies, 
the  following  testimony  is  found  at  pages  1565  and  1566  of  the  Proceedings: 

"Commissioner  Wehle :  Are  there  any  other  sources  of  saving  or  of  effectualization  for 
the  Philadelphia  system  which  are  in  the  minds  of  the  management  and  which  it  is  the  inten- 
tion of  the  management  to  develop? 

"Mr.  Joyce :  They  are  almost  without  end,  Mr.  Commissioner.  We  have  a  corps  of 
men  who  do  nothing  else  but  study  the  probabilities  of  economies  and  coordination  to  the 
end  of  serving  the  public  better,  at  a  lower  cost,  rearrangement  of  schedules,  rearrangement 
even  of  the  offices,  rearrangement  of  the  departments,  the  location  of  the  offices  at  convenient 
points,  and  the  arrangement  of  the  machinery  in  our  shops,  the  arrangement  of  the  repair 
bays  in  our  barns;  and  all  of  those  things  and  many  others  that  I  cannot  enumerate  are  the 
subject  of  constant  study,  and  the  day  hardly  passes  that  something  new  is  not  done  in  the 
way   of  improvement. 

"We  have  just  recently,  by  a  rearrangement  of  the  offices  on  the  subway-elevated,  effected 
a  saving  of  time  of  twenty  people,  and  were  able  to  drop  that  many  people  from  the  payroll 
without  any  appreciable  change  in  the  service  to  the  public,  and  with,  in  many  cases,  an 
improvement  in  that  service. 

"Conditions  change  from  day  to  day,  and  a  schedule  of  duty  assignments  that  will  obtain 
today  may  not  fit  the  conditions  at  all  six  months  from  today.  The  time  of  reporting  on 
duty  and  off  duty  for  certain  people,  to  relieve  stress  at  certain  times,  such  as  we  have  in 
the  system  of  collection  of   fares  on  the   subway-elevated,  changes   from  year  to  year. 

"Commissioner  Wehle :  But  those  are  really  improvements  in  efficiency,  generally  speak- 
ing, are  they  not,  that  you  now  refer  to? 

"Mr.  Joyce :     Yes. 

"Commissioner  Wehle:     Efficiency  in  office  management  or  something  of  that  sort? 

"Mr.  Joyce :     Efficiency   in  management   in  the  broad  sense." 

Mr.  Beeler  ought  to  be  a  welcome  visitor  at  any  electric  railway  office.  He 
is  fertile  in  suggestions  for  economies.  In  addition  to  those  previously  discussed 
at  some  length,  he  mentions  at  page  1668  of  the  Proceedings,  the  following : 

"Considerable  might  be  said  on  the  methods  of  organization,  telephone  dispatching,  the 
operation  and  location  of  division  headquarters,  methods  of  accounting,  fare  collection  and 
registration,  use  and  abuse  of  transfers,  prepayment  areas,  reduction  of  non-productive  miles 
to  and  from  car  houses,  advantages  of  good  track,  spiraled  curves,  smooth  special  work, 
efifects  of  corrugation,  bad  joints,  poor  drainage,  excessive  use  of  sand,  methods  of  greasing 
curves,  accident  prevention,  and  scores  of  other  equally  important  items  all  having  a  direct 
influence   on   the   operations   and   expenses." 

Interstate  Commerce  Commissioner  Eastman  summarized  the  opportunities 
that  exist  for  improving  service  "in  ways  that  will  result  in  substantial  economy 
and  also  add  to  traffic  and  revenues."     At  page  2067  of  the  Proceedings,  he  says : 

"I  think  there  are  very  great  opportunities,  or  at  least  very  substantial  opportunities, 
which  exist  in  that  respect.  *  *  *  *  i  can  summarize  at  the  present  time,  simply  by  say- 
ing that  they  consist,  first,  of  means  of  conserving  labor  by  increasing  the  mileage  of  the  cars 
per  hour,  in  various  ways,  such  as  the  skip-stop  plan,  improved  motors,  better  acceleration 
and  deceleration,  decrease  in  the  number  of  layovers,  and  all  those  various  means  of  making 
the  car  do  more  work  in  a  given  hour,  and  thus  conserving  labor. 

"Second,  by  the  introduction  of  trailers,  which  are  really  one-man  cars,  and  conserve 
labor  in  that  way;  by  the  introduction  of  one-man  cars  of  proper  type,  which  we  laid  a  great 
deal  of  emphasis  upon  in  the  Public  Service  Commission  of  Massachusetts ;  and  by  properly 
located  and  equipped  car  houses  and  shops.  Those  are  all  means  of  conserving  labor.  Then 
you  have  means  of  conserving  power,  by  lighter  cars,  by  adequate  feeders  and  by  various 
power-measuring  devices,  which  help  the  motorman  to  use  power  more  economically. 

"Then  you  have  means  of  conserving  property,  and  these,  I  think,  are  very  important, 
by  proper  maintenance  of  tracks  and  cars.  So  long  as  you  have  properties  where  the  cars 
are  bumping  along  over  poor  joints  and  poor  rail,  and  where  the  cars  themselves  are  in  poor 
condition,  you  not  only  increase  the  expense  of  operation  and  the  necessity  for  repairs,  but, 
at  the  same  time,  you  decrease  the  respect  for  property  on  the  part  of  the  public.  Nobody 
can  be  very  friendly  to  a  property  which  is  giving  poor  service  and  does  not  look  as  though 
it  were  in  good  condition:  that  looks  as  though  it  were  nearing  the  end  of  its  existence. 

"In  the  final  place,  there  are  means  of  conserving  revenue,  such  as  various  fare  regis- 
tration devices,   fare  boxes  and  reduction  in  the  misuse  of  transfers." 


272  Electric  Railway  Problem 

This  brings  us  squarely  to  the  matter  of  the  possible  revolution  in  operating 
methods  that  would  result  from  the  general  adoption  of  the  one-man  safety  car, 
and  the  more  radical  revolution  suggested  by  Henry  Ford's  proposed  change  in 
street  railway  motive  power  from  electricity  to  gasoline  or  alcohol. 

Mr.  Charles  W.  Kellogg,  of  the  Stone  and  Webster  organization  and  Chair- 
man of  the  Committee  on  One-Man  Car  Operation  of  the  American  Electric 
Railway  Transportation  and  Traffic  Association,  described  to  the  Commission  the 
characteristics  and  advantages  of  the  one-man  safety  car.  His  testimony  is 
found  at  pages  730  to  750  of  the  Proceedings,  where  he  gives  in  considerable  detail 
the  results  of  the  investigation  conducted  by  the  committee  through  question- 
naires sent  out  to  the  companies  known  to  be  operating  one-man  cars,  either  of 
the  modern  safety  type  or  of  the  made-over  type.  The  results  of  this  investiga- 
tion were  also  embodied  in  a  report  presented  by  the  conmiittee  at  the  Atlantic 
City  Convention  of  the  Aniericaii  Electric  Railway  .Association  in  October,  1919, 
copies  of  which  were  filed  with  the  Commission.'  Mr.  Kellogg's  testimony 
starts  off  with  what  seems  like  a  very  severe  indictment  of  the  management  of  the 
entire  electric  railway  industry  duriiig  the  period  of  ten  years  or  so  immediately 
preceding  the  war.  It  might  be  paraphrased  and  condensed  into  this  three-word 
sentence:  "Monopoly  fell  asleep."  At  pages  730  and  731  of  the  Proceedings, 
Mr.  Kellogg  says: 

".\boiit  ten  or  fifteen  years  ago.  or,  perhaps,  as  long  as  fifteen  years  ago.  there  was 
a  perfect  mania  among  street   railway  companies    for  heavy   street  cars,   Pullman  cars. 

"The  Chairman:     Why? 

"Mr.  Kc'lIoKg:  It  was  felt  that  they  were  more  dignified;  they  rode  smoother  on  rela- 
tively poor  track,  and  therefore  would  attract  traffic;  and  anyone  who  has  studied  the  situation 
and  remembers  the  conditions  in  those  days  will  know  that  even  a  small  town  that  did  not 
have  large,  heavy  douhle-truck  cars   was  considered   rather  out  of  the   running. 

"It  was  not  until  after  all  of  the  city  systems  were  equipped  with  these  very  heavy  cars, 
weighing  around  50,000  iwunds — some  of  them  even  heavier — that  the  industr)-  woke  up  to 
the  fact  that  an  enormous  umiecessary  weight  was  being  dragged  around  the  streets,  that  they 
meant  excessive  investment,  a  corresponding  heavy  track,  and  an  expensive  construction  to 
carry  these  big  cars.  It  meant  correspondingly  more  power  station  capacity  to  move  them, 
inchirling  in  that  also  substations,  cables,  etc..  and  correspondingly  higher  maintenance  costs, 
both  of  the  cars  themselves  and  for  the  track  they  ran  over  to  keep  the  service  .going. 

"The  Chairman ;  Would  you  say  that  these  large  cars  were  urged  by  the  car  manufac- 
turers? 

"Mr.  Kellogg:  I  should  say  not.  although  I  am  not  able  to  pass  on  that  point.  At  all 
events,  the  street   railways  were   willing  customers. 

"It  was  not  until  after  this  effect  had  occurred — I  think  that  is  a  fair  statement — until 
it  had  practically   fully  occurre<l.  that  the  results  were  realized  by  the  industry.'' 

Mr.  Kellogg's  committee  inits  the  case  somewhat  more  mildly  in  the  intro- 
ductory paragraphs  of  its  report,  where  it  describes  the  origin  and  developtnent 
of  the  modern  one-man  safety  car,  as  follows: 

"The  operation  of  street  cars  by  one  trainman  in  small  communities  where  small  gross 
per  car  mile  demanded  the  utmost  economy  in  operating  expenses,  is  not  a  new  idea  in  the 
.street  railway  business,  the  practice  having  been  followed  for  years  by  manv  of  the  smaller 
companies;  but  the  modern  light  safety  car  represents  a  radical  improvement  in  the  whole 
art  of  urtan  (rans|H>rtation  and,  therefore,  will  Ixr  the  principal  topic  discussed  in  our  report. 

"It  is  interesting  to  consider  the  evolution  of  the  safety  car.  Some  years  ago,  when  a 
franchise  providing  a  .S-ceiit  fare  was  considered  an  important  asset  of  a  street  railway  com- 
|)any,  heavy  cars  were  deemed  necessary  for  city  service.  It  was  felt  that  a  heavy  car  rode 
more  smo<ithly  and  would  allract  patronage  correspondingly,  so  that  car  weights  of  50,000 
to  S5,(XX)  lbs.  and  even  heavier  were  the  rule  rather  than  the  exception  for  up-to-date  city 
systems.  These  heavy  cars  recjuired,  of  course,  a  corresponding  investment  in  massive  track 
construction  to  carry  them  and  in  power  stations  and  subst.itions  to  move  them,  antj  a  corre- 


Operating  Economies  273 

spending  operating  cost  for  track  and  car  maintenance  and  fuel  to  keep  them  in  service. 
Troubles  have  come  thick  and  fast  since  then.  First,  the  waning  popularity  of  the  street  car, 
due  to  the  fast  multiplying  automobile  (recent  figures  show  that  there  are  today  in  this 
country  75  automobiles  for  every  street  car)  and  second,  five  years  ago.  the  jitney  competi- 
tion, followed,  due  to  the  war,  by  the  sharp  rise  in  prices  of  labor  and  material. 

"The  jitney  was  what  produced  the  Light  Safety  Car.  The  popularity  of  the  jitney 
proved  beyond  a  possibility  of  doubt  that  frequent,  quick  service  would  get  passenger  business 
away  from  the  slow  and  infrequent  street  car,  and  it  was  up  to  the  street  railway  industry 
to  develop  light  cars  that  would  simulate  jitney  service.  Following  this  idea.  Mr.  Charles  O. 
Birney  designed  the  car  that  now  bears  his  name.  It  was  realized  that  the  car  must  be  light 
in  order  to  accelerate  quickly  and  that  it  must  be  operated  with  one  man  in  order  to  compete 
with  the  jitney  which  was  similarly  manned.  The  safety  devices  followed  from  the  realiza- 
tion that  the  public  would  not  patronize  the  car  unless  it  was  convinced  that  it  took  no  more 
chances  of  doing  so  than  with  the  two-man  car. 

"The  design  of  the  new  car,  weighing  only  15,500  pounds  and  seating  32  people,  had 
to  be  from  the  bottom  up — wheels,  axles,  truck,  body  and  motors  were  all  radical  departures 
from  previous  practice  and  the  automatic  safety  features  alone  were  a  triumph  of  adaptation 
to  the  compelling  forces  w-hich  led  to  the  development  of  the  new  car.  These  safety  devices 
consisted,  in  general,  of  ways  to  make  the  operation  safe  in  case  the  operator  dropped  dead, 
or  slackened  in  attention.  The  'dead  man's  handle'  required  that  the  operator  have  his  hand 
constantly  on  the  controller  or  it  would  throw  the  power  off.  Similarly,  if  the  power  were 
so  thrown  off,  the  brakes  were  automatically  applied  and  sand  fed  to  the  track,  and,  when 
the  car  came  to  a  stop,  the  doors,  previously  held  securely  closed  by  air  pressure,  are  made 
available   for  manual  operation  to  form  emergency  exits  if  desired." 

From  the  above  it  may  be  gathered  that  the  purpose  of  the  one-man  safety 
car  is  to  reduce  the  cost  of  service  and  to  make  possible  an  increase  in  the  amount 
of  service  where  there  is  enough  potential  trafific  to  make  additional  service  pay. 
In  brief,  the  safety  car  attacks  the  street  railway  problem  at  both  ends — by  reduc- 
ing cost  and  by  developing  trafific.  This  car  suggests  great  possibilities ;  but  as  a 
potential  remedy  for  the  existing  troubles  of  the  electric  railway  industry  it  will 
have  to  pass  certain  tests.  First,  from  the  point  of  view  of  the  service  now  being 
rendered  by  the  electric  railways,  can  the  one-man  car  do  the  entire  job  every- 
where and  under  all  conditions?  If  not,  can  it,  either  as  the  principal  type  of 
street  railway  equipment  or  as  an  auxiliary  type,  do  the  job  under  all  those  con- 
ditions where  street  railway  service  is  necessary  but  is  now  being  operated  at  a 
loss?  Second,  if  the  one-man  safety  car  is  capable  of  furnishing  the  service, 
either  universally  or  in  all  places  where  the  service  is  now  unprofitable,  what  re- 
duction can  it  effect  in  the  cost  of  the  service?  Third,  if  this  car  is  capable  of 
furnishing  the  required  service,  what  can  it  do  in  stimulating  traffic  and  in- 
creasing the  gross  revenues  of  the  street  railways?  Fourth,  if  the  one-man 
safety  car  does  not  offer  a  complete  and  universal  remedy  for  the  present  dif- 
ficulties of  the  electric  railway  industry  where  a  remedy  is  needed,  how  will  it  fit 
in  with  other  proposed  remedies  to  be  applied  at  the  same  time? 

Can  the  one-man  safety  car  do  the  entire  job?  Obviously,  it  cannot  do  the 
work  of  elevated  and  subway  lines  where  extreme  density  of  traffic  makes  rapid 
transit  train  operation  necessary.  Therefore,  to  begin  with,  we  have  to  restrict  the 
use  of  the  new  car  as  a  remedy  to  the  surface  lines.  Furthermore,  it  does  not 
appear  that  this  car  is  adapted  to  high  speed  interurban  transportation.  While 
it  may  be  used  for  service  between  adjacent  urban  communities,  a  single-truck 
car  cannot  well  be  operated  at  the  high  speed  usually  attained  by  a  "regular  inter- 
urban" which  Mr.  Kellogg  describes  at  page  746  of  the  Proceedings,  as  follows: 

"An  interurban  generally  means  a  pretty  high-class  road  with  a  private  right  of  way, 
good  track,  well-ballasted  and  high-speed  cars,  very  different   from  city  service." 


274  Electric  Railway  Problem 

It  seems  clear  that  the  one-man  safety  car  is  adapted  for  "city"'  rather  than 
"interurban"  service,  as  described  by  Mr.  Kellogg.  Furthermore,  there  is  still 
considerable  uncertainty  as  to  the  adaptability  of  the  one-man  safety  car  for 
exclusive  service  in  the  congested  streets  of  a  great  city,  particularly  where  the 
traffic  load  is  heavy.  For  example,  General  Tripp,  Chairman  of  the  Committee 
of  One  Hundred  of  the  American  Electric  Railway  Association,  after  stating  that 
he  did  not  look  for  the  cutting  down  of  the  cost  of  service  to  any  great  extent, 
was  asked  what  he  thought  about  the  adaptability  of  the  one-man  car  for  opera- 
tion on  the  New  York  City  surface  lines.  His  testimony  on  this  point  is  found 
at  pages  170  and  171  of  the  Proceedings,  as  follows: 

"Commissioner  Meeker:  In  refiard  to  the  New  York  City  situation,  would  it  be  at  all 
feasible,  do  you  think,  to  adopt  perhaps  the  one-man  car  for  the  surface  lities,  some  of  the 
surface  lines  that  are  competing   with   the  long-haul   subway   and  elevated   lines? 

"Mr,  Tripp:  1  should  think  in  New  York  City  it  would  be  about  the  worst  place  that 
you  could  operate  a  one-man  car.  .At  rush  hours  a  one-man  car  simply  could  not  handle 
some  of  the  traffic,  particularly  on  the  downtown  crosstown  lines  leading  to  Brooklyn  Bridge 
and  to  the  various   ferries  and  Hudson  tubes. 

"Commissioner  Meeker:  Pardon  mc.  may  I  interrupt  there?  I  was  speaking  of  the 
lines  that  are  running  in  competition  with  the  elevated  and  the  subway  lines,  the  north  and 
south  lines  in  general,  and  may  1  add  here,  would  it  he  possible  to  run  them  at  frequent 
enougli  intervals  merely  for  local  traffic  under  a  zone  system  .so  that  it  might  relieve  the 
elevated  and  subway  lines  and  might  perhaps  contribute  towards  the  solution  of  the  trans- 
portation problem? 

"Mr.  Tripp:  My  judgment  would  he  that  it  would  not,  generally  speaking.  The  cars 
are  already  operated  on  the  principal  longitudinal  lines  about  as  closely  as  they  ought  to  run 
in  rush  hours  and  they  could  not  get  them  any  closer.  .And,  of  course,  a  car  that  seats  forty 
or  fifty  people  will  carry  more  than  a  one-man  car." 

Further  on,  at  page  171  of  the  Proceedings,  General  Tripp  continues  his  tes- 
timony with  respect  to  the  one-man  car : 

"A  one-man  car  under  my  theory  should  be  considered  only  from  the  standpoint  of  its 
economy,  looked  at  from  the  standpoint  of  the  public.  Will  it  properly  serve  the  public,  is 
it  all  they  rc(|uire.  and  if  it  is  a  satisfactory  ser\Mce  it  is  a  cheaper  service  and  the  public 
ought  to  get  its  service  as  cheap  as  it  can.  But  it  is  not  a  cure,  nor  is  it  fundamentally  proper 
to  attempt  as  a  step  in  the  solution  of  this  problem  to  force  a  one-man  car  into  a  situation 
that  economically  requires  a  larger  car.  It  is  forcing  an  economy  at  the  expense  of  the  public, 
because  the  whole  situation  is  set  up  on  an  erroneous   foundation." 

Nevertheless,  two  hundred  of  the  one-man  safety  cars  have  recently  been 
put  in  use  on  the  surface  lines  of  Brooklyn,  antl  it  seems  to  be  the  general  con- 
sensus of  opinion  among  the  advocates  of  the  safety  car  that  it  is  adapted  to 
much  heavier  traffic  lines  than  was  at  first  supposed.  The  evidence  shows  that 
these  cars  have  been  used  successfully  on  heavy  traffic  lines  in  Dallas,  Houston, 
Fort  Worth,  Bridgeport,  Seattle  and  Kansas  City,  Mo.  However,  it  is  still  un- 
doubtedly the  prevailing  opinion  that  the  one-man  safety  car  is  less  well  adapted 
than  existing  equipment  to  traffic  conditions  such  as  f>revail  on  the  principal  car 
lines  of  cities  like  Cleveland  and  Detroit  where  trailers  have  proven  their  value. 

A  kindred  problem  presents  itself  in  the  matter  of  the  adaptability  of  the 
one-man  safety  car  to  rush  hour  and  peak  load  service.  Obviously,  where  the 
existing  equipment  of  the  large  type  is  loaded  to  capacity,  the  smaller  safety  cars 
could  not  handle  the  traffic  on  the  same  schedules:  and  if  at  the  present  time  as 
many  large  cars  are  being  moved  during  the  rush  hours  as  the  tracks  will  accommo- 
date, the  smaller  safety  cars  would  be  less  well  adapted  to  the  service  than  is  the 
present  equipment.     Mr.   Kellogg,  in  his  testimony,   suggested  that   where  the 


Operating  Economies  275 

traffic  is  too  heavy  over  the  peak  for  the  Birney  cars,  the  old  heavy  cars  can  be 
brought  out  and  operated  as  auxiliaries  to  the  safety  equipment.  Wherever  this 
is  necessary,  it  means  that  a  negative  answer  must  be  given  to  the  question  here 
under  discussion,  namely,  can  the  safety  car  do  the  entire  job? 

Another  question  with  respect  to  the  adaptability  of  the  small  safety  cars 
applies  to  the  conditions  of  ice  and  snow  that  often  prevail  during  short  periods 
of  the  winter  in  most  northern  cities.  Here,  again,  Mr.  Kellogg  suggested  that 
the  heavier  two-man  equipment  might  be  called  out  in  an  emergency  to  fight  the 
adverse  weather  conditions,  but  it  is  clear  that  if  a  street  railway  company  has 
to  keep  a  complete  complement  of  heavy  two-man  cars  on  hand  to  take  the  place 
of  the  Birney  cars  during  snow  storms  or  during  the  rush  hours,  this  involves  a 
tremendous  offset  to  any  possible  advantages  derived  from  the  use  of  the  Birney 
cars  at  other  times.  Mr.  Kellogg  freely  admits,  at  page  744  of  the  Proceedings, 
in  answer  to  questions  from  Commissioner  Sweet,  that  the  Birney  car  is  better 
adapted  to  the  cities  in  the  southern  part  of  the  country  and  on  the  Pacific  coast 
where  there  is  verj-  little  snow,  than  to  cities  in  the  extreme  north;  but,  if  neces- 
sary, the  snow-fighting  can  be  done  by  special  snow-fighting  equipment.  He  also 
admits  that  a  great  deal  more  time  must  elapse  before  a  real  test  of  these  one-man 
safety  cars  can  be  made.  At  pages  744  and  745  of  the  Proceedings,  the  follow- 
ing questions  and  answers  appear: 

"Commissioner  Sweet :  Before  a  real  test  can  be  made  of  these  cars,  don't  you  think 
that  a  great  deal  more  time  must  elapse  so  that  the  public  taste  with  regard  to  the  matter 
may  be  better  determined? 

"Mr.  Kellogg :     That  is  perfectly  true.     It  is  a  new  thing. 

"Commissioner  Sweet :  So  that  it  would  be  stretching  the  point  somewhat,  do  you  not 
think,  for  the  Commission  to  make  any  particular  recommendation  with  regard  to  these  cars? 

"Mr.  Kellogg :  Oh.  I  think  for  the  Commission  to  hang  anything  definite  on  as  relatively 
new  a  proposition  as  this,  especially  with  its  limited  application,  would  be  very  dangerous." 

Further  on,  however,  in  response  to  questions  by  Chairman  Elinquist,  Mr. 
Kellogg  reiterated  his  belief  that  the  safety  car  has  important  benefits  for  the 
public,  for  the  companies  and  for  the  trainmen.  After  this  the  following  testi- 
mony appears  at  page  748  of  the  Proceedings : 

"The  Chairman  :  That  being  so,  why  is  it  not  a  very  good  thing  to  advocate  the  use 
of  the  one-man  car  just   as   much   as    possible? 

"Mr.   Kellogg:     I   think  it  is  a  good  thing. 

•        "The  Chairman:     If  it  is  a  good  thing  for  the  companies  as  well  as  for  the  public 

I        "Mr.   Kellogg:     And   for  the  trainmen. 

"The  Chairman :  .-^nd  for  the  trainmen,  why  should  it  not  be  a  good  thing  for  this 
Commission   to   advocate   the   use   of   such   a   car? 

"Mr.  Kellogg :     I  think  they  should  advocate  it  wherever  it  can  be  used  to  advantage." 

Still  further  on,  after  stating  that  a  number  of  companies  might  be  finan- 
cially able  to  buy  the  new  equipment,  but  that  "most  street  car  companies  are 
nearly  broke  now,"  Mr.  Kellogg,  at  page  749  of  the  Proceedings,  testifies  as 
follows : 

"The  Chairman:  Is  it  not  true  that  these  replacements  must  be  very  gradual  if  at  all, 
on  account   of  the   financial   condition   of   the  companies? 

"Mr.  Kellogg:  Yes,  and  even  if  they  had  the  money  they  would  have  to  go  at  it  gently, 
one  line  at  a   time. 

"The  Chairman:  Then  the  one-man  car  is  not  an  expedient  that  can  remedy  the  present 
situation  ? 

"Mr.  Kellogg:  No.  As  I  said  this  afternoon,  it  is  not  a  panacea,  it  is  not  something 
that  you  simply  fill  in  a  blank  check  and  say  that  is  all  there  is  to  it.  It  is  a  great  help  in 
some  cases." 


276  Electric  Railway  Problem 

Mr.  C.  I..  S.  Tinglcy,  of  the  American  Railways  Company,  raised  a  doubt  as 
to  the  adaptability  of  the  one-man  car  to  operation  on  heavy  grades,  but  this 
point  was  not  touched  upon  by  Mr.  Kellogg  in  his  testimony,  or  by  Mr.  Kellogg's 
Committee  in  its  report.  With  respect  to  operation  at  grade  crossings,  the  Com- 
mittee made  particular  inquiry  with  results  which  are  stated  by  Mr.  Kellogg  at 
page  739  of  the  Proceedings,  as  follows : 

"One  point  we  asked  particularly  about  wa.s  that  of  flagging  railroad  crossings.  You 
gentlemen  of  course  realize  that  it  has  lieen  the  practice  from  time  immemorial  in  the  street 
railway  business  when  a  street  car  approaches  a  railroad  crossing  for  the  conductor,  after 
the  car  has  been  stopped,  to  get  off  and  go  ahead  of  the  car  onto  the  crossing,  look  up  and 
down  the  track  and  signal  the  car  to  come  across.  With  the  Birney  car  that  practice  is 
impossible,  in  fact  it  would  be  dangerous  for  the  trainman  to  leave  the  car  and  go  onto  the 
railroad  crossing.  So  the  meth(xl  of  flagging  is  simply  to  stop  the  car.  for  the  operator  to 
look  up  and  down  the  track  and  if  all  is  clear  to  proceed.  There  is  some  difference  of  opinion 
as  to  the  safety  of  that.  Personally.  I  do  not  think  with  a  normal  railroad  crossing  where 
the  view  is  unobstructed  that  that  method  of  flagging  is  any  more  dangerous  than  the  old- 
fashioned  method.  But  wherever  a  complicated  set  of  tracks  are  crossed  it  is  nccesi>ar>-  with 
the  Birney  cars  to  maintain  a  flagman  who  can  actually  be  there  at  all  times.  Of  course, 
to  such  an  extent,  whatever  that  amounts  to,  it  tends  to  oflfsct  the  saving  in  expense  in  the 
use  of  these  cars." 

From  the  discussion  thus  far  it  is  perfectly  clear  that  the  one-man  safety  car 
cannot  perfomi  all  the  work  of  local  transportation  now  required  of  the  electric 
railways.  This  is  true  even  if  we  exclude  rapid  transit  and  interurban  service. 
Mr.  KeIlogg"s  Committee  in  its  report  stated  that  the  number  of  light  safety  cars 
in  operation  up  to  October,  1919,  was  about  1100,  and  that  600  more  were  under 
order  and  in  process  of  manufacture.  In  addition  to  these,  about  900  other  one- 
man  cars  of  different  types  were  at  that  time  in  use  in  the  United  States.  In  the 
issue  of  April  10.  1920,  the  Electric  Railway  Journal  places  the  number  of  safety 
cars  to  be  built  during  the  year  1920  at  from  .^,000  to  4.000.  The  number  ordered 
during  Januar>'  and  February  was  545.  Mr.  Homer  luring.  Chairman  of  the 
Board  of  Public  Trustees  operating  the  Eastern  Massachusetts  .Street  Railway 
Company,  told  the  Commission  that  200  of  the  safety  cars  had  been  ordered  for 
the  Bay  -State  lines,  the  first  of  the  cars  to  be  delivered  in  October.  With  respect 
to  them  he  says  at  page  1650: 

"We  hope  to  save  some  operating  expense;  but  much  oftener  we  hope  to  increase  our 
fret|uency  of  service  and  give  better  service  at  the  same  expense.  That  is  what  we  are  really 
hoping  to  gain." 

In  a  letter  dated  March  15,  1920.  Mr.  Loriiig  states  that  about  100  of  the 
safety  cars  have  been  delivered,  but  that  "none  have  been  put  in  operation  because 
of  the  very  bad  track  conditions,  due  to  snow  and  ice." 

While  it  is  not  possible,  from  the  testimony  and  the  data  submitted  to  the 
Commission,  to  determine  what  proportion  of  all  electric  railway  service  the 
Birney  car  could  be  depended  on  to  sujiply  successfully,  the  evidence  shows  great 
advantages  to  be  derived  from  the  use  of  this  car  under  favorable  conditions. 
The  possible  savings  to  be  effected  apply  principally  to  platform  c.\])ense.  power 
consumi)tion.  accident  ex])ense.  car  and  track  maintenance,  and.  ultimately,  the 
capital  account.  Platform  expense  is  saved  in  two  ways:  first,  by  the  elimination 
of  the  conductor,  and  second,  by  the  speeding  up  of  the  cars.  It  is  customary  to 
pay  the  ojicrator  of  a  one-man  car  a  higher  wage  than  is  paid  to  either  the  motor- 


Operating  Economies  277 

man  or  the  conductor  of  a  two-man  car.  The  difference  averages  about  ten  per 
cent,  ranging  all  the  way  from  one  cent  to  ten  cents  per  hour.  The  operator  of 
a  one-man  car  is  a  busy  man,  and  needs  to  combine  the  qualifications  of  motor- 
man  and  conductor.  Mr.  Kellogg's  committee  found  that  on  the  average  the 
differential  in  his  favor  was  about  four  cents  an  hour ;  but  in  my  opinion,  the 
ultimate  differential  will  probably  be  much  larger — perhaps,  as  much  as  ten  cents 
per  hour.  The  average  speed  of  the  safety  car  appears  to  be  from  ten  to  twenty- 
five  per  cent  greater  than  the  speed  of  the  heavy  two-man  equipment.  This  re- 
sults in  a  better  utilization  of  labor,  which  tends  to  offset  the  effect  of  the  higher 
wage  rate  so  as  to  bring  the  saving  in  platform  expense,  on  a  car-hour  basis,  back 
to  the  full  SO  per  cent  that  would  be  expected  from  a  reduction  of  one-half  in  the 
number  of  employes.  The  greater  average  speed  attained  by  the  safety  cars  is 
accounted  for  by  faster  acceleration  in  starting  and  faster  deceleration  in  stopping 
and  perhaps  to  a  slight  degree  by  the  fewer  stops  resulting  from  the  smaller  aver- 
age passenger  load. 

The  power  saving  results  from  the  light  weight  of  the  car,  and  averages 
about  50  per  cent.  The  saving  in  accidents  is  less  uniform,  but  is  due,  where  it 
occurs,  to  the  safety  appliances  from  which  the  safety  car  gets  its  name.  It  is 
believed  that  a  considerable  saving  in  car  maintenance  per  car  mile  will  be  a  per- 
manent result  of  the  use  of  the  lighter  equipment,  but  the  safety  car  is  still  new 
and  its  many  devices  have  not  yet  had  time  to  get  out  of  repair.  With  respect 
to  track  maintenance,  there  is  even  better  reason  to  expect  a  saving  as  the  result 
of  the  use  of  light-weight  cars,  particularly  in  those  cases  where  this  type  of 
equipment  is  used  exclusively.  After  a  while,  the  effect  will  undoubtedlj'  be  seen 
in  the  capital  account,  as  the  light  cars  will  permit  of  lighter  track  construction 
and  reduced  power  plant  capacity.  Moreover,  the  cars  themselves  represent  a 
much  smaller  capital  investment  per  seat  than  the  big  two-man  cars  do.  It  will 
take  a  good  while,  undoubtedly,  to  work  oft'  the  obsolete  investment  due  to  the 
big-car  policy  of  the  past,  but  once  that  is  done  the  total  investment  necessary 
on  a  system  completely  equipped  with  light  one-man  safety  cars  will  be  much 
less  than  has  been  found  necessary  where  the  heavy  cars  are  used. 

It  can  readily  be  seen  that  the  economies  normally  resulting  from  the  use 
of  the  light  one-man  safety  cars,  if  they  could  be  realized  to  the  full  extent  with- 
out a  diminution  of  gross  earnings  per  car  mile,  might  easily  make  all  the  dif- 
erence  between  bankruptcy  and  prosperity  in  the  street  railway  business.  Unfor- 
tunately, there  is  the  peak  load  of  the  rush  hours  which  usually  taxes  the  old-type 
cars,  no  matter  how  big  they  are,  to  their  capacity.  As  a  rule,  the  rush-hour 
service  cannot  be  cut  down,  which  means  that,  if  smaller  cars  are  used,  it  will 
be  necessary  to  run  more  of  them  to  take  care  of  the  peak.  However,  it  does  not 
mean  that  the  car  miles  run  must  be  doubled,  as  the  capacity  of  the  safety  cars 
is  much  more  than  half  the  capacity  of  the  two-men  cars  in  most  cases.  So  far 
as  seats  are  concerned  the  ratio  will  generally  be  as  32  is  to  42  or  to  44,  though  in 
some  cases  the  seating  capacity  of  the  old  cars  runs  considerably  higher.  If  more 
of  the  small  cars  are  required  for  the  rush  hour,  the  saving  in  operating  expenses 


278  Electric  Railway  Problem 

is  greatly  reduced  even  though  the  extra  number  of  small  cars  is  not  run  during 
the  rest  of  the  day.  This  is  the  "fly  in  the  ointment"  from  the  point  of  view  of 
operating  economies.  But  here  comes  in  the  opportunity  to  increase  revenues  by 
increasing  service.  The  safety  car  is  said  to  have  been  invented  to  meet  the  com- 
petition of  the  jitney.  Therefore,  it  is  logical  that  the  larger  number  of  units 
required  to  handle  the  peak  load  of  traffic  should  be  operated  throughout  the  day 
for  the  purpose  of  furnishing  better  service  and  stimulating  traffic.  In  fact,  the 
car  is  often  called  the  "frequent-service"  car  in  order  to  emphasize  its  advantages 
to  the  public.  Mr.  Kellogg  explains,  at  pages  Thl  and  71i^  of  the  Proceedings, 
the  financial  results  of  safety  car  operation  under  conditions  that  are  just  right. 
He  says: 

"Now,  on  the  matter  of  earnings,  of  course  these  reports  on  earnings  refer  to  the  most 
successful  lines  where  the  conditions  were  exactly  right  ior  the  use  of  these  cars,  and  the 
most  successful  lines  showed  a  slight  decrease  in  gross  iier  car  mile,  from  21.11  cents  to  20.65 
cents,  with  this  increase  in  car  miles  operated  of  53.4  per  cent  and  an  increase  in  gross 
earnings  of  51  per  cent.  In  other  words,  where  the  conditions  are  just  right  for  the  use  of 
these  cars  their  benefit  comes  from  taking  the  saving  in  operating  e.\pense,  that  is  in  power 
and  platform  time,  and   spending   that   money  on  additional   service. 

"Now,  I  want  to  explain  right  here,  so  that  the  Commission  will  realize  the  limitations 
of  this  Bimey  car,  that  tlic  only  place  where  it  can  accomplish  its  best  results  is  where  the 
schedule  initially  is  such  that  more  people  will  ride  if  cars  come  more  frequently.  *  *  *  • 
Now,  the  other  cases  would  Ik;  a  very  light  traffic  in  a  small  city  where  if  you  had  a  car 
every  30  seconds  you  would  get  no  more  people,  because  no  more  are  there  to  ride — there  the 
car  would  save  nothing  but  platform  expense  and  fuel — or  in  a  very  dense  traffic  where  cars 
were  frequent  enough  to  be  in  sight,  you  might  say,  most  of  the  time.  The  Birncy  car  would 
add  nothing  there  to  the  amount  of  traffic.  So  its  most  useful  field  is  in  cases  where  the 
traffic  on  a  line  can  Ik?  increased  if  the  frequency  is  furnished,  and  that  represents  the  maximum 
effective  use  of  these  cars." 

Based  upon  these  returns  from  the  six  companies  which  had  been  most  suc- 
cessful in  the  use  of  the  safety  cars,  Mr.  Kellogg"s  committee  in  its  report  worked 
out  a  mathematical  demonstration  calculated  to  make  cheerful  reading  for  street 
railway  managers  looking  for  some  solution  of  their  troubles  Other  than  higher 
fares  or  public  subsidies.     The  committee  says : 

"In  order  to  indicate  clearly  the  effect  to  l)e  expected,  from  the  results  already  actually 
obtained  by  street  railway  companies,  from  the  use  of  safety  cars,  the  following  typical 
example  has  been  worked  out." 

The  committee  then  assumes  the  case  of  a  double-track  line  four  miles  in 
length  upon  which,  under  present  conditions,  six  two-man  cars  are  being  operated 
at  an  average  speed  of  8  miles  per  hour  on  a  10-niinute  headway,  with  gross  earn- 
ings of  25  cents  per  car  mile  from  the  5-cent  fare.  It  figures  out  that  with  9 
safety  cars  making  a  speed  of  9  miles  per  hour,  the  headway  could  be  reduced  to 
6  minutes  and  the  service,  in  terms  of  car  miles  run,  would  he  increased  66% 
per  cent,  with  car  mile  earnings  of  24  cents.  The  committee  states  that  the  safety 
cars  can  be  bought  on  the  basis  of  25  per  cent  cash  down  and  the  balance  of  the 
price  payable  in  monthly  instalments  with  interest  at  seven  per  cent  on  deferred 
payments  covering  a  period  of  five  years.  The  indicated  results  are  certainly 
very  cheerful.     The  comparative  earnings  will  he  as  follows: 

Old  conditions.  .M5.2in  car  miles  per  year  at  2.Sc,  equals $78,802.50 

New  conditions.  525..550  car  miles  iier  year  at  24c,  equals 126.084.00 

Increase   in    gross   earnings 47,281.50 


Operating  Economies  279 

The  effect  of  the  safety  cars  upon  annual  expenses  is  estimated  as  follows: 

Increased  Cost 

One-fifth  of  purchase  price  of  9  cars  at  $6,000  apiece $10,800.00 

Average  yearly  interest  on  deferred  payments,  9  cars 1,530.00       $12,330.00 

Car  maintenance,  old  conditions,  3c.  x  315,210  (car  miles)....         $9,456.30 
Car  maintenance,  new  conditions,  2.1c.  x  525,350  (car  miles)..         11,032.35 

Increase   in  annual   car  maintenance  expense $1,576.05 

$13,906.05 

Sai'ings  in  Expense 
Power,   under   old  conditions : 

315,210  (car  miles)  x  3  kwh.  equals  945,630  kwh. 
Power,   under  new  conditions ; 

525,350  (car  miles)  x  1.5  kwh.  equals  788,025  kwh. 
Decrease   in   power  used,   157,605  kwh. 

Saving,  at  0.8c.  per  kwh.   for  fuel $1,260.84 

Trainmen's  wages,  under  old  conditions : 

12—18  hour  men  at  45c,   equals $97.20 

Trainmen's  wages,  under  new  conditions : 

9—18  hour  men  at  50c,  equals 81.00 

Saving   per  day    $16.20 

Saving  per  annum  365  x  $16.20,  equals 5,913.00 

Accidents  under  old  conditions,  5%  of  $78,792.50,  equals 3,939.63 

Accidents  under  new  conditions,  2}/^%  of  $126,0»4.00,  equals..  3,152.10 

Saving  per   annum    787.53 

Total   savings    7,961.37 

Total  increase  in  expenses   13,906.05 

Net  increase  in  expenses   5,944.68 

Increase  in  gross  earnings    47,281.50 

Increase  in  net  earnings   $41,336.82 

Increase  in  net  earnings  per  mile  of  single  track 5,187.10 

This  is  the  equivalent  of  6  per  cent  upon  an  investment  of  $86,452  per  mile 
of  single  track,  although  the  committee  uses  the  figure  $76,500. 

These  results,  compared  with  the  income  statements  usually  put  forward 
nowadays  by  the  electric  railway  companies  in  which  they  commonly  see  red  at 
the  end,  excite  admiration  as  a  proof  of  the  versatility  of  thought  that  subdues 
mathematics  with  equal  skill  to  the  service  of  pessimism  or  to  the  service  of 
optimism  according  to  the  occasion  and  the  motive.  It  must  be  borne  in  mind 
that  these  figures  are  given  out  by  Mr.  Kellogg's  committee  as  typical  of  results 
"already  actually  obtained"  by  street  railway  companies  from  the  use  of  safety 
cars.  They  suggest  as  an  appropriate  answer  to  a  street  railway  plea  for  an 
increase  of  fares  on  a  system  adapted  to  one-man  car  operation,  the  injunction : 
"Go  thou  and  do  likewise." 

The  conclusions  of  Mr.  Kellogg's  committee  are  as  follows : 

"1.  The  Safety  Car  is  one  of  the  most  important  improvements  in  street  railway  service 
that  has  appeared  for  many  years.     Its  valuable  features  in  the  order  of  their  importance  are: 

(a)  Greatly  improved   service  to  the  public,  both  as  to  frequency  and  safety. 

(b)  Increased  earnings  for  the  company. 

(c)  Decreased  operating  expenses. 

"2.  One-man  operation  alone,  while  useful  in  saving  plat'form  expense,  in  the  smaller 
communities  is  not  comparable  with  the  improved  service  that  can  be  obtained  with  the 
Light  Weight  Safety  Car  with  its  more   frequent  headway  and  greater  average  speed. 

"3.    The  savings  obtainable   from  One-Man   Cars   should   be   shared   with  the  trainmen 


280  Electric  Railway  Problem 

in  the  form  of  a  higher  hourly  rate  for  the  operators  of  such  cars  than  is  paid  to  the 
trainmen  on  two-man  cars. 

"4.  When  inaugurating  One-Man  Car  service,  it  is  good  policy  to  assure  the  trainmen 
that  no  one  will  lose  his  job  due  to  putting  in  the  new  cars.  They  are  installed,  as  a  rule, 
a  line  at  a  time,  and  experience  has  proved  that  the  company  is  not  burdened  with  extra  men 
through  thi.>i  policy. 

"S.  I'rom  the  nature  of  the  traffic  available,  the  Safety  Cars  can  accomplish  more  in  a 
larger  city  than  in  a  small  one,  for  the  reason  that  the  possibilities  of  increasing  riding  in 
the  small  community  arc  limited.  This  statement  is  made  to  correct  the  erroneous  impression 
existing  in  some  minds  that  the  Safety  Car  is  useful  only  for  saving  expense  in  the  smaller 
cities. 

"6.  Where  traffic  is  believed  to  be  too  heavy  on  peak  to  be  successfully  handled  by 
Safety  Cars,  the  larger,  heavy  cars  may  be  used  for  tripper  service  on  peak,  thus  making  the 
light  cars  handle  the  long-hour  runs, 

"7.  Similarly,  where  snow  storms  require  the  use  of  the  heavier  equipment  at  rare  inter- 
vals, the  Safety  Cars  can  still  be  used  to  advantage  during  other  times. 

"8.  The  Safety  Car.  though  light,  is  just  as  substantial  and  with  the  same  care  in 
maintenance  should  last  just  as  long  as  the  former  types  of  car.  It  has  a  steel  frame  and 
thoroughly  modern,  ventilated  interpole  motors. 

"9.  Regarding  the  matter  of  standardization,  your  Committee  was  not  unanimous,  but  the 
majority  opinion  favored  adhering  to  the  present  standard  design  of  the  Safety  Car  in  the 
interest  of  cheaper  costs  through  quantity  production. 

"10.  Experience  has  shown  that  the  overwhelming  majority  of  both  riding  public  and 
trainmen  favor  the  One-Man  Safety  Car;  that  it  can.  at  one  and  the  same  time,  improve  the 
public's  service,  increase  the  trainmen's  wages  and  raise  the  company's  profits:  that  it  can  be 
juirchased  without  financing  and  operated  for  about  hall  the  cost  of  an  ordinary  car;  and 
that  most  of  the  companies  that  have  tried  it  want  more.  We  predict  an  increasingly  rapid 
extension  of  the  use  of  a  device  that  can  make  a  showing  like  the  above." 

It  makes  one  rub  his  eyes  to  be  sure  he  is  seeing  straight  when  a  responsible 
committee  of  the  organized  electric  railway  industry  makes  such  a  promising 
report  at  a  time  like  this.  Still,  from  considerations  already  discussed,  we  can- 
not accept  the  theory  that  the  one-man  safety  car  is  to  he  everywhere  the  salva- 
tion of  the  industry,  and  accordingly  we  must  inquire  as  to  how  this  particular 
remedy  will  lit  in  with  others  that  have  been  or  may  be  suggested.  ( )hviously, 
there  is  nothing  in  one-man  car  operation  inconsistent  with  the  relief  of  the  electric 
railways  from  excessive  tax  burdens  and  other  public  obligations  where  they 
exist.  It  is  agreed,  however,  that  the  one-man  car  is  not  well  adapted  to  a  dis- 
tance tariff  or  a  complex  zone  plan.  One-man  operation  can  readily  be  arranged 
for  two  zones  by  the  adoption  of  a  combination  of  the  ])ay-enter  and  the  pay- 
exit  methods,  but  beyond  two  zones  the  problem  of  fare  collections  is  likelv 
to  be  too  complicated  for  the  motorman-conductor.  In  this  connection  it  should 
not  be  forgotten  that  in  the  Hritish  cities,  where  the  zone  system  has  long  been 
successfully  applied,  two-man  operation  is  the  rule. 

The  next  question  relates  to  the  compatibility  of  one-man  car  operation  with 
straight  fare  increases  above  the  5-cent  rate.  Anything  that  complicates  fare  col- 
lection, as  for  instance  the  odd  6-cent,  7-cent  or  S-ceiit  fare,  makes  one-man 
operation  more  difficult.  Moreover,  where  the  light  safety  car  is  to  be  used  to 
beat  the  jitney  or  to  cultivate  jwtential  sliort-haul  traflic.  high  fares  mtist  neces- 
sarily netitralize  to  some  extent  at  least  the  allurements  of  more  fre(|uent  service. 
The  potential  short-haul  rider  naturally  responds  to  two  inducements — conveni- 
ence and  cheajjuess.  lie  will  walk  if  he  has  to  wait  too  long  for  a  car;  also, 
if  he  has  to  pay  too  much  for  a  ride.  And  so,  while  one-man  car  operation  can- 
not be  said  to  be  theoretically  and  necessarily  inconsistent  with  fare  increases, 
it  would  appear  as  a  matter  of  trans|)ortation  psychulogv  that  to  attempt  simul- 
taneously to  attract  a  larger  number  of   riders  by  more   frequent  service  while 


Operating  Economies  281 

at  the  same  time  compelling  each  rider  to  pay  a  higher  fare,  no  matter  how  short 
his  ride,  would  be  more  or  less  futile.  Fare  increases  and  safety  car  service  are 
likely  to  work  against  each  other,  although  the  testimony  and  available  records 
do  not  throw  much  light  on  this  point  from  actual  experience. 

Most  of  the  street  railway  men  who  appeared  before  the  Commission  whose 
attention  was  called  to  Henry  Ford's  scheme  for  substituting  gasoline  for  elec- 
tricity as  a  motive  power  on  street  railways  were  quite  skeptical  about  it.  In  the 
present  state  of  Mr.  Ford's  experiments,  so  far  as  the  public  knows  about  them, 
a  state  of  mild  skepticism  seems  to  be  justified.  It  is  clear  that  the  coming  of  the 
Ford  gas  car  would  bring  the  electric  railway  business  to  its  Judgment  Dav,  sure 
enough.  The  street  railway  power  stations,  transmission  lines  and  overhead  and 
underground  electrical  equipment  would  all  go  to  the  scrap  heap  along  with  the 
old  cars  and  motors.  The  Henry  Ford  car  as  promised  is  a  light  car,  but  not  so 
light  as  the  safety  car.  It  may  become  in  the  near  future  a  tremendous  factor 
in  revolutionizing  the  street  railway  business,  but  at  the  present  time  it  is  no  factor 
at  all  except  possibly  a  psychological  one.  The  industr}'  will  either  have  to  wait 
or  else  go  on  without  it. 

So  much  is  involved  in  the  release  of  street  railway  companies  from  their 
franchise  contracts,  and  the  policy  of  higher  fares  or  of  subsidies  is  so  perilous  in 
many  ways,  that  everybody  concerned  ought  to  seek  to  solve  the  financial  problem 
of  street  railway  operation  by  the  application  of  the  principles  of  good  management, 
if  possible.  Therefore,  it  would  seem  that  before  fare  increases  are  granted  or 
new  contractual  relations  between  the  public  and  the  companies  are  established  a 
board  of  experts  ought  to  be  appointed  in  each  particular  case  to  hold  an  inquisi- 
tion on  the  management  for  the  purpose  of  determining  what  possibilities  there 
may  be  in  operating  economies  and  efficient  methods  of  conducting  and  developing 
the  business. 

There  can  be  no  doubt  whatever,  from  the  testimony  presented  to  the  Com- 
mission, that  substantial  economies  could  be  effected  on  a  great  many  street  rail- 
way systems  without  any  curtailment  of  the  net  value  of  the  service  rendered  to 
the  public.  No  doubt,  re-routing,  changes  in  car  schedules,  the  introduction  of 
the  one-man  car,  and  other  possible  changes  in  operating  methods  may  in  certain 
minor  respects  and  in  spots  adversely  afifect  the  quantity  or  the  quality  of  service 
now  rendered.  Such  a  result  is  inevitable  with  any  rearrangement  of  methods 
W'hile  it  is  as  true  now  as  it  ever  was  that  good  service  and  plenty  of  it  is,  from 
the  public  point  of  view,  the  desideratum  of  street  railway  operation,  there  is 
no  sufficient  reason  for  continuing  extravagant  and  wasteful  service.  During  the 
war,  and  even  during  this  reconstruction  period,  it  is  obviously  advantageous  for 
the  public  to  be  thrifty  and  somewhat  conservative  in  its  demands  where  thrift 
and  conservatism  are  an  essential  means  of  escaping  radical  fare  increases.  Still, 
from  the  public  point  of  view,  it  would  be  a  mistake  to  press  the  matter  of 
economies  in  operation  to  an  extreme,  or  to  insist  upon  electric  railway  companies 
abandoning  old  methods,  and  immediately  scrapping  all  their  existing  equipment 
in  order  to  take  advantage  of  a  new  type  of  cars  or  new  methods  of  operation 
that  have  not  yet  been  fully  proven  by  experience.  In  other  words,  it  is  important 
that  the  street  railway  industry  should  learn  a  lesson  from  its  experience  at  the 


282  Electric  Railway  Problem 

time  of  electrification  when  undue  optimism  with  respect  to  possible  future  econ- 
omies, without  any  immediate  or  adequate  provision  for  writing  off  the  superseded 
equipment,  was  to  a  considerable  extent  responsible  for  the  bad  financial  condition 
into  which  the  business  fell. 

In  view  of  the  public  interest  in  electric  railway  service  and  electric  railway 
prosperity,  and  particularly  in  view  of  the  effect  of  public  regulation  in  one  form 
or  another  upon  the  expenses  and  profits  of  the  business,  it  is  quite  essential  that 
the  operating  companies  should  get  "outside  advice"  with  respect  to  all  major 
changes  in  equipment,  economies  in  operation  and  readjustments  of  service. 
Some  of  this  outside  advice  can  be  furnished  by  the  state  utility  commissions,  but 
too  often  the  commissions  feel  themselves  pretty  closely  restricted  to  a  considera- 
tion of  the  financial  needs  of  the  companies.  .As  the  cooperation  of  the  riding 
public  and  its  local  representatives  is  essential  to  street  railway  success,  it  is 
desirable  that  the  outside  advice  should  include  any  constructive  help  which  the 
municipalities  may  be  in  a  position  to  give. 

An  illustration  of  the  doubtful  ultimate  results  of  operating  methods  and 
economies  which,  from  the  point  of  view  of  the  company,  may  for  the  time  being 
appear  to  be  very  beneficial,  is  found  in  the  attitude  of  Philadelphia  toward  the 
Philadelphia  Rapid  Transit  Company.  Under  date  of  October  16,  1919,  the  com- 
pany submitted  certain  proposals  to  the  City  of  Philadelphia  for  the  lease  of  the 
new  municipal  elevated  railway  now  under  construction,  and  for  an  amendment 
of  the  settlement  contract  of  1907  under  which  the  surface  lines  are  being  oper- 
ated. The  company  proposed  to  abolish  the  three-cent  exchange  tickets  and  to 
substitute  free  transfers  except  within  the  central  business  district  of  the  city, 
where  neither  exchange  tickets  nor  free  transfers  would  be  accepted.  In  con- 
sideration of  the  relinquishment  of  the  exchange  ticket  revenue,  the  company  asked 
the  city  for  relief  from  the  cash  payments  which  it  now  makes  under  the  1907 
contract  in  lieu  of  paving,  snow  removal,  car  licenses  and  other  franchise  obliga- 
tions which  were  commuted  in  1907,  and  for  relief  from  the  tax  on  dividends  of 
subsidiary  companies  and  from  payments  to  the  city  sinking  fund  for  the  ultimate 
amortization  of  the  company's  investment  as  a  step  toward  municipal  ownership 
in  the  future.  Under  date  of  Xovember  14,  1919.  Mr.  William  S.  Twining,  form- 
erly chief  engineer  of  the  Philadelphia  Rapid  Transit  Company,  and  during  the 
past  four  years  Director  of  the  Department  of  City  Transit  of  the  City  of  Phila- 
delphia, submitted  to  the  municipal  legislative  body  a  report  on  the  company's 
proposals.  In  this  report,  in  connection  with  his  discussion  of  the  particular 
points  at  issue,  he  referred  at  some  length  to  the  statements  made  on  behalf  of 
Mr.  Mitten  to  the  Federal  Electric  Railways  Commission  with  respect  to  the 
results  of  the  Philadelphia  cooperative  plan  and  the  economies  effected  thereunder. 
It  is  impracticable  in  our  present  discussion  to  present  Mr.  Twining's  criticisms 
of  the  Mitton  management  in  full,  but  a  few  quotations  will  sufiice  to  indicate  the 
attitude  of  the  responsible  head  of  the  city  transit  department  toward  the  much- 
vaunted  economies  by  which  the  Philadelphia  Rapid  Transit  Company  has  been 
enabled  to  maintain  the  five-cent  fare.  The  burden  of  Mr.  Twining's  argument 
is  that  the  company  in  its  etTort  to  maitUain  its  existing  capitalization  without 
abandoning  the  five-cent  fare  has  made  inadequate  provision  for  the  service  of  the 


Operating  Economies  283 

public.  At  page  19  of  his  report,  Mr.  Twining  states  that  while  the  company's 
gross  earnings  for  1919  showed  an  increase  of  approximately  46  per  cent  over  the 
year  ended  June  30,  1913,  the  increase  in  passenger  car  miles  was  less  than  5  per 
cent.  At  page  21  of  his  report,  he  makes  the  following  statements  with  respect  to 
the  loading  of  the  company's  cars  : 

"A  traffic  count  of  the  loading  of  the  company's  cars  taken  during  the  Christmas  rush 
of  1910  showed  that  of  the  passengers  carried  out  of  the  central  business  district  45  per  cent 
were  required  to  stand.  A  similar  count  in  October  of  1919,  shows  that  40  per  cent  of  the 
riders  stood.  This  percentage  will,  of  course,  be  increased  during  the  Christmas  rush  of  the 
present  year.  Rush-hour  loading  conditions  therefore  are  little  better  now  than  during  the 
heaviest '  period  of  1910,  when  conditions  were  notoriously  deplorable.  The  large  number 
of  passengers  who  are  required  to  stand  during  the  non-rush  hours  of  the  day  is  a  noticeable 
feature  of  present  loading  conditions. 

"A  comparison  of  loading  conditions  in  1915  and  1919  shows  that  the  company  is  now 
carrying  44.7  per  cent  more  passengers  out  of  the  business  district  during  the  maximum 
evening  rush  hour  with  only  14.5  per  cent  more  seats.  The  result  is  that  while  24.5  per  cent 
of  the  riders  were  required  to  stand  in  1915,  40.1  per  cent  were  required  to  stand  in  October, 
1919." 

With  respect  to  the  effect  of  existing  capitalization  upon  the  Company's 
finances,  Mr.  Twining,  at  page  7  of  his  report,  says: 

"The  future  of  the  Philadelphia  Rapid  Transit  Company  is  continuously  threatened 
because  of  the  deplorable  condition  of  overcapitalization  which  exists.  This  condition  has 
existed  at  all  times  during  the  history  of  the  system  and  results  from  the  watering  of 
securities  and  the  paying  out  in  excessive  dividends  those  funds  which  should  have  been  used 
to  provide  for  amortization  and  the  depreciation  and  obsolescence  of  the  property.  .Mthough 
the  originally  overcapitalized  property  has  been  allowed  to  depreciate  and  disappear,  it  is 
still  represented  in  the  Philadelphia  Rapid  Transit  Company's  fixed  charges  and  must  be 
satisfied  before  the  payment  of  any  dividends  to  the  Philadelphia  Rapid  Transit  Company 
stockholders." 

It  will  be  remembered  that  a  ser\ice-at-cost  contract  entered  into  by  the  City 
of  Philadelphia  and  the  Philadelphia  Rapid  Transit  Company  early  in  1918,  which, 
among  other  things,  provided  for  the  operation  of  the  City's  rapid  transit  lines 
now  under  construction,  was  finally  disapproved  by  the  Public  Service  Commis- 
sion of  Pennsylvania  largely  because  it  perpetuated  as  a  fixed  expense  of  transit 
service  in  Philadelphia  the  extraordinary  rentals  now  being  paid  to  a  multitude  of 
underlying  leased  lines.  Mr.  Twining  in  discussing  "The  Effect  of  Dead  Capital 
on  the  Fare"  makes  the  following  statement  at  page  39  of  his  report : 

"All  capital  invested  in  obsolete  or  superseded  apparatus  or  equipment  should  be  amortized 
and  only  such  money  as  is  now  active  in  the  carrying  on  of  the  business  should  be  entitled 
to  draw  interest  on  dividends.  In  other  words,  dead  capital,  like  the  superseded  equipment, 
should  not  burden  a  public  utility  business  and  hamper  the  w'orking  capital.  In  the  Phila- 
delphia Rapid  Transit  Company  much  equipment  and  apparatus — horses,  cars,  rails,  etc., 
purchased  and  their  cost  capitalized  during  the  horse-car,  cable-car  and  early  electric  periods, 
liave  long  since  disappeared,  but  the  capital  invested  in  those  discarded  facilities,  although 
actually  dead  and  representing  nothing  but  a  memory,  still  rides  on  the  back  of  the  capital 
now  working.  The  active  capital  is  forced  to  not  only  earn  its  own  interest,  but  must  carry 
a  load  of  dead  capital  besides.  In  the  Philadelphia  Rapid  Transit  Company's  capitalization 
there  exists  today  at  least  $40,000,000  of  dead  b\it  unamortized  capital  drawing  from  the 
net  earnings  of  the  system  an  average  of  at  least  10  per  cent,  or  $4,000,000  annually.  Is  it 
any  wonder  that  the  company  finds  it  difficult  to  increase  its  working  or  active  capital  when 
the  new  capital  must  share  in  carrying  such  a  load?  To  make  matters  worse,  this  dead  capital 
must  be  given  its  pound  of  flesh  before  the  new  and  active  capital  can  be  fed.  In  addition  to 
being  inactive  capital,  a  part  at  least  of  the  Philadelphia  Rapid  Transit  capitalization  is 
what  is  known  as  'water.'  This  only  aggravates  a  bad  matter,  and  with  this  load,  whether  it 
be  dead  capital  or  water,  the  company  finds  itself  unable  to  support  the  necessary  capital 
burdens  which  the  increasing  traffic  demands.  New  capital  can  only  be  supported  by  unen- 
cumbered profits  and  such  profits  are  now  exceedingly   speculative  on  5-cent   fares. 

"Since  Mr.  Mitten  came  here  eight  years  ago,  he  has  discarded   at  least   1,000  cars,   six 


284  Electric  Railway  Problem 

or  more  power  plants,  five  battery  sub-stations,  car  barns  and  considerable  mileage  of  track, 
and  distribution  svstem  amounting  in  the  aggregate  to  several  millions  of  dollars;  but  aside 
from  comparatively  small  renewal  appropriations,  this  capital  invested  by  the  underlying 
companies  still  draws  the  same  return  as  when  this  equipment  was  active  and  used  in  the 
service  of  the  public. 

"The  reason  why  the  company  must  ask  the  city  to  buy  up  its  exchange  busmess,  why 
the  contract-lease  was  rejected  by  the  Public  Service  Commission  and  why  so  much  difficulty 
is  contemplated  in  arriving  at  a  new  lease,  is  because  the  company's  capitalization  has  been 
allowed  to  pile  up.  propeny  deteriorate  and  disappear  without  the  establishment  of  depreciation 
or  amortization  funds  and  a  pyramid  of  leases  built  up  which,  for  999  years,  make  the 
superseded  property  more  potential  in  controlling  the  company's  service  and  fares  than  the 
property  now  used  in  public  service." 

It  is  evident  from  Mr.  Twining's  report  that  the  popularity  of  the  Mitten 
management  does  not  extend  to  the  City  Hall.  The  following  quotation  is  from 
pages  1  to  3  of  the  repoil : 

"Mr.  Mitten  recently  presented  Philadelphia's  answer  to  the  traction  question  before  the 
Federal  Electric  Railways  Commission  at  Washington,  in  which  he  claimed  that  the  solution 
of  the  problem  lies  in  the  elements  of  money,  management  and  men,  and  that  management  is 
the  main  connecting  link  between  the  money  and  the  men.  This  solution  absolutely  ignores 
the  needs  of  the  public,  and  I  desire  today  to  call  your  attention  to  the  fact  that  the  problem 
is  far  broader,  involving  the  city  and  the  company  as  two  corporations  connected  by  the  car 
riders  as  individuals. 

"At  the  last  meeting  Mr.  Mitten  told  you  that  the  S-cent  fare  was  a  religion  with  him. 
The  two  ordinances  now  before  you  are  iKith  intended  to  help  su()port  that  religion  and  to 
disguise  the  fact  that  the  .S-cent  fare  is  no  longer  able  to  even  appear  to  support  adequate 
transit  service.  He  has  now  reached  the  part  of  his  religious  service  where  he  is  passing 
the  hat  for  the  city's  contributions  in  support  of  home  missions.  One  of  these  ordinances 
is  an  appeal  for  a  direct  contribution ;  the  other  contains  provision  for  an  indirect  contribution. 
Philadeliihia  has  always  been  generous  in  charitable  work  and  Mr.  Mitten  figures  the  time 
is  now  propitious  to  make  an  appeal  lor  the  poor  car  rider,  whom  he  has  undertaken  to  ser^•e 
at  a  f^xed  rate  per  head,  but  finds  the  contract  growing  unprofitable,  so  he  makes  an  appeal 
for  charity  ostensibly  for  the  car  rider's  benefit  when  the  real  beneficiary  is  the  company, 
.^s  the  company's  finances  are  very  sick,  there  is  an  old  couplet  which  may  or  may  not  apply 
in  this  case :  i.r..  "When  the  devil  was  sick,  the  devil  a  monk  would  be :  and  when  the  devil 
was  well,  the  devil  a  monk  was  he.'  The  Company  is  in  desperate  need  of  money,  and  Mr. 
Mitten  thinks,  as  a  bit  of  business  psychology,  it  will  be  much  easier  to  get  it  in  large  pay- 
ments through  the  City  as  a  corporation  on  a  charitable  plea  than  to  extract  it  in  pennies 
from  the  car  riders  as  individuals.  He  has  reasons  for  such  psychology — the  plan  worked 
in  1907.  Fear  is  one  of  the  mo.st  potent  means  of  controlling  human  action,  and  by  creating 
a  fear  in  the  public  mind  that  fares  may  be  raised  if  his  appeal  be  not  heeded,  and  that  he  is 
endeavoring  to  prevent  such  a  contingency,  he  makes  it  appear  that  he  is  the  champion 
of  the  public.  This  is  not  the  fir.st  attempt  that  the  Company  has  made  to  raid  the  City's 
Treasury,  and  when  preparitig  to  make  such  a  raid  it  has  always  Ix'cn  the  Company's  policy 
to  represent  that  its  action  has  Ix-en  inspired  by  a  desire  to  benefit  the  public  and  render 
greater  .service  without  increasing  the  cost.  That  was  the  ostensible  pun^ose  of  the  1907 
contract,  at  which  time  the  Company  claimed  that,  if  relieved  from  burdensome  franchise 
obligations,  the  then  existing  schedule  of  fares  was  ample  to  provide  not  only  the  service 
then  recpiired  but  adequate  service  to  meet  the  future  growth  of  the  City,  .^t  that  time  the 
Company's  gross  earnings  were  approximately  $  1 8.0(X).(X10 ;  today,  although  the  Company's 
gross  earnings  have  practically  doubled,  it  is  again  appearing  Ix^fore  this  body  with  the  same 
pica  and  for  the  same  purpose,  with  this  difference,  however :  it  now  holds  out  simply  the 
hnfif  that  if  relicvi-d  of  the  remainder  nf  its  franchise  nhliitations  it  may  he  able  to  maintain 
present  conditions  of  sef^ice.  It  holds  out  absolutely  no  promise,  hope  or  prospect  of  im- 
provement of  conditions  in  the  future. 

"From  the  date  of  its  fdrmalion  in  1902.  the  Company  has  been  'seeking  the  pocket  of 
gold  which  lies  at  the  end  of  the  rainbow.'  and  it  still  is  trying  to  convince  itself  and  the  City 
that  it  will  eventually  escape  from  the  influence  of  the  unlucky  star  under  which  it  was  bom. 


".■^incc  the  organization  of  the  Company,  it  has  been  its  constant  hope  and  Ix-lief  th.it 
with  the  growth  of  gross  earnings  it  would  \ic  able  to  escape  from  the  financial  Nemesis 
which  has  continued  in  pursuit,  and  each  time  that  the  shadow  of  financial  disaster  has  hung 
over  the  Comi>any  it  has  ap|x-ared  licfore  Councils  and  presented  an  ingenious  plea  that  it  be 
allowed  to  trade  some  of  its  franchise  obligations  for  real  cash  from  the  City  Treasury." 


Operating  Economies  285 

Without  being  able  to  fathom  the  depth  of  the  antipathy  that  has  evidently 
grown  up  between  Mr.  Mitten  and  Mr.  Twining,  we  can  at  least  see  from  the 
quotations  given  above  that  in  applying  operating  economies  as  a  means  for  the 
solution  of  the  financial  difhculties  of  the  electric  railways,  the  interest  of  the 
public  in  good  service  must  not  be  overlooked,  and  that  economies  affecting  service 
cannot  be  carried  far  as  a  means  of  producing  dividends  on  excessive  capitalization 
without  arousing  public  resentment. 


Chapter  XXXII 
CONTROL  OR  ABOLISHMENT  OF  JITNEY  COMPETITION 

J II  Chapter  XX  of  this  report  I  have  discussed  at  considerable  length,  in  the 
light  of  the  testimony  adduced  before  the  Commission,  the  effect  of  automobile 
and  jitney  competition  upon  the  credit  of  the  electric  railway  industry.  As  Inter- 
state Commerce  Commissioner  Eastman  remarked  in  his  discussion  of  the  failure 
of  street  railway  credit,  the  investors  are  afraid  of  street  railway  securities,  not 
only  because  of  their  experience  in  the  past,  but  because  of  their  fear  of  what 
may  possibly  happen  in  the  future,  particularly  with  respect  to  the  possibilities 
of  automobile  competition  and  labor  complications.  The  old  structure  of  street 
railway  credit,  now  fallen  into  ruins,  was  undoubtedly  built  on  the  fact  of  exist- 
ing, and  the  assumption  of  future,  monopoly.  When  the  automobile  appeared  as 
an  active  competitor  of  the  electric  railway  it  introduced  a  new  factor  in  street 
railway  service  and  street  railway  finance  that  cannot  be  ignored  in  the  formula- 
tion of  public  policies,  whether  it  be  from  the  point  of  view  of  the  protection  of 
the  investors  in  street  railway  property  or  from  the  still  broader  point  of  view 
of  the  protection  of  the  interests  of  the  general  public  in  the  development  and 
maintenance  of  sufficient  and  ettlcient  local  transportation  service. 

The  automobile  and  the  jitney  bus  are  facts.  The  question  is,  from  the 
point  of  view  of  street  railway  service,  what,  if  anything,  arc  we  going  to  do 
about  them?  The  public,  through  its  governmental  agencies,  would  not  concern 
itself  with  the  effects  of  this  competition  if  it  were  not  that  local  transportation 
is  recognized  to  be  an  essential  public  service.  So  far  as  private  automobiles 
are  concerned,  although  they  undoubtedly  have  their  effect  upon  the  extent  to 
which  people  make  use  of  the  street  cars,  they  are  even  now  less  important  than 
human  legs  as  a  competitor  of  the  electric  railways,  and  it  is  not  deemed  to  be 
consonant  witii  the  theory  of  .American  institutions  and  government  that  the  free 
movement  of  private  citizens  by  their  own  means  of  locomotion  should  he  re- 
stricted in  order  to  compel  them  to  nvikc  use  of  public  vehicles,  whether  the  latter 
be  o|)erated  by  private  agencies  or  directly  by  the  government.  Therefore,  we 
may  dismiss  from  consideration  the  feasibility  of  curtailing  the  use  of  private 
cars  by  restrictions  established  in  the  iiUerest  of  the  common  carriers.  All  that 
could  properly  be  done  in  this  direction  would  be  to  compel  the  private  vehicles 
using  the  public  highways  to  pay  license  fees  or  taxes  proportionate  to  the  bur- 
dens they  place  upon  the  highways  as  compared  with  the  burdens  placed  upon 
the  highways  by  the  street  cars.  In  this  connection,  the  result  aimed  at  might  be 
accomplished  either  by  the  elimination  of  special  taxes  and  other  financial  obliga- 
tions imposed  upon  the  electric  railways  on  account  of  their  use  of  the  public 
streets,  or  by  the  levying  of  corresponding  ta.\cs  and  public  burdens  upon  motor 

286 


JiTNEV  Control  287 

vehicles.  The  testimony  before  the  Commission  does  not  show  clearly  the  ex- 
tent, if  any,  to  which  the  competition  of  private  automobiles  could  or  ought  to  be 
restricted  by  the  adoption  of  this  policy.  It  seems  to  be  accepted  that  the  free 
development  of  private  automobiles  is  not  to  be  interfered  with  except  that  regu- 
lation of  parking  and  the  use  of  congested  thoroughfares  should  be  such  as  to 
prevent  the  automobiles  from  cluttering  up  the  street  railway  tracks  and  delaying 
the  street  cars. 

The  real  issue  arises  with  respect  to  the  abolition  or  curtailment  of  the  auto- 
mobile bus  and  the  jitney  as  common  carrier  rivals  of  the  street  car.  Probably 
most  street  railway  men  will  now  admit  that  the  street  car  had  something  to 
learn  from  the  jitney,  and  that  its  failure  to  learn  the  lesson  in  advance  of  the 
jitney  has  been  one  of  the  important  factors  in  bringing  the  electric  railway 
industry  into  its  present  deplorable  condition  and  in  unsettling  the  confidence  of 
the  general  public  and  of  the  investors  in  the  future  of  the  electric  railway  as  an 
institution.  Speaking  abstractly,  most  people  would  undoubtedly  agree  that  if 
the  automobile  as  a  common  carrier  gives  promise  of  being  able  to  perform  the 
full  serv'ice  now  rendered  by  the  electric  railways  and  to  do  it  more  efficiently 
and  economically,  then  it  would  be  against  the  public  interest  for  the  government 
to  interfere  by  restrictive  regulation  to  save  from  the  junk  pile  the  equipment  of 
an  obsolete  mode  of  transportation.  Therefore,  the  fundamental  questions  to 
be  answered  in  attacking  the  problem  of  public  policy  toward  the  jitney  and  the 
automobile  bus  are  these :  First,  is  the  electric  railway  operated  on  permanent 
tracks  obsolete,  or,  if  not  interfered  with,  about  to  become  obsolete  as  the  prin- 
cipal means  of  local  transportation  ?  Second,  if  not  capable  of  supplanting  the 
electric  railway  as  a  means  of  local  transportation,  to  what  extent  and  by  what 
means  can  the  motor  vehicle  be  used  to  supplement  and  round  out  electric  rail- 
wav  service?  While  there  is  considerable  difference  of  opinion  as  to  the  relative 
superiority  of  the  automobile  and  the  electric  street  car  as  the  permanent  prin- 
cipal means  of  supplying  local  transportation  service  in  small  towns,  and  even 
in  medium-sized  cities,  the  opinion  appears  to  be  nearly  unanimous  that  the 
electric  railway  operating  on  tracks  is  by  all  odds  the  most  efficient  means  of 
furnishing  local  transportation  service  in  the  big  urban  centers.  In  the  very 
largest  cities,  where  the  bulk  of  the  transportation  service  is  now  rendered  or 
is  likely  to  be  rendered  by  elevated  railroads  or  subways  operating  at  high  speed,  it 
is  not  altogether  clear  that  the  residuum  of  passenger  traffic  to  be  carried  on  the  sur- 
face of  the  streets  may  not,  under  some  conditions,  be  carried  more  efficiently  by 
motor  vehicles  not  restricted  by  the  necessity  of  using  fixed  tracks  or  fi.xed  over- 
head equipment,  than  by  electric  railways  such  as  we  now  have.  That  this  pos- 
sibility is  receiving  serious  consideration  is  evident  from  the  recently  adopted 
policy  of  the  City  of  New  York,  looking  to  the  general  use  of  motor  buses  to 
compete  with  and  take  the  place  of  the  surface  car  lines.  Mayor  John  F.  Hylan 
quotes  the  late  Theodore  P.  Shonts,  President  of  the  Interborough  Rapid  Tran- 
sit Company,  as  having  expressed  the  opinion  that  the  ideal  system  of  local  trans- 
portation for  New  York  would  handle  the  surface  traffic  by  means  of  motor  buses. 
Unfortunately,  Mr.  Shonts  is  dead  and  cannot  be  appealed  to  for  a  confirmation 
of  his  alleged  statement,  but  there  are  many  living  witnesses  who  are  ready  to 


288  Electric  Railway  Problem 

predict  that  the  surface  cars  in  Manhattan,  at  least  in  downtown  Manhattan,  are 
doomed.  This  question  of  the  relative  qualifications  of  the  motor  bus  and  the 
street  car  as  a  njeans  of  transportation  on  the  surface  of  congested  streets  as- 
sumes great  practical  importance  at  the  present  time,  particularly  in  New  York, 
on  account  of  the  warfare  that  has  sprung  up  between  the  bankrupt  surface  elec- 
tric lines  and  the  motor  buses  recently  brought  into  service  at  the  instigation  of 
the  city  administration.  It  is  clear  that  if  public  welfare  requires  the  continua- 
tion of  electric  railway  service  under  the  conditions  that  prevail  in  a  given  com- 
munity, the  public  authorities  ought  not  to  attempt  to  destroy  this  essential 
means  of  public  service  through  a  subsidized  or  patronized  competition.  In 
New  York,  however,  the  motives  of  the  city  administration  in  promoting  the 
operation  of  the  buses  appear,  from  the  public  pronouncements  of  the  city  of- 
ficials, to  be  mi.xed.  Apparently  there  is  the  desire  to  establish  a  new  means  of 
transportation  that  will  ultimately  displace  the  surface  street  railways  entirely. 
Along  with  it  is  the  immediate  desire  to  furnish  service  where  street  railway 
transportation  has  been  suspended,  and  also  to  punish  the  street  car  lines  for 
attempting  to  increase  their  charges  above  the  uniform  5-cent  fare  with  free 
transfers.  The  recent  partial  disintegration  of  the  Brooklyn  Rapid  Transit  lines, 
for  example,  had  the  etlect  of  breaking  many  individual  car  lines  into  two  or 
three  parts,  with  a  duplication  or  triplication  of  the  original  5-cent  fare.  One 
of  the  announced  purposes  of  the  city  administration  in  connection  with  the 
development  of  bus  service  was  to  supply  a  5-cent  service  in  direct  competition 
with  these  car  lines  for  the  purpose  of  compelling  the  restoration  of  the  5-cent 
fare  on  the  electric  railway. 

Where  jitneys  and  automobile  buses  acting  as  common  carriers  are  subject 
to  regulation  by  state  commissions  and  are  required  to  procure  a  certificate  of 
public  convenience  and  necessity  before  establishing  a  route  or  undertaking  to 
render  public  service,  the  motor  vehicles  are  usually  prevented  from  entering  into 
active  competition  with  street  car  service  unless  the  latter  is  shown  to  be  wholly 
inadequate.  That  street  railway  service  and  jitney  service  cannot  permanently 
exist  and  pay  their  own  way  in  competition  with  each  other  under  any  ordinary 
urban  conditions  seems  to  be  well  established  by  experience  and  by  the  condi- 
tions inherent  in  local  transjiortation  service,  but  the  belief  is  general  that  the 
motor  bus  may  properly  be  used  to  supplement  the  service  rendered  by  the 
street  cars.  The  motor  bus  may  be  used  to  render  a  sort  of  dc  luxe  service  at 
a  higher  rate  of  fare,  such  as  the  service  now  rendered  on  Fifth  Avenue  and  cer- 
tain other  high-grade  residential  streets  in  New  York  City,  by  the  Fifth  Avenue 
Coach  Company,  or  the  buses  may  be  operated  on  other  independent  routes 
where  no  street  railway  ser\Mce  has  been  installed,  or  they  may  be  operated 
merely  as  feeders  to  the  street  railway  system  to  take  care  of  traffic  in  partially 
develojied  territory  in  advance  of  the  time  when  street  railway  tracks  can  be 
laid  with  reasonable  assurance  that  the  investment  will  be  self-sustaining. 

Mr.  John  .\.  Heeler,  transportation  engineer,  discusses  automobile  and  bus 
competition  at  pages  1673  and  1674  of  the  Proceedings,  where  he  says: 

".■\t  present  a  RriMt  deal  of  publicity  is  lioiiiR  Riven  to  the  pos.sibilities  of  motor  buses 
to  replace  ni>n-payinK   street  car  lines,  and  it  has  even  been  predicted  that  the  street  railway 


Jitney  Control  289 

industr>-  is  doomed.  These  predictions  are  based  largely  on  the  operations  of  jitney  lines, 
where  the  buses  are  running  in  competition  with  the  street  cars,  and  skimming  off  the  best  of 
the  short-haul  business,  or  where  operations  of  the  buses  are  made  possible  by  higher  fares 
such  as  on  the  Fifth  Avenue  Coach  Company  of  New  York  City,  where  a  ten-cent  fare  has 
been  charged  for  years. 

"The  bus,  with  its  limited  carrying  capacity,  requires  a  higher  ratio  of  man-power  per 
passenger  carried.  The  greater  number  of  units  increases  the  congestion  and  street  accidents. 
The  cost  of  fuel  and  repairs  is  much  higher  per  car  mile.  The  bus  has  higher  depreciation. 
The  street  car  wears  out  its  own  roadway  of  steel  rails  while  the  bus  wears  out  the  paving 
laid  at  great  expense  by  the  public.  Where  any  considerable  volume  of  traffic  exists,  motor 
bus  service,  considering  everj'thing,  costs  more  than  good  street  car  transportation  should. 
There  are  many  places,  however,  where  the  bus  can  be  employed  to  the  great  advantage  of 
both  public  and  company.  There  are  other  places  where  the  bus  should  not  be  allowed. 
Unquestionably,  however,  the  companies  should  study  this  with  a  view  of  coordinating  bus 
service  with  the  car  service,  where  use  is  warranted  as  a  part  of  the  general  transportation 
scheme." 

Mr.  Walter  Jackson  expressed  views  substantially  in  accord  with  those  of 
Mr.  Beeler.  He  had  made  a  considerable  study  of  bus  operation  in  Great  Britain 
in  connection  with  his  study  of  the  British  zone-fare  system.  The  following  tes- 
timony in  regard  to  bus  operation  is  found  at  page  1615  of  the  Proceedings: 

"The  Chairman :  Are  the  buses  in  England  operated  in  connection  with  the  tramway 
companies? 

"Mr.  Jackson :     Generally  they  are  and  have  been. 

"Here  is  a  peculiarity  of  English  law :  A  private  operator,  a  private  person  or  company, 
can  go  into  the  bus  business  with  no  other  preliminaries  than  securing  police  approval  for  the 
form  of  bus.  It  must  comply  with  certain  safety  precautions  and  speed  conditions  and 
weight,  and  thereupon  you  can  go  into  the  bus  business  just  as  cheerfully  as  people  go  into 
the  jitney  business  here. 

"On  the  other  hand,  if  the  municipally  owned  railway  wants  to  go  into  the  bus  business, 
it  has  to  apply  to  Parliament  for  a  special  privilege. 

"The  British  Electric  Traction  Company,  which  operates  over  thirty  properties,  has  bus 
operation  in  connection  with  sixteen  or  seventeen  of  them,  and  the  Leeds  Municipal  Tram- 
ways operate  motor  buses  and  trackless  trolleys.  Edinburgh,  which  has  just  acquired  the 
system,  has  laid  out  half  a  dozen  motor  bus  routes,  and  Aberdeen  is  putting  in  motor  bus 
routes,  and  Glasgow  is  considering  them. 

"The  Britisii  idea  for  using  buses  is,  so  far  as  most  of  those  properties  are  concerned, 
the  development  of  the  suburban  traffic,  to  know  where  you  stand.  A  comparable  case  is  that 
of  the  Municipal  Railway  of  San  Francisco,  in  developing  bus  service  across  Golden  Gate 
Park  and  other  places.  The  Stone  &  Webster  interests  in  Washington  run  a  number  of 
bus  lines  and  feeders  to  the  interurbans.  They  do  not  make  money  on  them.  They  did  make 
a  little  money  on  one,  but  generally  speaking  you  give  a  bus  service  because  you  lose  less 
money  on  it  than  on  the  track,  and  you  feel  that  you  have  to  give  it  because  you  are  a 
utility  and  there  is  a  demand  for  it. 

"The  buses  in  Leeds  are  run,  say,  on  a  thirty  minute  headway  and  the  trackless  trolleys 
about  twenty;  and  when  the  service  justifies  ten  minutes,  they  will  put  down  track,  but  not 
before.'' 

Further  on,  at  page  1616,  Mr.  Jackson  explains  why  he  does  not  think  that 
the  bus  can  entirely  supplant  the  street  railway.     His  testimony  is  as  follows : 

"The  Chairman :  Can  the  bus  entirely  supplant  the  street  railway  in  cities  in  this 
country  ? 

"Mr.  Jackson  :     Certainly  not. 

"The  Chairman:     Why? 

"Mr.  Jackson :  It  is  a  matter  of  capacity  as  well  as  operating  expense.  The  buses 
proposed  in  this  country  do  not  exceed  SO  seats.  A  bus  operation  calls  for  no  standees.  In 
this  country  it  is  being  developed  along  the  lines  of  a  de  luxe  line,  with  ten-cent  fares;  and 
the  biggest  excuse  or  the  best  reason  they  have  got  for  asking  the  double  fare  is  that  there 
is  a  seat  for  every  passenger. 

"The  ratio  of  labor  expense,  platform  expense,  on  a  bus  is  far  more  unfavorable  than 
on  a  street  car. 

"Take  the  comparison  in  London :  The  London  County  Council  car  seats  78  passengers 
and  has  two  operators.  The  London  bus  now  in  use  seats  34  passengers  and  has  two  operators. 
In  one  case  you  have  got  39  passengers  to  each  employe  and  in  the  other  case  you  have  got 
17  passengers  to  each  employe." 


290  Electric  Railway  Problem 

Mr.  William  J.  Dark,  for  the  past  thirty-two  years  connected  with  the  Gen- 
eral Electric  Company,  and  a  pioneer  in  the  development  of  the  electric  railway, 
in  discussing  possible  economies  in  electric  railway  operation,  expressed  the 
opinion  that  very  little  further  improvement  can  be  expected  in  the  type  of 
motors  used.  At  pages  144  and  145  of  the  Proceedings,  he  discusses  the  future 
possibilities  of  the  Ford  gasoline  car  and  of  the  motor  bus  not  operating  on 
tracks  as  a  substitute  for  electric  railway  transportation.  In  this  connection  he 
says: 

"Of  course,  this  is  true,  that  as  long  as  your  labor  item  is  the  great  big  one  in  your 
operating  expense,  there  is  not  very  much  room  to  cut  down  otherwise.  Now,  your  current 
costs  are  small,  relatively.  Of  course,  it  is  entirely  possible.  I  have  ceased  saying  that 
anything  is  impossible.  I  have  seen  such  wonderful  things  come.  We  will  say,  for  instance, 
Mr.  Fcrd  may  revolutionize  all  traction  on  street  railways,  as  he  has  said  he  is  going  to  do. 
I  don't  think  he  will  be  able  to  do  it,  but  it  may  come  along  and  better  our  present  form  of 
electrification ;  but,  as  I  remarked  a  moment  ago,  so  long  as  you  have  to  have  platform 
wages,  you  understand,  and  switchmen  and  men  in  the  car  bam,  you  have  not  a  great  way 
to  go  in  the  way  of  economy. 

"Mr.  Warren:  Mr.  Clark,  right  at  that  point,  you  spoke  of  Mr.  Ford.  Do  you  *  *  *  * 
think  that  a  carrier  on  tires  through  the   highway   can  ever  be  as  satisfactory  economically 

as  a  carrier  on  rails? 

******** 

"Mr.  Clark:  .'\s  a  wholesale  transp<irtation  proposition,  something  equivalent  in  trans- 
portation  facilities  to  that  given  by  the  street  railway,  no. 

"Mr.  Warren:  Mr.  Ford's  suggestion,  as  1  recall  it,  was  to  equip  an  automobile  car 
which  would  run  on  rails,  was  it  not? 

"Mr.  Clark  :     Yes. 

"Mr.  Warren:     It  was  not  to  run  a  large  jitney,  for  instance? 

"Mr.  Clark:  Oh,  that  was  not  his  idea;  but  if  you  will  let  me  finish  my  answer,  of 
course,  it  does  appeal  to  the  average  person,  if  he  can  be  picked  up  at  his  own  curbstone, 
you  understand,  and  delivered  at  the  curbstone  where  he  wishes  to  go;  but,  in  my  opinion, 
with  any  vehicle  propelled  by  any  power,  not  operating  on  rails,  you  cannot  care  for  local 
travel  under  the  requirements  of  the  .American  pulilic.     You  cannot  do  it." 

Mr.  Frank  J.  Sprague,  the  celebrated  engineer  who  in  1887  at  Richmond, 
Va.,  equipped  the  first  conmiercially  successful  electric  railway,  gave  his  opinion 
as  to  the  future  of  the  industry  at  pages  759  and  7f>0  of  the  Proceedings.  Chair- 
man Elmquist's  questions  and  Mr.  Sprague's  replies  at  this  point  are  as  follows : 

"The  Chairman :  Now,  Mr.  Sprague,  you  have  Iwrne  a  very  conspicuous  part  in  the 
develoi)ment  of  this  industry  and  have  naturally  given  very  close  attention  to  it.  You  have 
seen  it  developed  from  a  small  industry  to  iK-rhaps  the  second  largest  in  the  country  and 
performing  a  very  great  public  service.  In  recent  years  you  have  also  witnessed  the 
tremendous  development  in  gocKl  roads  and  in  the  automobile  industry  and  in  the  very  recent 
years  in  the  aircraft  industry.  Now  Ix^aring  in  mind  the  very  great  initiative  of  the  .Ameri- 
can people,  can  you  for  a  few  moments  present  to  us  what  you  believe  to  be  the  future 
of  the  electric  railway  industry? 

"Mr.  Sprague:  Well,  the  electric  railway  industry  is  going  to  face  greater  and  greater 
competition  all  the  while.  It  is  facing  it  tixlay  in  the  automobile.  The  better  the  roads, 
the  better  the  pavements,  the  cheaper  the  automobile,  the  more  people  who  can  buy  one,  the 
more  the  electric  railway  has  got  to  suffer.     That  is  undoubtedly  tnic. 

"The  Chairman:  .Xnd  will  it  .stand  up  under  the  force  of  this  competition  and  rapid 
expansion  of  other  linos  of  activity  in  transportation? 

"Mr.  Si)raguc:  NVcll,  any  of  them,  the  aircraft  and  the  automobile,  will  create  a  traffic 
of  their  own  which  will  Ix-  in  addition  to  the  traffic  the  electric  railway  will  carry. 

"When  the  electric  light  was  first  introduced  it  was  widely  predicted  that  the  day  of 
gas  was  ended.  The  principle  of  the  incandescent  lamp  itself  has  lx?en  but  little  changed  in 
all  these  years.  \\'c  have  gone,  it  is  true,  from  a  carbon  filament  to  the  metallic  filament, 
but  the  twsic  principle  is  the  same,  a  high  resistance  filament  inside  of  a  vacuum  and  operated 
at  certain  standard  pressure,  and  that  pressure  has  remained  practically  constant  all  these 
years.  There  has  b»-cn  an  improvement  in  the  economy  of  the  lamp.  On  the  other  hand, 
those  interested  in  the  gas  industry  have  tried  to  improve  their  product  and  widen  the  uses 
of  it.  and  1  guoss  there  is  more  gas  used  today,  despite  the  rivalry  of  the  electric  light,  than 
there  rver  was  in  the  past. 


Jitney  Control  291 

"People  get  the  habit  of  riding.  They  do  not  entirely  forsake  one  method  and  adopt 
some  other.  They  simply  ride  more.  And  I  think  the  electric  railway  has  a  field  of  its  own, 
meeting  competition,  of  course,  all  the  while,  but  if  it  is  well  managed,  if  it  is  well  kept  up, 
if  its  standard  is  maintained,  it  will  hold  a  traffic  of  its  own. 

"The  Chairman :  Will  not  the  improvement  such  as  you  have  mentioned  cause  a  more 
general  distribution  of  our  population  throughout  the  country,  decentralizing  the  cities  and 
spreading  them  out  into  suburban  territory  on  small  tracts  of  land,  thus  causing  more  travel? 

"Mr.  Sprague :     The  more  you  spread  them  out  the  more  intercommunication  will  exist. 

"The  Chairman :     And  that   will  be   beneficial  to  the   railroad  industry  ? 

"Mr.  Sprague :     Yes,   I  think  so. 

"The  Chairman :  Do  you  feel  hopeful  that  the  electric  railway  as  it  now  stands  is  a 
permanent  institution? 

"Mr.  Sprague:     Absolutely. 

"The  Chairman:  And  such  an  institution  that  capital  can  safely  invest  in  it  and  people 
depend  on  service   from  it? 

"Mr.  Sprague:     They  can,  if  they  can  be  assured  of  reasonable  treatment." 

Mr.  Richard  T.  Higgins,  Chairman  of  the  Public  Utilities  Commission  of 
Connecticut,  closed  his  direct  statement  at  pages  1109  and  1110  of  the  Proceed- 
ings, with  the  following: 

"I  believe  that  the  states  that  have  imposed  burdens  upon  street  railway  companies  in 
the  nature  of  street  paving,  heavy  expense  of  maintaining  highway  bridges  and  so  on, 
should  reduce  or  repeal  those  impositions,  if  we  are  going  to  save  our  street  railways. 

"I  think  it  would  be  difficult  for  any  man  to  prophesy  what  effect  the  future  will  have 
as  between  the  automobile  and  tlie  street  railway ;  but  we  know  today  that  street  railways 
are  absolutely  essential  for  the  handling  of  the  traffic  in  our  populous  cities,  and  during  the 
transition  period  at  least  those  companies  and  the  public  should  be  protected  and  safeguarded 
in  their  rights  until  such  time  as  the  change  comes  about. 

"Further  than  that,  if  we  are  in  a  transition  period,  where  the  policy  of  transportation 
is  changing  from  the  street  railwav  car  to  the  rubber-tired  vehicle,  I  believe  that  the  street 
railway  companies'  franchises  should  be  so  amended  as  to  permit  them  to  make  a  charge  in 
keeping  with  the  public  demand,  and  to  protect  the  millions  of  dollars  of  investments  now 
in  street  railway  properties  owned  by  millions  of  people  all  over  our  country." 

Mr.  Richard  Schaddelee  was  severely  critical  of  commission  regulation  from 
the  point  of  view  of  the  electric  railways.  In  Chapter  XX  of  this  report  I  have 
already  quoted  his  testimony  with  respect  to  the  unfairness  of  jitney  competition 
in  Illinois  and  the  cure  that  was  found  for  it  through  court  action,  not  through 
any  action  by  the  state  comtnission.  At  page  860  of  the  Proceedings,  he  discusses 
the  relation  of  the  private  automobile  to  the  future  of  the  electric  railway,  as 
follows : 

"Of  all  the  factors  to  which  the  present  critical  condition  of  the  electric  lines  has  been 
attributed  there  is  only  one  against  which  the  commissions  cannot  afford  protection.  This 
single  exception  is  the  competition  of  the  private  automobile. 

"And  this  factor  is  the  one  that,  in  my  opinion,  is  least  responsible  for  our  critical  illness. 

"The  automobile  has  fastened  the  riding  habit  on  the  public,  has  accustomed  it  to  rapid 
transit  and  thus  has  been  rather  beneficial  to  us  than  otherwise. 

"The  electric  lines  which  I  am  connected  with  or  have  knowledge  of  are  collecting  more 
street  car  fares  now  than  ever  before. 

"Our  gross  business  is  very  satisfactory  and  will  continue  to  increase  if  we  receive 
enough  money  to  restore  our  credit  with  the  investors. 

"The  electric  railways  are  not  sick  and  will  not  die  by  reason  of  being  economically  or 
evolutionarily  obsolete,  or  superannuated;  nor  by  reason  of  natural  decay.  If  these  were 
the  causes  of  our  illness,  or  if  we  were  threatend  with  extinction  by  a  superior  mode  of 
locomotion  that  can  better  perform  our  functions  under  the  same  restriction  as  to  fares, 
and  under  the  same  requirements  as  to  service,  taxes,  etc.,  then  in  that  case  it  would  be 
useless  to  ask  or  request  for  relief.  For  no  private  interests  can  successfully  resist  real 
economic  evolution. 

"Electric  railways  are  now  more  necessary  to,  and  enter  more  intimately  into  the 
social  and  industrial  life  of  our  urban,  suburban  and  interurban  population  than  ever  before, 
even  if  a  small  percentage  of  this  population  is  not  now  as  exclusively  dependent  upon  electric 
railway  transportation  as  it  was  ten  or  twenty  years  ago. 


292  Electric  Railway  Problem 

"The  automobile  has  been  a  great  factor  in  relieving  congestion  in  cities  by  encouraging 
suburban  and  interurban  residence. 

"These  people  loci  that  the  automobile  makes  them  independent  of  the  electric  lines, 
yet  they  will  use  them  habitually,  using  their  car  or  our  cars  as  their  convenience  or  caprice 
dictates. 

"No,  gentlemen,  the  present  critical  illness  and  the  impending  death  of  the  electric  lines 
are  not  due  to  natural  causes. 

"W'c  are  ill.  even  unto  death,  entirely  by  reason  of  an  artificial  cause  and  that  is: 
insufficient  financial  nourishment." 

Mr.  Ruger  W.  Babson  tells  what  he  thinks  of  the  future  of  the  street  rail- 
way at  pages  1059  and  1060  of  tlie  Proceedings,  where  the  following  testimony 
occurs : 

"The  Chairman:     What,  in  your  judgment,  is  the  future  of  the  street  railway  industry? 

"Mr.  liabson :  I  think  in  some  communities,  in  the  large  cities,  they  will  be  profitably 
operated,  and  there  will  be  a  sound  business  for  them.  I  think  in  other  communities  they 
will  be  disbanded.     I  do  not  think  one  problem  can  apply  to  all. 

"I""or  instance,  we  assumed  that  candles  had  gone  out  of  business  when  kerosene  came, 
and  that  kerosene  went  out  of  business  when  gas  came,  and  that  gas  went  out  of  business 
when  electricity  came;  yet,  as  a  matter  of  fact,  there  are  more  candles  and  more  kerosene 
and  more  gas  being  sold  today  than  ever  before. 

"1  think  that  the  street  railways  of  the  future  will  find  their  function  with  subways  and 
elevated  lines,  and  I  think  in  a  great  many  communities  the  street  railway  has  come  to  stay. 
For  instance,  you  can  get  in  from  Brookline  into  the  center  of  Boston  more  quickly  by  street 
railway  than  you  can  in  a  taxicab.  That  is  the  test.  .■Xnd  I  believe  for  that  service  the  street 
railway  should  be  allowed  to  charge,  if  it  wanted  to.  as  much  as  the  taxicab. 

"On  the  other  hand,  there  arc  hosts  of  other  instances  where  you  can  travel  better  by 
taxicab  than  you  can  by  street  car. 

"I  think  the  thing  ultimately  is  going  to  be  solved  on  the  basis  of  service,  whatever 
sy.stem  we  have,  whether  we  have  municipal  ownership  or  service-at-cost  plans,  or  what  not." 

That  "jitneys  should  be  regulated  and  their  operating  requirements  made 
no  less  onerous  than  those  imposed  on  the  street  cars,"  is  the  opinion  of  Mr. 
Beeler.  expressed  at  page  1669  of  the  Proceedings.  Mr.  Babson  speaks  even 
more  emphatically.     At  page  1064.  he  says: 

"I  do  not  believe  in  letting  Tom,  Dick  and  Harry  run  these  Ford  cars  around.  I  believe 
that  jitney  service  should  be  regulated,  and  that  it  should  be  done  decently  and  properly,  and 
in  a  responsible  way  and  by  responsible  people." 

At  page  1065.  he  says  further: 

"I  think  the  jitney  service  should  be  under  the  same  regulations  as  the  street  railway 
service. 

"Commissioner  Sweet :  You  would  want  to  have  just  as  much  guaranty  of  continued 
service  a.s  with  the  street   railroad? 

"Mr.  Babson:     Yes. 

"Commissioner  Sweet:     The  public  is  entitled  to  that? 

"Mr.  Babson:  Yes.  I  sympathize  with  the  Public  Service  Commission  in  their  demand 
for  service,  and  it  seems  to  mc  that  there  is  the  great  field  at  the  present  time  for  work — 
to  demand  service:  hut  we  are  all  discussing  price,  and  we  forget  all  about  service.  I  think 
there  arc  a  lot  of  street  railtoad  comiMnies,  that,  if  they  would  only  wake  up  and  give  good 
service,  they  would  save  themselves." 

Further  on.  at  pages  1068  and  1069  of  the  Proceedings,  Mr.  Babson's  idea 
that  free  competition  between  the  electric  railways  and  the  automobile  bus  system 
should  be  permitted  is  elaborated  and  defined  as  follows: 

"Mr.  Warren:  Mr.  Babson,  as  I  get  your  view  of  the  situation  it  is  either  that  the 
restrictions  on  the  street  railways  should  Ik."  removed  or  corresponding  restrictions  should  be 
imposed  upon  the  jitneys,  inchiding  the  motor  buses,  and  then  they  should  be  left  to  see  which 
one  will  survive  in  cases  where  Ixith  are  not  needed.     Is  that  right? 

"Mr.  Babson:  Well,  I  would  rather  remove  these  artificial  restrictions  on  the  street 
railways  first. 

".Mr,  Warren:     By  that  yf)u  mean  the  taxes  and  burdens? 


Jitney  Control  293 

"Mr.   Babson :     Yes,  I   would  not  put  paving  taxes   for  instance  on  the  jitneys. 

"Mr.  Warren:  I  was  not  referring  to  that  so  much  as  I  was  to  what  is  called  regulation. 
I  suppose  nearly  everybody  would  agree  that  those  burdens  which  have  no  relation  to  the 
service  and  that  are  not  necessary  to  performing  the  service  and  amount  only  to  a  tax  on 
the  car  rider  ought  to  be  removed  anyway.  If  income  is  needed  by  the  community  it  ought 
to  be  acquired  tlirough  some  proper  method  of  taxation  and  not  by  an  indirect  tax  on  the 
car  rider,  but  aside  from  that  there  is  a  great  deal  of  regulation  of  street  railways  that  does 
not  apply  to  jitneys  in  most  places;  for  example,  the  street  railways  are  expected  to  operate 
in  a  snowstorm  as  well  as  in  fair  weather;  it  is  expected  that  they  will  begin  very  early  in 
the  morning  and  operate  until  midnight  and  in  some  places  all  night.  Would  you  remove 
such  requirements  as  that? 

"Mr.  Babson :     I  should  make  them  equal,  yes,  sir. 

"Mr.  Warren:     Make  them  equal? 

"Mr.  Babson  :     Yes,  sir. 

"Mr.  Warren:     And  then  let  them  see  who  could  best  serve  the  public? 

"Mr.  Babson :  I  feel  very  strongly  that  we  should  insist  on  regulations  for  service  and 
we  should  hold  up  the  standard  of  service  on  all  forms  of  public  utilities;  and  I  feel  that  the 
great  work  of  public  utility  commissions  is  to  see  that  the  public  has  proper  service  and  to 
see  that  the  jitneys  and  the  street  cars  are  under  the  same  rules  as  to  service. 

"Mr.  Warren:  So  that  practically  I  infer  that  rather  than  remove  these  service  regula- 
tions from  the  street  railways  you  would  leave  them  on,  but  you  would  impose  corresponding 
requirements  on  the  jitneys. 

"Mr.  Babson  :     So  far  as  they  refer  to  service,  yes. 

"Mr.  Warren:  If  they  were  going  to  undertake  to  serve  in  a  certain  street  in  com- 
petition with  the  street  railway  they  should  meet  the  same  hours  and  same  service  conditions. 

"Mr.  Babson  :     Yes,  sir. 

"Mr.  Warren:  And  if  the  fare  was  going  to  be  regulated  on  the  street  railway  then 
the  fare  on  the  jitney  should  be,  but  your  judgment  I  take  it  would  be  that  as  regarding  the 
fare,  if  they  were  in  competition  you  would  let  them  regulate  that  themselves? 

"Mr.  Babson:     Yes.  I  would  let  that  regulate  itself. 

"Mr.  Warren :  .\nd  tlie  same  I  presume  as  regards  liability  for  accident.  I  do  not  know 
whether  you  have  noticed,  but  I  happened  to  be  in  Williamstown  over  Sunday  and  in  reading 
the  Republican  I  saw  that  a  jitney  in  Holyoke,  where  they  had  just  been  considering  a 
regulation  of  jitneys,  had  been  upset  with  six  or  seven  children  in  it;  one  or  two  had  been 
killed  and  the  rest  were  all  taken  to  the  hospital.  Now,  if  that  had  happened  to  a  street 
car  in  Massachusetts  it  would  have  amounted  to  anywhere  from  twenty  to  fifty  or  sixty 
thousand  dollars  damages  would  it  not,  as  our  juries  operate? 

"Mr.  Babson:     Including  lawyers'  fees. 

"Mr.  Warren :  Well.  I  think  with  that  it  would  be  still  more,  but  it  would  have  been 
a  very  substantial  amount.     How  would  you  meet  that? 

"Mr.  Babson :  I  think  that  same  thing  should  apply ;  yes,  I  should  think  the  same  thing 
should  apply. 

"Mr.  Warren:  Most  of  the  jitneys  which  are  at  present  operating  in  Massachusetts 
are  individual  operators,  and  the  only  way  it  could  be  reached  would  be  by  requiring  some 
sort  of  a  bond. 

"Mr.  Babson:     When  I  speak  of  jitneys  I  have  more  in  mind  the  bus  system. 

"Mr.  Warren:  .^nd  there  you  would  expect  a  corporation  with  some  responsibility  of 
operation  ? 

"Mr.  Babson :    Yes." 

Other  witnesses  also  laid  stress  upon  the  point  that,  in  many  parts  of  the 
country  at  the  present  time,  the  electric  railways  have  to  meet  unfair  competition 
from  the  jitney  buses  for  passenger  traffic,  and,  so  far  as  the  interurban  lines 
are  concerned,  unfair  competition  from  the  motor  trucks  for  freight  service. 

If  jitney  buses  are  to  be  regulated  in  such  a  way  as  to  meet  the  requirements 
of  fair  competition,  several  questions  arise.  In  the  first  place,  it  must  be  deter- 
mined by  whom  the  regulatory  authority  shall  be  exercised,  and,  in  the  second 
place,  what  particular  regulations  are  necessary  in  order  to  put  jitney  competi- 
tion on  a  fair  basis.  The  development  of  public  control  over  the  jitney  busi- 
ness has  followed  along  much  the  same  lines  as  the  development  of  control  over 
electric  railways,  but  is  still  a  long  way  behind.  For  example,  in  some  states 
where  the  regulation  of  electric  railway  service  and  rates  has  been  conferred 
upon  the  state  commissions,  the  regulation  of  the  jitneys  is  still  left  in  the  hands 


294  Electric  Railway  Problem 

of  the  individual  municipalities.  If  both  systems  of  local  transportation  are  to 
be  tolerated,  and  if  their  competition  is  to  be  put  upon  a  fair  basis,  it  seems  rea- 
sonably clear  not  only  that  general  legislation  emanating  from  the  same  source 
and  applying  both  to  the  electric  railways  and  the  jitneys  is  necessary,  but  also 
that  the  power  of  interpreting  and  applying  such  legislation  in  the  manner  char- 
acteristic of  commission  regulation  should  be  exercised  in  the  case  of  both 
utilities  by  the  same  authority.  Undoubtedly,  if  it  is  to  be  admitted  that  exclu- 
sive state  regulation  is  an  appropriate  and  necessary  method  of  controlling  elec- 
tric railway  service  and  rates,  the  electric  railways  have  a  just  grievance  so  long 
as  the  competition  of  the  jitney  bus  is  subject  to  no  substantial  restrictions 
except  those  which  may  be  imposed  by  the  caprice  of  the  municipal  authorities, 
or  by  their  hostility  to  the  street  railways  over  which  they  have  lost  jurisdiction. 
I  am  not  at  this  point  admitting  that  exclusive  state  regulation  is  the  proper 
method  of  controlling  the  electric  railways,  but  merely  admitting  that,  if  this 
system  is  to  prevail  with  respect  to  electric  railways,  their  demand  that  the  jitneys 
should  be  similarly  controlled  is  a  logical  one.  It  is  my  own  view,  however,  as 
will  be  shown  in  a  later  section,  that  local  transportation  cannot  be  regulated 
with  the  highest  degree  of  success  except  through  a  carefully  worked  out  plan 
of  cooperation  between  state  and  local  authorities. 

What  Mr.  Lucius  S.  Storrs  thinks  should  be  done  with  respect  to  the  jitneys 
is  shown  at  pages  444  and  445  of  the  Proceedings,  where  the  following  testimony 
is  found : 

"CommissloiKT  Meeker:  I  take  it  that  you  advocate  the  regulation  of  the  jitney  and 
the  motor  truck  traffic  and  control  of  such  traffic  by  the  public,  in  order  to  put  those  services 
on  the  same  footing  as  the  services  rendered  by  the  street  railway  companies? 

"Mr.  Storrs:  .-Xhsohitcly,  it  seems  to  nic  essential  from  the  standpoint  of  the  communities 
and  the  coniinonwoalths.  in  the  large  communities,  to  have  that  character  of  transportation 
thoroughly  regulated,  the  .same  as  the  other  means  of  transportation  arc  regulated. 

"Commissioner  Meeker:  .And  if  those  means  of  traffic  are  able  to  heat  the  street  rail- 
ways out,  if  they  were  all  subjected  to  the  saine  regulation,  the  same  measure  of  control, 
then  the  street  railway  companies  would  have  to  take  a  licking;  but  it  is  wholly  unfair, 
I  gather  from  your  testimony,  to  have  these  services  rendered  on  an  unfair  basis? 

"Mr.  Storrs:      Yes.  sir. 

"Commissioner  Meeker:     Which  is  really  service  rendered  to  the  public  at  less  than  cost? 

"Mr.   Storrs:     Without  doubt. 

"Commissioner  Meeker :  And  at  the  expense  of  the  established  service  rendered  by  the 
street  railway  companies? 

"Mr.  Storrs:  The  communities  and  the  states  have  invited  investors  to  come  in  and 
provide  the  essential  transportation  need  of  the  communities,  and  have  in  the  past  guaranteed, 
through  their  statutes,  a  transportation  monopolv.  In  this  case,  this  other  public  utilitv  would 
come  in,  and  for  the  coiiuiiunity  and  the  commonwealth  to  allow  unregulated  competition  is 
inconceivable.     It  should  not  Ih."  allowed  to  go  on." 

At  pages  454  and  455  Mr.  Storrs  continues  as  follows: 

"Commissioner  Sweet:  If  I  understand  you  right,  you  think  that  jitneys,  auto  trucks, 
and  any  conveyance  that  carries  people  for  hire,  ought  to  be  regulated  and  controlled  on  the 
same  eipiitablc  principles,  with  a  view  to  the  general  interest  of  the  public,  as  well  as  the 
electric   railways? 

"Mr.  Storrs:     .Absolutely. 

"Commissioner  Sweet:     You  would   recognize,   then,  the  right  of  jitneys  to  exist? 

"Mr.   Storrs:     Without  question. 

"Cotnmissioner  Sweet  :  Hut  I  dare  say  that  you  think  if  they  were  properly  regulated, 
there  would  not  Ik-  so  many  of  them? 

"Mr.  Storrs:  The  weather  regulates  them  automatically  at  times.  During  periods  of 
severe  rain,  they  get  off  of  the  streets,  and  during  periods  of  snowstorms,  the  service  is 
entirely  discontinued,  or  continued,  perhaps,  through  that  portion  of  the  street  that  is 
clcarcil  of  snow  by  the  railway   for  its  own  needs. 


Jitney  Control  295 

"Commissioner  Sweet:  If  the  same  rule  were  applied  to  these  methods  of  conveyance 
as  is  applied  to  electric  railways,  do  you  think  it  would  make  a  very  material  difference  in 
the  number  of  jitneys  that  would  be  used? 

"Mr.  Storrs:     Oh,  without  doubt. 

"Commissioner  Gadsden  :  As  a  matter  of  fact,  has  not  that  been  the  history  throughout 
the  United   States  already,   Mr.   Storrs? 

"Mr.  Storrs  :     That  has  been  the  history. 

"Commissioner  Sweet:     Have  you  figures  that  would  show  that? 

"Mr.  Storrs:  They  can  be  prepared.  We  have  no  figures  of  that  particular  kind, 
because  in  our  country  there  has  been  no  regulation. 

"Commissioner  Sweet :  But  it  would  seem  reasonable  that  they  should  be  regulated  on 
the  same  general  principles  as  the  electric  railways. 

"Mr.    Storrs:     Yes;    that   is   true. 

"Commissioner  Sweet :  Can  you  think  of  any  reason  that  would  be  given  why  they 
should  not  be  so  regulated? 

"Mr.   Storrs :     It  is  inconceivable  to  me  that  there  would  be  any  reason.'' 

Undoubtedly,  back  of  the  demand  for  efifective  jitney  regulation  is  the  hope 
and  expectation  on  the  part  of  the  electric  railway  men  that  such  regulation  will 
greatly  restrict,  if  it  does  not  entirely  destroy  the  jitneys.  On  this  point,  Mr. 
Storrs'  testimony  is  reiterated  farther  on  in  the  Proceedings.  At  page  460,  we 
find  the  following : 

"Commissioner  Gadsden :  Well,  the  point  I  wanted  to  get  your  opinion  on  was  this : 
Is  it  not  true  that  wherever  there  has  been  proper  public  regulation,  the  jitney  has  practically 
disappeared? 

"Mr.  Storrs:     .'Mmost  entirely." 

Mr.  W.  B.  Head,  Vice-President  of  the  Dallas  Railway  Company,  at  page 
635  of  the  Proceedings,  tells  how  jitney  competition  was  destroyed  in  Dallas,  as 
follows : 

"It  was  done  by  creating  a  zone  in  which  they  were  not  allowed  to  operate,  and  that 
zone  comprises  practically  all  of  the  business  section. 

"Mr.  Warren;     That  was  taken  into  litigation? 

"Mr.  Head:     That  was  taken  into  litigation,  and  had  to  go  through  the  courts. 

"Mr.  Warren;     And  it  was  sustained,  was  it? 

"Mr.  Head:  It  was  sustained;  yes,  sir.  There  had  been  other  ordinances  passed,  the 
requiring  of  bonds,  and  things  of  that  kind.  There  were  altogether  four  or  five  lawsuits  in 
the  court." 

The  testimony  of  Mr.  Homer  Loring  with  respect  to  jitney  competition  in 
eastern  Massachusetts  and  the  proper  way  of  handling  it,  and  the  testimony  of 
Mr.  William  C.  Bliss  about  jitney  control  in  Rhode  Island  have  already  been 
cited  at  considerable  length  in  Chapter  XX  of  this  report.  One-man  car  opera- 
tion as  a  means  of  meeting  and  overcoming  jitney  competition  failed  in  Kenosha, 
Wisconsin,  in  1914.  The  reasons  are  explained  by  Mr.  James  D.  Mortimer,  at 
page  781  of  the  Proceedings,  where  he  says : 

"In  1914.  the  little  street  railway  down  there,  embracing  about  seven  and  a  half  miles  of 
track,  had  very  severe  jitney  competition.  Distances  were  very  short.  We  undertook  the 
operation  of  one-man  cars.  That  produced  a  very  unfavorable  public  reaction.  The  tovvn 
was  not  well  situated  for  the  operation  of  one-man  cars,  because  there  are  twenty-five  rail- 
road crossings  in  our  seven  and  a  half  miles  of  track,  and  one  of  the  principal  functions  of 
the  conductor  is  to  flag  the  railroad  crossings.  At  least,  that  was  the  principal  function  during 
the  time  when  the  jitneys  were  so  active." 

It  appears  that  in  1918  the  trainmen  in  Kenosha  demanded  an  increase  of 
ten  cents  per  hour  in  their  wages,  but  the  company  told  them  it  was  not  making 
enough  money  to  grant  the  increase.  Then  the  men  threatened  to  strike,  and  the 
company  "told  thein  that  was  probably  the  best  thing  for  them  to  do  under  the 
circumstances,  and  that  there  were  lots  of  other  means  of  employment  in  Kenosha 


296  Electric  Railway  Problem 

that  were  more  remunerative."  The  men  struck  and  street  railway  service  was 
entirely  stopped.  What  happened  then  is  described  by  Mr.  Mortimer  at  page 
782  of  the  Proceedings,  as  follows : 

"While  there  had  been  much  complaint  about  single-truck  cars  and  the  fact  that  they 
would  like  double-truck  cars  down  there,  opinion  gradually  changed,  and  on  numerous 
occasions  the  editorial  writers  in  the  local  press  wished  the  company  would  take  a  car  out 
of  the  station  and  let  it  stand  down  in  Market  Square,  so  they  could  see  what  a  street  car 
looked  like. 

"Things  developed  that  way  for  five  weeks,  until  the  Railroad  Commission  ordered  the 
jitneys  off  the  streets  and  ordered  the  company  to  resume  service.  \Vc  resumed  service  at 
a  five-cent  fare,  and  with  largely  increased  revenues.  We  are  now  operating  that  short 
system  with  the  smallest  average  sized  cars  and  the  largest  earnings  per  car  mile  that  we 
have  in  the  .State  of  Wisconsin." 

Dr.  IXigald  C.  Jackson  discussed  the  relations  of  the  street  railway  to  the 
jitney  from  the  point  of  view  of  community  economy.  He  reached  the  con- 
clusion that  street  railway  service  is  generally  more  economical  than  jitney  serv- 
ice, even  though  the  direct  cost  to  the  individual  rider  may  be  greater.  Upon  the 
specific  subject  of  the  apparent  advantage  of  the  jitney  buses  in  not  having  a 
big  investment  tied  up  in  permanent  way  and  tracks  and  power  plants.  Dr.  Jack- 
son says,  at  pages  1425  and  1426  of  the  Proceedings: 

"Here  is  a  thing  that  affects  this  (pustion  of  the  drift  to  the  buses.  You  must  remember 
that  practically  hall,  or  .somewhere  in  the  neighborhood  of  half  of  the  total  fixed  investment 
of  the  street  railways  is  in  the  permanent  way  and  paving.  It  is  fixed.  It  is  that  part  that 
is  corresponding  to  the  street  surface.  That  proportion  has  slowly  increa.sed  during  the  past 
years.     The  increase  in  proportion  has  not  been  very  marked,  but  it  has  slowly  increased. 

"The  jitney  buses,  whether  they  arc  of  the  sporadic  kind  or  regular  system  line  buses, 
which  run  at  will  on  the  street  surfaces,  are  freed  from  this  investment.  That  puts  them  in  a 
position  W'here,  perhaps  unless  the  difference  in  circumstances  is  understood  by  the  public, 
the  drift  toward  the  buses  will  continue,  and  will  actually  take  care  of  a  good  part  of  the 
present  surface  hauling  of  the  street  railways. 

"If  the  public  fully  understands  the  situation,  I  think  the  buses  will  not  be  looked  upon 
as  being  so  favorable  as  they  are  now  looked  upon  as  being. 

******** 

"Now,  the  jitney  buses  do  not  have  this  investment.  True,  their  owners  contribute  by 
taxes  and  license  fees  toward  the  cost  of  pavements,  but  .so  do  the  street  railways,  in  addition 
to  financing  the  investment  of  their  own  permanent  way  which  is  used  jointly  by  other  street 
traffic.  Moreover,  the  street  railways  m.ike  heavy  investments  in  power  plants  of  the  most 
economical  character,  which  is  a  conserv-ation  policy  as  well  as  a  policy  for  economy,  and 
the  jitney  does  not.  These  considerations  make  the  jitney  business  more  like  other  commercial 
enterprises  in  respect  of  the  rapidity  of  turnover  of  capital,  and  also  enable  it  to  compete  with 
street  car  service  operated  with  flat   fares." 

Dr.  Jackson  then  goes  on  to  discuss  the  eflfect  of  jitney  operation  upon  street 
congestion  and  paving  costs.     At  page  1426,  he  says: 

"Now,  the  question  really  is,  will  jitney  bus  lines  with  systematic  routes  and  reliable 
schedules  make  desirable  substitutes  or  successors  to  the  street  railways,  or  at  least  as  to  a 
part  of  their  business,  as  has  been  asserted,  more  or  less  unthinkingly,  but  sometimes  with 
real,  definite  decisions.     *     •     *     * 

"What  would  bo  the  effect  on  the  street  traffic  congestion  in  cities  such  as  Chicago 
or  Hallimorc  or  Philadelphia  or  Boston  and  a  large  number  of  others  if  the  surface  street 
railway  service  was  replaced  by  bus  service  of  equal  reliability?  Many  of  the  American 
cities,  I  do  not  know  how  many,  but  ipiite  a  large  numlKr,  each  have  more  than  one  thousand 
cars  operating  on  street  railways  during  their  rush  hours. 

"To  replace  such  a  service  with  buses  would  retpiire  .several  times  as  manv  vehicles, 
thereby  adding  to  the  welter  of  street  traffic  in  the  heart  of  each  city.  These  vehicles  would 
cause  more  than  a  proportionate  addition  to  the  traflic  confusion  because  they  would  travel 
at  will  over  the  street,  instead  of  In'ing  confined  to  certain  definite  channels  like  the  street 
cars.  Moreover,  additional  streets  would  have  to  be  paved  with  smooth  pavement  at  great 
expense  to  support  this  bus  traffic.     Buses  run  very  well  on  smooth  paved  streets  like   Fifth 


Jitney  Control  297 

Avenue,  New  York,  and  certain  streets  of  Baltimore  or  Newark,  but  few  American  cities 
pave  sufficient  streets  with  smooth  pavements  of  the  quality  enabling  them  to  stand  heavy 
traffic,  and  the  cities  would  find  it  necessary  to  make  enormous  additions  to  their  investments 
in  pavements  before  jitney  buses  would  meet  the  general  needs  of  local  transportation.  In 
addition  to  this  a  large  increase  of  annual  cost  for  paving  maintenance  would  follow.  Given 
equally  systematic  and  reliable  service  by  street  cars  and  by  jitney  buses,  community  economy 
stands  with  the  street  car  for  service  in  main  channels." 

But  the  public  may  demand  jitney  service  anyway,  not  realizing  how  much  it 
costs.     At  page  1426,  Dr.  Jackson  continues : 

"I  am  satisfied  that  that  opinion  is  correct  community  economy,  that  is,  dollars  and  cents, 
when  you  have  equal  physical  results  in  the  way  of  .service;  but  it  may  not  be  that  which 
satisfies  the  public  best,  and  if  it  is  not  that  which  satisfies  the  public  best,  the  jitney  buses 
must  come  and  the  rail  service  practically  relinquish  its  short-haul.'' 

Dr.  Jackson  thinks  that  "the  jitney  may  be  made  serviceable  for  certain  special 
conditions,"  but  that  "it  is  necessary  under  our  present  cotiditions  of  city  life 
to  maintain  the  rail  traffic  at  a  high  degree  of  completeness."  His  conclusion  is 
reached  at  page  1428  of  the  Proceedings,  where  he  says: 

"If  we  allow  the  street  railway  to  decline  and  the  jitney  to  partially  take  its  place,  it  is 
possible  that  the  direct  transportation  cost  of  the  individuals  in  the  community  w'ill  decrease 
compared  with  the  cost  under  present  conditions,  but  the  total  cost,  considering  the  sum  of 
the  direct  and  indirect  costs,  will  actually  be  increased,  and  the  final  result  of  allowing  our 
local  transportation  by  street  railways  to  decline,  will  lead  us  into  a  less  satisfactory  ultimate 
condition,  although  the  immediate  effect  may  appear  to  be  improved." 

Still,  Dr.  Jackson  is  not  sure  that  the  public  will  agree  with  him,  and  he  says 
that  it  is  for  the  public  to  decide  whether  "a  sacrifice  of  community  economy" 
shall  be  made  for  the  sake  of  other  things.  On  the  subject  of  repressive  regula- 
tion, at  pages  1428  and  1429,  he  says : 

"In  my  opinion  no  amount  of  repressive  regulation  will  be  adequate  to  do  away  with 
the  competition  which  jitney  buses  produce.  You  can  make  repressive  legislation  all  you 
choose,  and  then  it  will  not  do  away  with  them,  if  the  public  believes  they  are  right.  The 
street  railway  man  who  says:  'If  they  would  only  regulate  these  jitneys  oflf  the  streets,  we 
would  be  all  right' — that  street  railway  man  should  look  into  his  mental  processes  and  see 
what  is  the  matter  with  his  management  that  allows  the  jitney  to  come  up;  because  you 
cannot  get  rid  of  them  by  repressive  legislation  if  the  public  believes  they  are  necessary." 

At  page  1429,  he  continues : 

"I  believe  that  the  present  sporadic  jitney  is  a  scheme  that  will  soon  lose  popular  favor; 
and.  in  fact,  at  one  time  in  certain  cities  it  was  very  rife — anybody  would  buy  a  Ford  and 
run  it  for  a  while,  and  it  was  in  great  favor;  but  in  most  of  those  cities  where  it  was  in  the 
greatest  favor  for  a  time,  it  is  in  much  less  favor  now." 

Dr.  Jackson's  point  that  the  regulation  of  jitneys  should  be  for  the  purpose 
of  establishing  regular,  definite  lines  and  providing  for  systematic  transportation 
for  the  benefit  of  the  community,  is  emphasized  at  page  1429  of  the  Proceedings, 
as  follows : 

"The  Chairman:  The  kind  of  legislation  which  you  have  in  mind  is  that  in  the  interest 
of  the  public,  rather  than  that  in  the   interest  of  the  street  railway  system? 

"Mr.  Jackson:  Yes;  and  I  say  that  regulation  of  the  jitneys  which  is  in  the  interest 
of  the  public,  aids  the  public,  because  it  makes  systematic  transportation  out  of  it. 

"Legislation  or  regulation  which  is  in  favor  of  the  street  railway  company,  which  is 
repressive  on  the  jitneys,  will  never  put  the  jitneys  out  of  business,  because  the  public  will 
have  them  if  the  public  thinks  they  want  tliem. 

"The  one  way  to  put  the  jitneys  out  of  business,  I  am  satisfied,  is  for  the  street  railway 
people  to  make  their  service  satisfactory,  and  their  prices  so  reasonable  that  the  public  are 
satisfied  to  ride.     *     ♦     *     ♦ 

"If  the  street  railway  service  cannot  be  made  complete  and  adequate  to  the  needs,  some 
other  service,  such  as  jitney  service,  w-ill  come  in  as  a  competitor.     In  fact,  it  ought  to  come 


298  Electric  Railway  Problem 

in  and  be  encouraged  unless  means  can  be  provided  to  make  the  street  railway  service  adequate 
to  the  needs,  and  the  necessities  of  the  present  are  to  find  the  best  ways  of  making  the  street 
railway  service  adequate,  in  view  of  the  fact  that  it  is  ultimately  the  cheaper  service." 

Mr.  Charles  L.  Henry,  of  the  Indianapolis  and  Cincinnati  Traction  Com- 
pany, called  attention  to  competition  of  the  motor  truck  for  interurban  freight 
business.  In  the  development  of  the  motor  truck  business  during  the  war  period 
the  Highways  Transport  Committee  of  the  Council  of  National  Defense  ran  up 
against  the  problem  of  "wildcatting,"  and  issued  a  circular  calling  attention  to 
it  in  the  following  language,  quoted  at  page  713  of  the  Proceedings: 

"One  very  pertinent  subject  is  suggested,  and  that  is  the  possibility  of  a  few  individuals 
who  might  attempt  to  haul  freight  from  a  large  city  to  towns  30  or  40  miles  away  for  a 
sum  per  hundred  weight  which  would  make  it  impossible  for  one  oiierating  a  route  regularly 
and  on  fixed  schedule  to  meet  such  competition.  The  suggestion  made  is  that  a  continuation 
of  sucli  practices,  wildcatting,  as  it  were,  in  the  motor  transportation  field  tends  to  dis- 
courage the  entrance  into  this  field  of  those  who  would  seek  to  serve  the  public  regularly  and 
satisfactorily,  and  at  a  cost  to  the  shipper  of  just  enough  to  make  a  venture  financially 
profitable." 

Mr.  Henry's  comment  is  found  at  pages  713  and  714  of  the  Proceedings,  as 
follows : 

"Now,  take  that  and  apply  it  to  the  interurbans.  It  tells  its  own  story.  It  is  rather 
remarkable  that  at  this  early  day  in  the  development  of  trucking  they  should  have  to  issue 
such  a  circular  as  that.  We  do  not  ask  you  to  do  away  with  the  truck  hauling  by  motors, 
but  we  do  think  they  ought  to  be  under  the  same  kind  of  regulation  and  restrictions  that  we 
are  under. 

"Mr.   Warren:     They  are  like  the  jitneys,   I   suppose,  arc  they   not? 

"Mr.  Henry:  They  are  worse;  that  is  all.  The  jitneys  are  lice,  and  these  are  full 
grown  animals. 

"There  is  no  reason  why  this  sort  of  wildcatting,  as  this  gentleman  calls  it  here,  should 
be  permitted  to  go  on  uncontrolled,  and  I  am  glad  to  know  that  some  fellow  going  into  the 
truck  business  has  seen  fit  to  call  attention  to  it.  It  may  bring  about  important  results.  It 
is  one  of  the  things  that  you  gentlemen  ought  to  take  into  consideration,  and  take  such 
action  as  you  may  think  is  best  in  regard  to  it,  liecause  it  amounts  to  a  great  deal.'" 

The  conclusion  ot  the  whole  matter  of  the  control  or  abolishment  of  jitney 
competition  may  be  summed  up,  perhaps,  in  a  few  words.  .Ml  transportation 
service  is  for  the  public.  Jitneys  and  automobile  buses  cannot  be  repressed 
merely  for  the  sake  of  compelling  people  to  ride  on  the  street  cars,  particularly 
if  the  car  fares  are  higher  than  the  jitney  fares  and  the  car  service  less  convenient 
than  the  jitney  service,  and  if  the  electric  railways  are  to  continue  in  the  position 
of  a  more  or  less  speculative  business  in  which  the  private  owners  stand  to  reap 
the  principal  advantages  from  the  restriction  of  competition.  However,  it  is 
clearly  in  the  public  interest  that  all  common  carriers  engaged  in  local  transpor- 
tation service  should  be  required  to  render  adequate  and  safe  service,  and  that 
local  transportation  facilities  should  be  develo])f(l  in  the  most  economical  and 
effective  way  from  the  point  of  view  of  the  comnnmity.  L'nnecessary  and  de- 
structive competition  in  such  services  ought  not  to  be  permitted,  and  the  com- 
ninnity  at  large  should  conserve  the  established  facility  that  still  is  and  (jromises 
to  continue  for  an  indetinite  period  the  principal  means  of  local  transportation. 
The  problem  is  in  considerable  measure  a  local  one,  but  in  every  case  is  should  be 
solved  with  intelligent  regard  to  the  permanent  interests  and  oliligations  of  the 
community.  If  the  street  railways  are  to  be  allowed  the  benefits  of  even  a  quali- 
fied  monopoly,   they   should   be   required   to   fulfill    its   obligations.     They   nnist 


Jitney  Control  299 

render  service  that  is  adequate  and  convenient  at  rates  that  are  attractive.  The 
community  can  afford  to  go  a  long  way  to  preserve  street  railway  service ;  but 
the  question  constantly  forces  itself  to  the  front  whether  it  could  not  adopt  the 
necessary  protective  measures  with  a  better  conscience  if  it  were  prepared  in 
fact  to  deal  with  local  transportation  as  a  full-fledged  public  function.  We  are 
still  discussing  primarily  the  problem  of  restoring  electric  railway  credit.  Jitney 
repression  will  not  do  that  effectively,  if  it  leaves  the  riding  public  in  a  crotchety 
mood. 


Chapter  XXXIII 

COOPERATIVE    RELATIONS    BETWEEN    MANAGEMENT 

AND  MEN 

An  important  leak  in  electric  railway  revenue  in  various  places  and  at  dif- 
ferent times  has  resulted  from  the  "knocking  down"  of  fares  by  conductors.  In 
other  cases,  as  a  result  of  overcrowding  or  carelessness,  the  conductors  have 
failed  to  collect  from  all  the  passengers.  Obviously,  it  is  impossible  to  measure 
accurately  these  unrecorded  losses.  The  Indiana  Public  Service  Commission 
found  a  very  serious  condition  existing  in  this  respect  on  the  Indianapolis  lines. 
Mr.  Carl  H.  Mote,  then  secretary  of  the  Indiana  Commission,  testifies  in  regard 
to  it  at  page  1118  of  the  Proceedings,  as  follows: 

"W'c  found  by  a  survey  made  in  Indianapolis,  that  the  companies  there  were  losing  13.8 
per  cent  of  their  total  revenue  by  failure  to  collect  the  fares. 

"Mr.  Warren:      How  much? 

"Mr.  Mote:     13.8  per  cent  of  the  total  revenue.     That   revenue   is   now  being  collected. 

"Commissioner  Bcall :  Was  that  due  to  war  conditions — the  different  class  of  labor  that 
you  had  during  the   war  conditions? 

"Mr.  Mote:     Incidentally  to  that,  but  that  was  not  the  fundamental  thing. 

"Commissioner  Gadsden :     You  mean  knocking  down. 

"Commissioner  Beall :  You  think  that  was  a  condition  that  had  endured  for  a  number 
of  years? 

"Mr.  Mote:     Yes. 

"Commissioner  Beall :  I  know  a  great  many  companies  had  that  trouble  during  the  war 
period,  due  to  the  different  class  of  lal)or  that  they  had  to  use.  How  do  you  account  for  it 
in  that  case?  Did  they  have  lower  grade  of  labor  than  most  other  cities  or  was  their  system 
incorrect  ? 

"Mr.  Mote:  Well,  during  the  rush  hours  it  was  shown  to  be  a  physical  impossibility  for 
the  conductor  to  collect  the  fares. 

"Commissioner  Bcall:     Have  they  corrected  it?     What  did  they  do? 

"Mr.  Mote:     By  the  installation  of   the  pay-as-you-enter  cars. 

"The   Chairman:      Has  that   increased   the   revenue? 

"Mr.  Mote:  Absolutely.  I'or  instance,  a  16  per  cent  increase  in  rate  has  given  the 
company  a  25  per  cent  increase  in  revenue." 

Mr.  Mote  stated  that  in  his  opinion  the  pay-as-you-enter  system  had  not 
slowed  down  the  operation  of  the  cars  to  an  appreciable  extent,  and  the  cost  of 
adopting  it  had  been  slight.     At  page  1119  of  the  Proceedings,  he  says: 

"Another  objection  that  the  company  raised  to  introducing  the  pay-as-you-enter  car  was 
the  expense.  They  had  the  old  type  car.  We  worked  out  a  very  simple  modification,  how- 
ever, of  their  old  type  car,  which,  I  think,  did  not  cost  them  to  exceed  $50  or  $6(1  per  car  to 
convert  their  old  type  cars  into  pay-as-you-enter  cars.  The  gain  has  been  treinendous,  and  I 
think  the  company  itself  would  never  go  back  to  the  old  type  of  car  now." 

This  backwardness  of  the  Indianapolis  street  railway  companv  with  respect 
to  the  conservation  of  its  revenues  was  only  one  of  the  evidences  of  {xjor  managc- 
incnt  found  by  the  Indiana  Commission  in  its  contact  with  the  street  railways  of 
the  state.  Mr.  Mote  stated  that  a  good  many  cases  of  bad  conditions  of  opera- 
tion had  been  found.     He  spoke  particularly  of  costly  wrecks  on  intcrurban  lines 

300 


Cooperation    with    Labor  301 

that  should  have  been  avoided.  In  one  case,  where  the  block  signals  were  out 
of  repair,  he  estimated  that  the  wreck  would  cost  the  company  $150,000.  He 
pointed  out  that  the  predecessor  of  the  Ft.  Wayne  &  Northern  Indiana  Traction 
Company,  the  one  electric  railway  of  the  state  now  in  receivers'  hands,  had  a  tre- 
mendous disaster  a  few  years  ago  which  resulted  in  a  receivership.  The  present 
company,  he  said,  was  going  through  a  friendly  reorganization  to  reduce  its 
securities.  Mr.  Mote  did  not  state  to  what  extent  the  bad  operating  conditions 
in  Indiana  were  due  to  a  failure  of  the  employes  to  cooperate  fully  with  the 
management,  but  he  indicated  that  in  general  the  street  railway  employes  were 
not  well  organized. 

I  have  cited  the  conditions  described  by  Mr.  Mote  to  give  something  of  a 
background  to  the  suggestion  of  Mr.  Thomas  E.  Mitten  that  the  real  cure  for  the 
financial  problem  of  the  street  railways  is  to  be  found  in  his  scheme  of  coopera- 
tive management.  In  Indiana  the  economies  and  improvements  suggested  by  the 
Public  Service  Commission  enabled  the  companies  to  get  along  without  raising  the 
fares  above  five  cents.  In  Philadelphia  the  necessary  economies  and  efficiencies 
were  developed  by  the  company  as  a  matter  of  policy  initiated  long  before  the 
war.  While  the  Indiana  Commission  was  insisting  on  the  adoption  of  the  pay- 
as-you-enter  plan  for  getting  all  the  fares  collected  and  paid  into  the  street  rail- 
way treasury,  the  Philadelphia  Rapid  Transit  Company  was  appealing  to  the 
self-interest  of  its  employes  under  the  "Cooperative  Plan"  and  refusing  to  adopt 
the  fare-box  method  of  collection.  Mr.  Mitten's  prepared  statement  was  read 
into  the  Proceedings  by  Mr.  C.  J.  Joyce.     At  page  1515  we  find  the  following: 

"Results  here  secured  are  thrown  into  bold  relief  by  comparison  with  conditions  existing 
elsewhere.  Philadelphia  Rapid  Transit,  with  almost  5  per  cent  fewer  employes  than  in  1910. 
is  now  producing  over  98  per  cent  more  effective  traffic  units  per  employe,  this  as  against 
results  secured  on  the  Pennsylvania  Railroad  contained  in  a  speech  by  Vice-President  W.  W. 
Atterbury  as  reported  in  the  public  press,  wherein  the  number  of  employes  is  said  to  have 
been  increased  14  per  cent,  the  output  (or  effective  traffic  units)  being  11  per  cent  less  than  in 
pre-war  days.  The  case  of  the  Pennsylvania  Railroad,  showing  decreased  production,  is  but 
one  of  the  many  instances,  wherein  the  effort  to  increase  production  has  given  way  to  the 
great  struggle  upon  the  part  of  labor  to  secure  a  larger  wage  for  a  smaller  amount  of  work. 
"Aside  from  the  urgent  necessity  of  helping  to  make  up  for  the  shortage  of  necessaries 
occasioned  by  the  war  in  Europe,  it  stands  to  reason  that  capital  and  labor  cannot  divide  that 
which  does  not  exist  and  that  more  of  everything  essential  must  now  be  produced  in  order 
that  there  may  be  more  with  which  to  supply  our  needs.  If  the  forces  of  labor  and  manage- 
ment will  combine  so  effectively  as  to  produce  almost  100  per  cent  more  per  man,  as  we  are 
doing  here  through  cooperative  effort,  much,  if  not  all,  that  is  required  to  overcome  the 
higher  cost  of  living  will  have  been  accomplished. 

"The  keystone  of  all  success  as  between  Man  and  Management  is  confidence.  Distrust 
breeds  discontent.  Confidence  begets  confidence  and  cooperative  effort  then  becomes  possible. 
The  confidence  of  the  Men  in  the  Management  and  likewise  the  confidence  of  the  Manage- 
ment in  the  Men  is  what  makes  Philadelphia  stand  out  in  accomplishment. 

"Philadelphia  is  almost  alone  in  its  position  of  antagonism  to  'cash  box  fare  collection' 
or  any  system  which  tends  to  show  a  lack  of  confidence  in  the  conductor.  It  can  hardly 
be  expected  that  a  self-respecting  employe  will  take  seriously  the  statement  that  he  is  our 
partner  if  we  require  the  action  of  the  passenger  to  assure  us  that  the  fare  collections  are 
being  properly  made." 

Here  we  have  two  quite  distinct  phenomena — efficiency  and  honesty  imposed 
by  a  state  commission  and  efficiency  and  honesty  developed  through  a  coiubined 
appeal  to  honor  and  self-interest.  Which  is  the  better?  As  shown  by  Table  II, 
in  Chapter  XXVIII  of  this  report,  the  gross  passenger  revenues  of  the  Phila- 
delphia Rapid  Transit  Company,  without  any  change  in  the  fare,  showed  an  in- 


302  Electric  Railway  Problem 

crease  of  20.3  per  cent  for  the  first  nine  months  of  1919  as  compared  with  the 
first  nine  months  of  1917.  The  increase  in  the  passenger  revenues  of  the  Indian- 
apolis Traction  and  Terminal  Company  during  the  same  period  was  29.48  per 
cent,  but  the  average  rate  of  fare  had  increased  17.37  per  cent  in  the  meantime. 
Philadelphia  appears  to  have  a  little  the  better  of  it,  but,  as  the  saying  goes,  one 
swallow  does  not  make  a  summer,  and  very  little  can  be  proven  decisively  as 
to  the  superiority  of  methods  by  the  comparison  of  a  single  city  where  good 
results  have  been  obtained  with  another  city  where  the  results  have  been  almost 
as  good.  Yet,  it  does  not  take  figures  to  prove  the  impossibility  of  attaining 
and  permanently  maintaining  any  very  liigh  degree  of  etticiency  in  an  industry 
where  the  characteristic  attitude  of  the  men  toward  the  management  is  one  of 
distrust  and  hostility.  There  can  be  no  doubt  that  if  the  Philadelphia  Coopera- 
tive Plan  or  something  similar  to  it,  or  at  least  something  that  produces  the  same 
degree  of  loyalty  and  zeal  in  the  employes  as  appears  to  have  been  developed 
in  Philadelphia,  could  be  applied  to  the  electric  railways  everywhere,  a  very  long 
step  would  have  been  taken  towards  the  restoration  of  the  financial  health  and 
credit  of  the  industry.  A  plan  that  would  do  away  with  absentee  ownership 
and  absent-minded  operation  would  surely  open  the  way  for  the  restoration  of 
the  good  will  of  the  people,  and  that  means  money. 


Chapter  XXXIV 
PUBLIC  SUBSIDIES 

If  electric  railway  service,  that  is  deemed  essential  to  the  public  welfare, 
cannot  be  made  self-sustaining  out  of  its  earnings ;  or  if  the  community  for  other 
reasons  deems  it  necessary  to  maintain  street  railway  fares  at  a  point  so  low  that 
the  revenues  will  not  cover  the  entire  cost  of  the  service,  it  becomes  necessary 
to  make  supplementary  provision  for  the  support  of  local  transportation,  either 
directly  or  indirectly,  through  contributions  from  other  sources.  In  one  way  or 
another  the  cost  of  the  service  must  be  paid,  and  this  is  true  whether  the  policy 
of  private  ownership  and  operation  is  continued  or  not.  At  the  same  time  it  is 
obviously  more  difticult  from  the  political  standpoint — and  I  use  the  term  "poli- 
tical" in  its  broad,  fundamental  sense — to  justify  public  subsidies  for  private 
companies  operating  for  profit  than  to  justify  the  subsidizing  of  a  public  function 
operated  directly  for  the  service  of  the  community.  If  public  subsidies  are  neces- 
sary, that  fact  constitutes  a  powerful  argument  for  the  complete  elimination  of 
private  investments  and  private  management  from  the  electric  railway  industry. 
Indeed,  in  some  of  the  states  constitutional  provisions  have  been  adopted  designed 
to  prevent  the  state  or  the  municipalities  from  subsidizing  or  lending  their  credit 
to  any  private  corporation  operating  for  profit.  Nevertheless,  the  electric  rail- 
way industry  has  fallen  into  such  a  condition  that  the  question  of  adopting  the 
policy  of  public  subsidies  is  being  widely  discussed  and  seriously  considered. 
The  testimony  of  the  witnesses  before  the  Commission  is  full  of  the  subject. 

At  the  outset  we  need  to  determine  what,  in  the  case  of  the  electric  rail- 
ways, constitutes  being  self-sustaining  and  what  different  forms  public  subsidies 
may  take.  It  is  not  necessary  at  this  point  in  the  discussion  to  enter  into  the 
niceties  of  economics,  finance  and  statecraft  for  the  determination  of  the  precise 
boundary  line  between  a  condition  of  self-support  and  a  condition  of  public  de- 
pendence in  the  case  of  a  local  transportation  service.  It  will  perhaps  come  close 
enough  to  scientific  accuracy  if  we  say  that  in  order  to  be  self-sustaining  a  street 
railway  system  must  earn,  in  the  form  of  compensation  for  definite  services  ren- 
dered, a  sum  sufficient  to  pay  the  entire  cost  of  the  service,  including  operating 
expenses,  with  proper  reserves  for  depreciation,  accidents,  and  other  deferred 
liabilities ;  taxes  and  other  public  charges  proportional,  as  nearly  as  may  be,  to  the 
taxes  and  public  charges  imposed  upon  other  industries :  and  the  necessary  cost 
of  the  capital  actually  and  necessarily  invested  in  the  business.  Stated  in  dif- 
ferent words,  this  qost  of  service  includes  the  maintenance  of  the  complete  in- 
tegrity of  the  physical  property,  the  provision  for  all  operating  costs  attributable 
to  the  period  of  service,  whether  payment  thereof  is  immediate  or  deferred,  and 
the  return  upon  capital  which,  under  the  conditions  of  the  investment,  will  be 


304  Electric  Railway  Problem 

sufficient  to  maintain  the  necessary  supply  of  capital.  Perhaps  the  most  elusive 
portion  of  this  definition  is  that  which  relates  to  the  compensation  of  the  investors. 
To  be  a  little  more  specific,  the  cost  of  service  must  include  a  sufficient  return 
upon  the  capital  already  tied  up  in  the  business  to  satisfy  the  legitimate  obliga- 
tions incurred  at  the  time  such  capital  was  secured,  and  also  the  offer  of  a  suffi- 
cient return  upon  new  capital  to  induce  it  to  make  itself  available  in  adequate 
quantities  to  enable  the  street  railway  system  to  expand  and  improve  its  facilities 
as  rapidly  as  public  necessity  and  the  obligations  of  public  service  may  require. 
In  connection  with  our  analysis  of  the  various  forms  which  a  subsidy  may 
take,  we  must  distinguish  public  exemptions  and  cash  contributions  based  upon 
a  general  consideration  of  the  advantage  to  the  community  at  large  of  main- 
taining local  transportation  service,  from  public  appropriations  made  in  pay- 
ment for  specific  and  measurable  services  rendered  by  the  transportation 
systems.  For  example,  a  cash  payment  by  the  city  for  transportation  furnished 
to  policemen  and  firemen  while  on  duty  would  not  be  in  the  nature  of  a  subsidy, 
unless  it  was  entirely  out  of  proportion  to  the  cost  of  the  service  rendered.  In 
the  same  way,  a  cash  payment  to  the  street  railway  for  hauling  and  delivering 
street  construction  materials,  or  for  removing  garbage  and  ashes,  is  not  a  subsidy, 
but  a  payment  for  definite  services  performed.  It  might  even  be  maintained 
that  a  special  tax  or  assessment  upon  improved  real  estate  readily  accessible  to 
local  transportation  service  and  based  upon  the  cost  of  readiness  to  serve  might 
be  levied  by  the  munici])ality  and  the  proceeds  paid  into  the  street  railway  treasury 
without  our  getting  quite  over  the  line  into  the  field  of  subsidies.  That  would 
depend  largely  upon  the  definiteness  of  the  computations  of  cost  upon  which  the 
special  levy  was  based.  Indeed,  if  special  assessments  were  levied  to  provide 
the  capital  cost  of  street  railway  extensions,  on  the  same  theory  upon  which  pave- 
ments and  other  street  improvements  are  often  paid  for  by  assessments  for  bene- 
fits, this  could  not  he  regarded  as  subsidizing  the  street  railways,  unless  they 
were  permitted  to  claim  ownership  of  the  property  paid  for  by  the  assessments 
and  include  it  in  tiie  capital  account  upon  which  they  are  entitled  to  earn  a  fair 
return  from  the  rates.  In  a  certain  .sense,  it  might  be  said  that  the  electric  rail- 
ways are  subsidized  to  the  extent  that  they  are  given  free  rights  of  way  in  the 
public  streets,  but  in  another  sense  the  street  car  may  be  regarded  merely  as  a 
type  of  public  conveyance  well-suited  to  public  needs  and  having  as  much  right 
in  the  highway  as  any  other  vehicle.  (Ine's  point  of  view  with  respect  to  this 
particular  angle  of  the  problem  will  determine  what  he  thinks  about  the  policy 
of  exacting  compensation  for  street  railway  franchises.  If  the  street  railways 
are  not  recjuired  to  pay  for  the  use  of  the  streets,  the  privilege  of  using  public 
property  without  giving  specific  compensation  for  it  would  be  reg^arded  by  some 
as  the  i'(|uivalent  of  a  subsidy.  The  same  rules  will  apply  to  the  use  of  free 
pui)lic  bridges,  viaducts,  subways  and  other  special  stnictures  that  are  a  part  of 
the  iiighway,  except  that  where  streets  have  to  be  widened,  bridges  made  stronger 
or  other  street  imi)n)vements  made  more  expensive  for  the  specific  purpose  of 
accommodating  street  car  traffic,  many  hold  the  opinion  that  the  street  railway 
company  should  either  carry  the  extra  investment  in  its  own  capital  account  or 
else  pay  an  amiual  rental  sufficient  to  cover  the  city's  fixed  charges  on  the  extra 


Public    Subsidies  305 

investment.  For  the  purposes  of  this  discussion  I  shall  assume  that  the  free  use 
by  the  street  cars  of  public  streets,  bridges,  viaducts,  subways,  etc.,  where  their 
use  is  free  to  the  general  public  in  common  with  their  use  by  other  vehicles  and 
by  pedestrians,  does  not  constitute  a  public  subsidy  and,  therefore,  is  not  incon- 
sistent with  a  condition  of  honorable  self-support  so  far  as  the  street  railways 
are  concerned.  I  shall  assume  that  in  paying  the  cost  of  the  tracks  and  their 
special  foundations  and  of  the  pavement  in  and  about  the  tracks,  the  street  rail- 
ways are  contributing  everything  that  can  be  equitably  required  of  them  as  a 
condition  precedent  to  their  free  use  of  the  streets.  As  we  have  already  seen, 
many  of  the  witnesses  before  the  Commission  went  so  far  as  to  hold  that  the 
companies  should  be  relieved  of  their  paving  obligations,  not  as  a  matter  of  special 
favor  or  emergency  concession,  but  as  a  matter  of  right.  Indeed,  I  am  inclined 
to  the  opinion  that  theoretically  the  street  railways  ought  not  to  be  compelled 
to  install  the  original  paving  except  where  paving  in  and  about  the  tracks  is  made 
necessary  by  the  presence  of  the  rails,  but  that  they  should  be  compelled  to  pay 
a  portion  of  the  cost  of  maintaining  and  replacing  the  pavement  to  the  extent 
of  their  use  or  abuse  of  it.  This  distinction  leads  to  the  remark  that  we  here 
have  a  double-headed  proposition.  In  some  cases,  no  doubt,  the  street  railway 
companies  have  been  subsidizing  the  cities ;  in  other  cases,  the  tables  have  been 
turned  or  in  the  future  may  be  turned.  In  brief,  it  may  be  said  that  a  public 
subsidy  is  a  special  exemption  or  a  direct  or  indirect  cash  payment  for  services 
that  are  not  specific  or  definitely  measurable. 

In  the  proper  sense  of  the  term,  therefore,  a  public  subsidy  may  take  the 
form  of  special  exemptions  from  taxation  or  other  public  burdens,  of  a  free  con- 
tribution of  capital,  or  of  specific  payments  in  the  form  of  public  cash  or  public 
services  for  general  or  cominunity  benefits  derived  from  the  availability  of  ade- 
quate transportation  service  furnished  by  the  electric  railways  at  their  own 
expense. 

The  definite  forms  of  subsidy  usually  suggested  are:  (1  j  relief  from  taxation, 
(2)  a  gift  or  loan  of  capital  or  credit,  and  (3)  an  appropriation  from  taxes  or 
other  public  funds  to  make  up  current  deficiencies  in  revenues  below  the  cost  of 
the  service.  In  general,  under  a  carefully  worked  out  and  thoroughly  consistent 
service-at-cost  plan,  or  even  under  the  policy  of  unrestricted  public  regulation 
continuously  and  strictly  applied,  there  can  be  no  such  thing  as  a  subsidy  to  the 
electric  railway  companies,  except  where  it  is  impossible  for  them  at  any  rate 
of  fare  to  be  self-sustaining.  With  the  exception  noted,  any  subsidies  granted 
and  any  contributions  exacted  by  the  public  authorities  will  be  passed  on  to  the 
car  riders,  and  the  companies  will  neither  be  benefited  nor  hurt  by  them.  (Jf 
course,  this  does  not  follow  under  any  form  of  contractual  relations  not  based 
upon  the  service-at-cost  principle,  and  does  not  follow  with  any  degree  of  exacti- 
tude where  public  regulation  is  applied  intermittently  or  spasmodically. 

The  question  as  to  whether  or  not,  under  existing  constitutional  restrictions, 
a  real  public  subsidy  can  be  granted  to  a  privately  owned  or  privately  operated 
street  railway  is,  in  each  particular  case  a  question  for  the  lawyers  and  the 
courts ;  but  the  question  of  the  elimination  or  modification  of  constitutional  re- 
strictions is  a  matter  of  public  policy  to  which  we  may  address  ourselves.     Con- 


306  Electric  Railway  Problem 

stitutional  restrictions  have  a  certain  fixity  which  makes  it  necessary  that  emer- 
gency plans  should  be  accommodated  to  them,  though  permanent  plans  may  be 
postulated  upon  their  removal  in  due  course.  As  we  shall  see,  the  way  to  public 
ownership  is  obstructed  and  progress  in  that  direction  is  impeded,  in  many  juris- 
dictions, by  constitutional  limitations  upon  municipal  authority.  Yet  these  limi- 
tations may  not  be  as  deeply  intrenched  in  the  political  science  of  the  /Vmerican 
people  as  the  restrictions  that  stand  in  the  way  of  the  adoption  of  the  policy 
of  granting  public  subsidies.  It  may  not  be  practicable  to  remove  these  latter 
restrictions.  In  fact,  while  the  undoubted  tendency  of  constitutional  and  statu- 
tory development  in  the  states  is  toward  an  enlargement  of  the  powers  of  muni- 
cipalities to  undertake  as  public  functions  the  standard  modern  utility  services, 
there  is  no  marked  tendency  toward  the  removal  of  the  restrictions  on  public 
subsidies  to  private  enterprises.  I  shall  refer  to  the  constitutional  status  of  sub- 
sidies in  New  York  and  Massachusetts  as  illustrative,  without  having  attempted 
to  make  a  general  survey  of  the  states  with  respect  to  this  subject.  Section  9, 
of  Article  VIII,  of  the  New  York  State  Constitution  provides  that  "neither  the 
credit  nor  the  money  of  the  State  shall  be  given  or  loaned  to  or  in  aid  of  any 
association,  corporation  or  private  undertaking."  Section  10  of  the  same  article 
provides  that  "no  county,  city,  town  or  village  shall  hereafter  give  any  money 
or  property,  or  loan  its  money  or  credit  to  or  in  aid  of  any  individual,  association 
or  corporation,  or  become  directly  or  indirectly  the  owner  of  stock  in,  or  bonds 
of,  any  association  or  corporation ;  nor  shall  any  such  county,  city,  town  or  village 
be  allowed  to  incur  any  indebtedness  except  for  county,  city,  town  or  village  pur- 
poses." These  rather  sweeping  prohibitions  have  not  prevented  the  City  of  New 
York  from  entering  into  contracts  under  which  hundreds  of  millions  of  dollars 
have  been  or  are  being  spent  in  the  construction  of  rapid  transit  lines  leased  to 
private  companies  for  o])eration.  Even  though,  in  certain  cases,  the  companies 
are  furnishing  a  portion  of  the  cost  of  construction  and  in  all  cases  are  required 
to  supply  the  equipment  at  their  own  expense,  and  even  though  the  city's  invest- 
ment in  the  new  subways  has  to  stand  aside  until  the  operating  companies  have 
been  fully  taken  care  of,  the  New  York  Court  of  .Appeals  has  upheld  these  rapid 
transit  agreements  as  not  violative  of  the  constitutional  restrictions  cited  above. 
In  New  York,  however,  the  subways  are  city-owned. 

As  indicative  of  the  trend  of  public  opinion  on  the  constitutional  aspects  of 
the  subsidy  question,  it  is  noteworthy  that  Massachusetts,  as  recently  as  1918, 
adopted  the  following  new  constitutional  provision : 

"The  credit  of  the  ComiTKmwcalth  shall  not  in  any  manner  he  piven  or  loaned  to  or  in 
aid  of  any  in(livi(hial,  or  of  any  private  association,  or  of  any  con>oration  which  is  privately 
owned  or  managed." 

Anent  this  new  factor  in  the  situation,  the  Massachusetts  Public  Service 
Commission,  in  its  Sixth  Annual  Report,  issued  in  Jaiuiary,  1919.  at  page  xxxi, 
makes  the   following  comment: 

"The  lanKiiaRC  of  this  amendment  is  very  broad.  It  is  at  least  a  question  whether  the' 
expression  "credit  of  the  commonwealth"  would  not  include  the  credit  of  intcRral  parts,  like 
the  cities  and  towns,  and  no  douht  it  would  cover  financial  aid  provided  throuRh  taxation 
as  well  as  the  actual  InirrowiiiK  of  money.  It  would  seem,  also,  that  the  lanRuaRe  applies  to 
indirect  as  well  as  to  direct  use  of  credit.     If  a  portion  of  the  cost  of  street   railway  service. 


Public    Subsidies  307 

then,  is  to  be  borne  by  the  community  as  a  whole,  or  if  community  credit  is  to  be  used  in 
the  furnishing  of  capital,  it  would  seem  to  follow  that  the  companies  must  either  be  publicly 
owned  or  publicly  managed,  and  perhaps  both." 

What  the  Massachusetts  Commission  thought  of  the  need  for  subsidizing  the 
car  riders  is  clearly  shown  in  the  discussion  leading  up  to  the  above.  At  pages 
xxix  and  xxx  of  this  most  notable  report,  the  situation  is  summarized  as  follows : 

"Sumining  up  the  matter,  no  one  can  view  the  present  situation  with  optimism,  or  believe 
that  the  policies  and  methods  now  pursued  are  likely,  unless  general  conditions  change 
radically,  to  bring  either  good  service  or  good  credit,  or  to  further  the  healthy  growth  and 
development  of  the  community. 

"It  is  far  easier,  however,  to  fix  upon  the  goal  to  be  reached  than  to  point  the  way  to 
it.  much  less  difficult  to  know  what  ought  to  be  done  than  how  to  do  it.  Briefly  stated, 
the  essential  needs,  from  the  standpoint  of  the  future  welfare  of  the  state,  are: 

"(1)  Restoration  of  credit,  or  some  other  means  of  providing  the  capital  necessary 
to   place  the   street   railway   properties   in   condition   for   first-class   service. 

"(2)  Return  to  a  basis  of  fares  which  will  enable  the  railways  to  play  their  proper 
part  in  community  life. 

"The  prime  necessity  is  good  service,  and  it  cannot  be  had  without  rehabilitation  and 
improvement.  Next  to  good  service  is  a  system  of  fares  which  will  make  the  service  as 
useful  as  possible,  and  help  rather  than  hamper  the  development  of  the  community  on  health- 
ful and  economically  sound  lines.  Massachusetts  is  not  blessed  with  much  natural  wealth 
or  with  many  geographical  advantages,  and  other  parts  of  the  country  are  beginning  to 
challenge  her  place  in  the  commercial  world.  If  it  is  to  be  retained,  it  will  require  the  best 
possible  use  of  her  resources,  foremost  among  which  are  her  industries  and  her  people.  This 
means,  among  other  things,  the  maintenance  of  good  living  and  labor  conditions.  In  this 
connection  nothing  is  more  important  than  cheap  and  good  transportation  facilities  which 
will  spread  population,  encourage  living  in  the  country  districts,  and  give  labor  the  mobility 
which  the  welfare  of  our  industries  demands. 

".\s  we  view  it,  present  conditions  in  street  railway  transportation,  and  still  more  the 
conditions  which  are  in  sight,  both  as  to  service  and  as  to  rates,  are  opposed  to  the  best 
interests  of  the  state.  The  only  alternative,  however,  is  some  plan  by  which  a  portion  of  the 
cost  of  service  will  be  taken  from  the  shoulders  of  the  car  rider  and  be  met  by  some  form 
of  general  ta.xation.  This  suggestion  is  radical,  but,  as  above  indicated,  not  wholly  unprece- 
dented. In  the  long  run,  poor  transportation  at  high  rates  will  damage  the  mill  owner,  the 
merchant  and  the  land  holder.  In  the  long  run.  good  transportation  at  low  rates  will  operate 
greatly  to  their  advantage.  This  fact  lies  at  the  root  of  our  policy  of  state  highway  con- 
struction, and  years  ago  it  received  clear  recognition  in  the  early  days  of  steam  railroad 
building,  when  both  state  aid  and  municipal  aid  were   freely  granted. 

"It  is  necessarv'  to  look  beyond  today  and  into  tomorrow,  to  balance  future  benefits 
against  present  burdens.  What  we  are  now  suggesting  is  not  very  different  from  what  the 
steam  railroads  for  a  long  time  have  actually  been  doing.  They  sell  commutation  tickets  at 
verv  low  rates,  not  because  there  is  any  direct  profit,  but  because  they  believe  that  it  is  good 
policy  to  do  so,  in  the  public  interest  and  ultimately  in  their  own.  The  burden  is  borne  by 
freight  and  other  forms  of  traffic.  In  the  present  instance,  the  street  railways  have  no  other 
business  which  can  carry  the  load  and,  if  a  portion  of  it  is  shifted  from  the  car  riders,  it 
must  be  borne   by  the   community   as   a   whole." 

It  will  be  remembered  that  Professor  Charles  J.  Bullock,  in  his  testimony, 
urged  strongly  the  doctrine  of  "equal  taxation,"  but  admitted  that  in  the  present 
street  railway  emergency  it  might  be  proper  to  exempt  the  companies  entirely 
from  the  property  tax  for  a  period  of  years,  and  depend  on  a  net  income  tax  to 
catch  the  lucky  ones,  if  there  were  any  such,  which  might  be  making  money  when 
the  industr}'  as  a  whole  was  in  deep  distress.  Professor  Bullock's  views  on  the 
relative  rights  of  the  car  rider  and  the  taxpayer  are  set  forth  at  pages  642  and 
643  of  the  Proceedings,  where  he  says : 

"Under  normal  conditions  it  would  seem  that  street  car  riders  ought  to  pay  just  what  the 
service  costs,  and  not  more  nor  less.  If  you  exempt  public  utilities  from  taxation  and  give 
the  riders  untaxed  service,  yon  increase  by  so  much  the  taxes  that  owners  of  property  have 
to  pay.  and  that  is  something  that  a  city  ought  not  to  do  and  cannot  afford  to  do  under  normal 
conditions. 

"There  are  many  demands  for  city  expenditure.  To  fritter  away  your  source  of  revenue 
by  giving  untaxed  service,  by  granting  exemptions  which  benefit  the  rider,  is  bad  municipal 


308  Electric  Railway  Problem 

finance  and  it  is  not  fair  as  between  the  car  riders  and  taxpayers  who  arc  not  necessarily  the 
same  people,  or,  if  they  are  the  same  people,  do  not  use  the  cars  in  the  same  proportion  that 
they  pay  taxes.  Our  municipal  taxes  fall  very  largely  upon  real  property,  and  that  may  be 
very  largely  owned  by  non-residents  who  get  no  benefit  from  the  street  railroad  service 
whatever  and  never  patronize  it.  Then  even  those  that  own  property  in  the  city  and  pay 
taxes  there  do  not  use  the  street  railways  in  precise  proportion  to  their  ownership  of  property. 
Putting  part  of  the  cost  of  furnishing  street  railway  service  into  the  tax  levy  is  not  under 
normal  conditions  good  finance.  The  proper  theory  would  seem  to  Ik-  that  of  equal  treatment 
of  the  industry  with  other  property.  It  .should  not  be  burdened  beyond  other  property  in 
business;  it  should  not  pay  tax  less  than  other  property  in  business.  If  you  levT  upon  the 
industry  of  the  electric  railways  taxes  precisely  like  those  levied  upon  other  similar  objects 
of  taxation,  you  hold  the  lialance  level  between  the  taxpayers  and  the  car  riders  and  you  do 
substantial  justice  to  all  parties  in  interest  and  the  correct  theory  seems  to  be  that  of  equal 
taxation  of  public  utilities  under  normal  conditions. 

"Now  every  general  theory  has  of  course  certain  limitations.  The  limitations  to  this 
theory  of  equal  taxation  are  implied  in  the  expression  'normal  conditions'  that  I  have  used. 
In  time  of  war  when  revenue  is  the  paramount  need,  the  Govenmient  may  very  properly  levy 
a  tax  on  transportation,  as  it  has  just  recently  done  during  the  war.  .\nd  similarly,  in  times 
when  transportation  facilities  are  needed  and  it  is  not  practicable  to  get  them  in  any  other 
way,  governments  mav  properly  ofTer  exemptions  from  taxation,  as  they  have  often  done. 
The  exemption  policy  has  been  abused.  Perpetual  grants  of  exemption  have  l>een  given  which 
were  never  justified,  but  exemption  for  a  limited  numlier  of  years  of  companies  undertaking 
public  .service  enterprises  which  it  is  not  likely  can  prove  immediately  profitable  may  be 
justified  under  special  conditions." 

At  page  646  of  the  Proceetlings.  Mr.  Warren  asked  Professor  Bullock 
whether  in  his  opinion,  the  present  emergency  is  so  great  as  to  warrant  extend- 
ing to  the  companies  at  tliis  lime  temporary  relief  from  ordinary  ta.xation.  He 
got  the  following  answer : 

"Well,  there  are  companies  that  are  not  earning  operating  expenses,  and  if  a  proper 
allowance  for  depreciation  is  made,  of  course,  vast  numbers  of  companies  are  not  earning  their 
o|K'rating  expenses,  and  conditions  are  getting  worse.  That  is,  wages  are  rising  and  costs 
of  materials  and  suiiplies  have  not  Iwgnn  to  decline.     •     *     ♦     * 

"Now,  under  those  conditions  we  are  likely  to  reach  a  point  in  Massachusetts  where 
we  have  got  not  only  to  alx.ilish  taxes,  hut  we  have  got  to  go  down  into  our  pockets  and 
make  up  deficits  if  we  are  going  to  have  street  railway  service." 

Professor  Bullock's  view  that  a  non-resident  land  owner  who  never  comes 
around  to  ride  on  the  cars  gets  no  benefit  from  them  and  ought  not,  under  normal 
conditions,  to  be  taxed  for  their  support  is  quite  at  variance  with  the  views  ex- 
pressed by  the  Massachusetts  Public  Service  Commission  in  its  Sixth  Annual 
Report  from  which  I  have  already  quoted.  Its  detailed  comparison  of  the  street 
railways  to  the  public  roads,  and  its  argument  to  show  the  taxj)ayer's  interest 
in  ade(|uate  transportation  facilities  is  full  of  significance.  At  pages  xxiii  to  xxv 
of  the  report,  it  says: 

"Primarily  Massachusetts  is  a  manufacturing  state,  and  the  percentage  of  mill  and  factory 
workers  in  its  comparatively  den.se  population  is  very  large.  The  importance  to  such  a  com- 
munity of  an  elVicient  and  cheap  means  of  local  transportation  is  obvious.  There  is  no  other 
way  of  preventing  congestion,  maintaining  gotxl  living  cimditions,  developing  the  country 
districts,  and  adjusting  the  supply  of  labor  iiuickly  to  fluctuating  needs  in  tlie  various  centers. 
This  is  stating  the  matter  laldly  atid  inadequately,  but  a  moment's  thought  will  make  it 
unnecessary   to  amplify. 

"The  conununity  interest  in  Inm.sportation  has  alrc.idy  been  recognized,  in  part.  There 
was  a  time  when  private  enlcrpri.se  was  relied  upon  in  the  case  of  ordinary  highways.  During 
the  first  half  of  the  last  century  a  multitude  of  turnpike  corpor.ations  were  chartered  by  the 
Legislature,  with  power  to  build  roads  tx-twcen  specified  points  and  to  collect  tolls.  Such 
turnpikes  were  constructed  from  Hoston  in  straight  lines  to  all  the  principal  surrounding 
towns,  and  even  He.ic.in  Sirect  was  a  toll  mad  until  1S<>S  Gradually,  however,  the  collection 
of  tolls  was  discontinued  :ind  the  care  of  these  tunv)i!:es  was  taken  over  by  the  towns  and 
counties  .\t  the  present  time,  our  streets  and  highways  are  all  built  and  maintained  by 
public  authorities,  and  the  cost  is  carried  by  the  comnmnity  generally  and  is  not  assessed  in 
propiirli.in  Ici  the  use  whiih   i^   inidi-  ,if  tliein      \m  fii-iiro^  of  total   investment  or  total   main- 


Public    Subsidies  309 

tenance  expense  are  available,  but  the  original  cost  of  state  highways  alone  has  been  more 
than  $14,t)tK.),000.  and  the  aggregate  cost  of  city  and  town  streets  must  be  far  greater. 

"As  yet,  this  principle  has  not  been  applied  to  the  steel  highways  which  the  street  rail- 
ways use,  although  many  more  persons  must  be  carried  in  cars  over  these  highways  than  are 
carried  in  other  vehicles  over  the  public  streets,  and  although  the  general  community  interest 
is  in  other  respects  very  clear.  Broadly  speaking,  street  railways  are  just  as  important 
to  merchants,  to  mill,  factory  and  land  owners,  although  they  may  never  ride  in  the  cars, 
as  they  are  to  the  people  who  use  them  every  day.  It  will  help  in  realizing  this  to  think  of 
the  situation  w'hich  would  arise  if  the  railways  should  cease  operation,  unless  some  equivalent 
form  of  transportation  were  substituted.  The  fact  has.  indeed,  been  given  an  indirect  recog- 
nition in  practice,  for  there  is  little  doubt  that,  when  the  railways  were  originally  built,  real 
estate  owners  and  business  men  at  times  took  their  securities  with  little  hope  of  direct  profit, 
but  in  anticipation  of  the  indirect  benefits  which  would  accrue  from  their  construction. 

"If  street  railways  are  a  public  necessity,  like  the  highways,  the  schools  and  the  drainage 
system — and  they  clearly  are — street  railway  fares  may  be  regarded  as  a  form  of  taxation. 
In  other  words,  it  is  now  the  policy  to  levy  the  cost  of  this  public  service  upon  the  car  riders 
alone  through  the  fares  which  they  pay,  rather  than  upon  the  community  as  a  whole  through 
general  taxation.  Precisely  the  same  principle  might  be  followed  in  the  other  cases.  For 
example,  a  road  tax  might  be  levied  upon  vehicles  in  proportion  to  size  and  mileage  operated, 
or  a  school  tax  upon  families  in  proportion  to  children  in  attendance ;  but  it  has  come  to  be 
settled  practice  and  belief  that  it  is  in  the  public  interest  not  to  assess  the  cost  of  these 
enterprises  in  such  a  manner,  but  to  allow  it  to  be  borne  by  the  entire  community. 

"There  is  no  inherent  reason  why  street  railway  service  should  not  be  regarded  in  the 
same  light  and  treated  in  a  similar  way.  If  the  streets  are  a  benefit  to  the  man  who  owns 
no  vehicle,  or  the  schools  to  the  man  who  has  no  children,  so  are  the  street  railways  to  the 
citizen  who  never  uses  them.  The  problem  is  really  one  of  taxation,  to  be  dealt  with,  not 
in  accordance  with  mere  custom  or  tradition,  but  in  the  manner  which  will  produce  the  best 
results  for  Massachusetts.  If  the  greatest  good  to  the  greatest  number  can  be  secured  by 
continuing — in  theory  at  least — to  place  the  entire  burden  of  the  cost  of  street  railway  service 
upon  car  riders,  objections  are  not  in  order;  but,  if  this  is  not  the  case,  the  Commonwealth 
ought  not  to  be  deterred  by  mere  prejudice  or  conservatism  from  following  a  different  course." 

Mr.  Ralph  S.  Bauer,  of  Lynn,  advocated  free  street  car  service  on  the  theory, 
first,  that  the  ehmination  of  the  machinery  of  fare  collection  and  accounting 
would  greatly  reduce  the  total  cost  of  the  service,  and,  second,  that  local  trans- 
portation benefits  the  business  men  and  property  owners  to  such  an  extent  that 
they  can  aftord  to  support  it  out  of  taxation.  Mr.  Frederick  F.  Ingram,  a 
Detroit  manufacturer,  formerly  a  member  of  the  Public  Lighting  Commission 
of  that  city,  and  a  member  of  the  Michigan  Constitutional  Convention  of  1907, 
in  which  he  was  a  leader  of  the  movement  for  municipal  home  rule  and  municipal 
ownership,  advanced  the  opinion  that  street  railway  fares  should  be  kept  down 
to  a  low  figure  and  that  the  resulting  deficiency  should  be  made  up  bv  a  tax  on 
land  values.     At  page  1124  of  the  Proceedings,  he  says: 

"My  opinion  is  that  if  you  keep  on  advancing  fares,  you  are  not  going  to  increase  your 
revenue,  .^t  least,  you  will  reach  the  point,  and  are  probably  very  near  to  it  now-,  in  many 
instances,  where  with  further  increases  you  will  not  increase  your  revenue ;  so  that  you 
cannot   look   to  that. 

"The  people  must  be  transported  to  their  work,  and  my  idea  is  to  charge  a  nominal  fare 
without  reference  to  whether  it  will  pay  the  revenue.  That  would  be  inaugurated,  in  my 
mind,  under  municipal  ownership,  and  I  do  not  know  whether  it  could  be  figured  out  under 
private  ownership,  or  not ;  but  under  municipal  ownership  I  do  not  see  why  a  nominal  fare 
could  not  be  char,ged,  and  then  the  balance,  whatever  deficit  came,  be  taken  out  of  the  values 
of  the  land,  the  site  value  that  your  street  railway  benefits :  take  a  portion  of  that  for  the 
public  treasury,  to  support  the  street  railway  that  runs  into  this  territory  that  is  benefited 
by   it." 

A  little  further  on,  at  pages  1125  to  1127  of  the  Proceedings,  this  suggestion 
is  elaborated  as  follows: 

"Mr.  Ingram:  My  suggestion  was  that  the  passengers  be  charged  a  nominal  fare  without 
pretense  of  covering  the  cost  of  the  service. 

"The   Chairman:     What   should   that   fare   be? 
"Mr.  Ingram :     Well,  3  cents  or  4  cents. 


310  Electric  Railway  Problem 

"The  Chairman:     With  or  without  transfers? 

"Mr.  Ingram:  With  the  transfer.  We  are  accustomed  to  transfers.  Tliat  would  make 
for  tremendous  trouble,  to  educate  the  people  out  of  the  transfer  idea,  at  least  in  Detroit. 
Then  the  deficit,  whatever  it  may  be,  should  be  assessed  against  the  land  that  is  affected  by 
the  service. 

"The  Chairman:     How  would  you  apply  that  to  existing  street  car  lines? 

"Mr.  Ingram:  By  simply  passing  the  money  over  to  the  treasury  of  the  street  car 
company  and  assessing  it.  In  our  city  we'  are  constitutionally  compelled  to  assess  our  land 
separate   from  our   improvements,  buildings,  and  so   forth. 

"The  Chairman:     Vou  mean  the  lands  that  are  benefited  by   the  street  car  lines? 

"Mr.   Ingram:     Yes. 

"The  Chairman:     They  are  to  be  assessed  each  year  to  make  up  the  deficit? 

"Mr.  Ingram:  For  the  preceding  or  following  year;  that  is  a  twokkeeping  proposition, 
what  that  deficit  takes  care  of,  either  on  an  estimate  or  hook  showing.  That  would  satisfy 
the  street  car  riders,  and  values  arc  created  at  both  ends  of  the  line  and  along  the  line  by 
this  public  service  and  it  is  taking  a  portion  of  it  to  pay  for  the  service. 

"The  Chairman:  Then  you  believe  that  this  deficit  should  be  borne  by  property  that  is 
Ijenefited   rather  than  by  the  general   public  through   taxation? 

"Mr.  Ingram:  Yes.  I  do.  That  is  the  general  public  so  far  as  they  own  that  land. 
That  would  not  apply  to  the  buildings,  you  know,  the  buildings  are  not  benefited  by  the 
facility  of  travel,  but  the  land  is,  and  why  should  not  it  bear  some  of  the  burdens  as  well 
as  the  passengers  on  the  cars  ?  It  would  not  create  any  great  apprehension  among  the  land 
owners,  it  seems  to  me,  and  it  would  be  a  satisfactory  solution  so  far  as  the  car  rider  is 
concerned. 

"The  Chairman  :     What  fare  are  they  charging  there  now? 

"Mr.  Ingram:     They  are  charging  a  straight  5-cent  fare  with  the  transfers. 

"The  Chairman :  Under  your  plan  with  a  3-cent  fare  might  it  not  be  that  there  might 
be  a  deficit  of  two  or  three  or  four  millions  of  dollars  in  the  operation? 

"Mr.   Ingram:     There  might  l)e. 

"The  Chairman:     .\nd  that  would  all  have  to  be  applied  to  the  benefit  of  the  property? 

"Mr.   Ingram :     Yes,   sir. 

"The  Chairman:     Would  not  that  be  a  great  burden  to  the  property? 

"Mr.  Ingram:     I  do  not  think  so,  no.  sir.     I  do  not  think  so. 

"The  Chairman:  Have  you  ever  attempted  to  work  out  a  scale  for  taxation  based  upon 
your  plan  to  see  how  it  would  affect  property   in   Detroit? 

"Mr.  Ingram :  Yes,  I  have.  I  mentioned  my  suggestion  advisedly  because  I  had  thought 
alwut  those  things.  In  London  when  they  make  a  great  improvement  like  opening  a  new 
street  or  widening  it  they  do  not  assess  that  against  the  property  of  London  but  against  the 
property  that  is  benefited  by  extra  condemnations. 

"The   Chairman:     That   is   new   construction? 

"Mr.  Ingram:  Yes.  excess  condemnation,  that  is  construction,  yes.  But  I  do  not  see 
why  the  .same  theory  would  not  work  as  works  in  operation  in  this  country.  In  California 
the  irrigation  in  dry  counties  is  done  on  that  basis.  The  cost  of  the  irrigation  waters  and 
maintaining  them  and  operating  them  is  assessed  pro  rata  against  the  property  affected  by 
it  and  it  is  very  satisfactory  to  the  property  owners.  .\nd  that  theory  applied  to  the  railroads, 
I  do  not  see  any  complications  in  the  railroad  proposition  that  are  not  equal  to  the  California 
exjicriment. 

"The  Chairman:     Has  your  proposition  l>cen   discussed   in   Detroit? 

"Mr.   Ingrain:     No.  sir,  not   to  any  extent.   I  do  not   think. 

"The  Chairman:     Do  you  know  how  the  property  owners  look  upon  it? 

"Mr.  Ingram:  I  do  not.  I  could  not  speak  for  them.  I  only  speak  for  myself.  I  do 
know  that  a  good  many  I  have  di.scusscd  it  with  think  that  is  a  solution,  but  that  is  not  a 
matter  that  has  been  discus.scd  in  a  big  way,  you  know,  and  l)rought  out   for  discussion. 

"The  Chairman:  I  presume  that  on  a  referendum  vote  on  that  question  the  street  car 
riders  who  do  not  own  property  or  who  may  own  property  that  is  remote  from  the  street  car 
lines  would  all  vote  for  that  sort  of  a  proposition,  to  get  a  3-cent   fare. 

"Mr.  Ingram:     I  think  the  property  owners  in  a  large  measure  would  vote   for  it. 

"The  Chairman:     You  think  they   would? 

"Mr.  Ingram:  I  do.  I  don't  think  that  that  would  l)e  received  with  much  dismay  by 
property  owners  that  appreciate  the  value  of  good  service,  and  of  course  primarily  of  the 
line  itself." 

It  is  noteworthy  in  connection  with  Mr.  Ingram's  testimony  that  the  nuini- 
cipai  ownership  cliaiiter  of  the  Detroit  charter  adopted  oripnallv  in  1913  by  an 
80  |)er  cent  alVirmative  vote,  and  reaftinned  as  a  part  of  the  new  charter  in  1918 
by  a  still  more  impressive  preponderance  of  favorable  votes,  requires  the  street 


Public    Subsidies  311 

railway  commission  to  proceed  to  acquire  or  establish  a  municipal  street  railway 
system,  and  to  fix  the  fares  at  a  point  where  they  will  pay  the  full  cost  of  opera- 
tion, including  taxes  equivalent  to  what  a  private  company  would  pay,  and  also 
interest  on  the  bonds  and  amortization  charges  sufficient  to  pay  them  off  within 
30  years.  This  charter  provision  was  first  adopted  in  the  pre-war  days,  but 
unless  it  is  changed,  Mr.  Ingram's  idea  of  charging  a  nominal  fare  and  making 
up  the  deficiency  of  taxes  cannot  be  caried  out  there  even  under  municipal 
ownership.^ 

In  Massachusetts  the  subsidy  idea  has  received  formal  recognition  in  the 
statutes  of  the  state,  though  not  to  the  full  extent  advocated  by  a  number  of  the 
Massacliusetts  witnesses  who  appeared  before  the  Commission.  The  Boston  El- 
evated Railway  Act,  passed  in  1918,  brought  the  Boston  street  railway  lines  under 
the  plan  of  public  operation  on  a  service-at-cost  basis  for  a  minimum  period  of 
ten  years.  The  public  trustees  in  charge  are  required  to  fix  the  fares  at  a  point 
where  they  will  pay  the  full  cost  of  service,  but  in  case  deficiencies  occur  these 
are  to  be  made  up  temporarily  out  of  taxes  and  the  payment  of  dividends  is  to  go 
right  on.  In  the  first  twelve  months  of  trustee  operation,  from  July  1,  1918,  to 
July  1,  1919,  the  Boston  Elevated  Railway  piled  up  a  deficiency  of  $4,980,151 
of  which  $3,980J51  had  to  be  made  up  out  of  taxes.  The  other  $1,000,000  was 
supplied  by  the  reserve  fund.  The  next  eight  months,  running  through  Feb- 
ruar}',  1920,  added  about  $448,000  more  to  the  deficit.  Meanwhile  the  fare  went 
to  7  cents  on  August  1,  1918;  to  8  cents  December  1,  1918,  and  to  10  cents  July  10, 
1919.  The  system  earned  a  surplus  during  the  months  of  October,  November 
and  December,  1919,  and  January,  1920,  but  in  February  it  sufifered  a  severe 
relapse  into  its  monthly-deficit  habit.  The  great  dissatisfaction  of  the  Boston 
public  with  the  high  fares  led  to  a  pronounced  agitation  for  a  law  restoring  the 
5-cent  fare  and  placing  upon  the  tax  rolls  permanently  the  burden  of  any  defi- 
ciencies that  might  arise  under  that  rate.  Upon  the  recommendation  of  Governor 
Coolidge,  in  a  message  dated  July  23,  1919,  the  Massachusetts  legislature  estab- 
lished a  special  Street  Railway  Commission,  with  duties  described  as  follows : 

"It  shall  be  the  duty  of  the  commission  to  make  an  investigation  and  study  of  the  street 
railway  situation  in  this  commonwealth,  with  a  view  to  determining  what  action  may  be 
required  to  promote  the  public  welfare  and  convenience  in  relation  thereto,  what  action  should 
be  taken  for  the  purpose  of  securing  lower  fares,  what  portion  of  the  expenses  of  operation, 
if  any,  should  be  borne  by  the  public  treasury  and  what  means  should  be  used  for  the  purpose 
of  providing  adequate  and  low-priced  transportation,  and  whether  and  to  what  extent  public 
ownership  is  the  proper  solution  of  the  street  railway  problem.  The  commission  shall  also 
consider  the  advisability  of  establishing  fare  districts  on  street  railway  lines,  with  a  basic 
fare  of  five  cents  for  each   fare  district  established." 

This  Street  Railway  Commission,  reporting  on  November  15,  1919."  recom- 
mends that  the  Boston  Elevated  Railway  Service-at-Cost  Act  be  amended  so  as 
to  give  the  trustees  more  freedom  in  adjusting  fares,  and  then  goes  on  to  say, 
at  pages  32  and  33  of  its  report : 

"If,  then,  the  trustees  are  relieved  from  these  conditions  and  are  given  a  free  hand  in 
fixing  fares,  it  should  be  provided  that  if  a  fare  so  fixed  by  them  as  adequate  to  meet  the 
cost  of  the  service  is  deemed  by  the  communities  to  be  higher  than  the  best  interests  of  the 
area  served  requires,  then,  for  the  purpose  of  securing  lower  fares,  the  cities  and  towns 
served  may,  with  the  approval  of  the  Public  Service  Commission,  contribute  to  the  income 
of  the  road  a  sum  that  shall  not  exceed  $2  per  thousand  upon  the  assessed  valuation  of  said 
cities  and  towns.     The  desire  of  said  cities  and  towns  thus  to  contribute  shall  be  expressed 


312  Electric  Railway  Problem 

through  a  petition  addressed  to  the  Public  Service  Commission,  said  petition  from  cities  being 
authorized  by  a  vote  of  the  city  council,  approved  by  the  mayor,  and  said  petition  from  towns 
being  approved  by  a  vote  of  the  selectmen  in  each  town.  If  any  city  or  town  in  the  community 
served  shall  fail  within  sixty  days  of  the  filing  of  the  first  petition  to  file  a  similar  petition, 
then,  upon  conditions  named  in  the  bill  suggested,  a  referendum  vote  shall  be  taken  of  all 
the  people  in  the  communities  served. 

"If  the  trustees  continue  to  oi)erate  the  road  under  existing  conditions,  and  the  measures 
of  relief  we  recommend  are  adopted,  it  will  result  in  relieving  the  road  of  subway  rentals 
(including  the  Cambridge  subway)  amounting  to  a  little  less  than  $1.91KUKK),  and  of  bridge 
and  paving  burdens  to  the  amount  of  $250.lHKt.  This  relief,  aided  by  an  increased  use  of 
the  system,  which  accompanies  a  growing  population,  might  enable  the  trustees  to  reduce  the 
fare,  but  it  must  not  be  forgotten  that  under  the  terms  of  the  act  of  1918  the  reserve  fund 
of  $1,(IO().00(),  provided  in  section  5,  must  be  made  good  if  in  any  way  depleted.  The  fund 
has  not  only  all  been  used  to  meet  the  deficits  in  running  the  road,  but  a  further  sum  of 
$3,980,151  has  been  supplied  by  the  Common  wealth  and  assessed  upon  the  cities  and  towns  in 
which  the  railway  operates,  so  that  before  fares  can  be  reduced,  more  than  S5.()00,000  must 
be  accumulated  out  of  surplus  earnings,  to  make  good  the  SI.OlXl.fXH)  of  the  reserve  fund,  with 
30  per  cent  additional  as  provided  for  in  the  act,  and  to  reimburse  the  cities  and  towns  in 
which  the  road  operates  for  the  $3,980,151  advanced  by  them.  It  must  be  concluded  that 
this  would  make  it  extremely  unlikely  that  fares  can  be  materially  reduced  for  some  years 
if  labor  and  materials  remain  at  present  prices." 

It  will  be  noted  that  these  reconinietidations  include  the  release  of  the  Boston 
Elevated  Railway  Company,  for  the  time  being,  from  its  obligation  to  pay  ren- 
tals for  the  municipally-owned  subways.  This  release  would  be  equivalent  to  a 
subsidy,  as  the  subways  were  built  especially  for  electric  railway  operation,  and 
they  are  not  highways  in  the  sense  of  being  free  for  the  use  of  other  vehicles 
besides  the  street  cars  and  rapid  transit  trains.  The  provision  for  a  direct  sub- 
.sidy,  from  the  communities  served,  for  the  purpose  of  keeping  fares  down  is 
even  more  radical.  Indeed,  a  similar  provision  is  already  in  force  in  the  Bay 
State  Street  Railway  Service-at-Cost  Act  of  1918.  Mr.  Homer  Loring.  Chairman 
of  the  Board  of  Public  Trustees  now  operating  the  Eastern  Massachusetts  Street 
Railway  (the  old  Bay  State  system),  explained  this  act  to  tiie  Commission  at 
page  KAO  of  the  Proceedings.  Among  the  features  of  the  aet  is  a  provision 
by  which  the  state  guaranteed  and  thus  made  salable  an  issue  of  6  per  cent  serial 
bonds  up  to  :f4,0(X),000.  of  which  $2,500,000  have  been  sold  at  par.  The  act 
also  authorizes  any  municipality  served  by  the  Bay  State  lines  to  come  forward 
with  a  contribution  "for  the  purpose  of  preventing  increases  in  fares  or  of  re- 
ducing fares  or  of  avoiding  discontinuance  or  reduction  of  service."  The  sum 
contributed  for  the  expenses  of  any  one  year  may  not  be  more  than  fifty  cents  on 
each  $1000  of  assessed  valution  in  a  city  or  $1  per  $10(X)  in  a  town.  Within 
these  limitations,  the  amount  contributed  may  be  "any  part  or  all  of  the  increase 
in  the  cost  of  operation  due  to  increased  wages  or  the  cost  of  supplies  or  coal  in 
excess  of  the  average  cost  for  the  year  ending  July  first,  nineteen  hundred  and 
fourteen,  as  determined  aiul  apportioned  by  the  trustees."  These  contributions 
were  authorized  for  the  period  of  the  war  and  for  two  years  thereafter.  But  the 
Bay  State  lines  were  given  no  actual  guaranty  by  the  state  like  the  guaranty 
given  to  the  Boston  F.levated  Railway  Company.  .\t  pages  1651  and  1652  of  the 
Proceedings,  Mr.  Loring  says: 

"I  am  a  believer  in  the  F.levated  plan,  in  many  instances.  I  believe  in  all  large  cities 
it  is  an  admirable  plan.  Where  the  fare  can.  with  reasonable  certainty,  pnxluce  receipts 
which  will  c<|ual  the  cost  of  ^erviie.  the  guaranty  should  not  be  a  serious  matter,  and  of 
course.  1  am  a  Ixliever  in  the  fact  ihat  the  taxpayer  should  properly  conlrihiite  to  a  certain 
extent.     1  think  in  the  Bay  Slate  that  is  going  to  be  done  generally  by  our  cities  there. 


Public    Subsidies  313 

"I  had  the  mayor  and  a  committee  wait  on  me  the  other  day  from  one  of  our  cities,  asking 
whether  there  was  anything  to  permit  them  to  decide  what  fare  they  would  pay,  and  then 
have  the  general  taxpayer  pay  the  balance;  and  they  proposed  to  go  before  the  legislature 
and  ask  for  special  legislation  to  do  that.     There  is  a  feeling  that  has  grown  most  rapidly. 

"Commissioner  (iadsden :     1  thought  you  had  an  act  in  Massachusetts  along  that  line? 

"Mr.  Loring :  We  have  an  act.  Mr.  Commissioner,  which  is  a  good  start,  but  all  that 
they  can  contribute  is  fifty  cents  per  thousand  for  cities  and  a  dollar  a  thousand  for  towns. 
The  amount  is  enough  to  contribute  enough  to  keep  us  from  abandoning  the  lines,  but  it  is 
not  enough  to  affect  the  fares. 

"Commissioner  Meeker :  What  is  this  SO  cents  a  thousand  and  a  dollar  a  thousand — 
what  does  it   mean  ? 

"Mr.  Loring :  On  the  assessed  valuation.  Let  me  show  you :  It  will  mean,  in  Fall  River, 
seventy-five  to  one  hundred  thousand  dollars.  Of  course,  that  would  not  have  a  great  influence 
on  Fall   River's    fare. 

"Commissioner  Meeker:     It  means  50  cents  per  thousand  dollars  of  taxable  valuation? 

"Mr.  Loring:     Of  taxable  property,  yes. 

"Commissioner  Gadsden:     It  really   recognizes  the  principle,   does   it  not? 

"Mr.  Loring:  They  have  recognized  the  principle  and  it  has  grown  very  rapidly  in  the 
last  tw'O  years.  Where  you  seldom  met  a  man  among  thinking  people,  the  taxpayers  them- 
selves, who  felt  it  ought  to  be  done,  only  a  short  time  ago,  now  you  find  them  everywhere. 

"The  trustees  introduced  in  the  last  legislature  a  bill  that  we  called  the  'fifty-fifty'  bill. 
It  recognized  the  principle  that  the  taxpayer  ought  to  contribute,  but  it  also  tried  to  get 
away  from  what  I  think  is  a  great  mistake,  to  tell  the  car  rider:  'You  will  pay  five  cents  or 
six  cents  and  then  whatever  additional  expense  there  is  the  taxpayer  will  pay.' 

"The  fifty-fifty  bill  divided  fifty-fifty  the  cost  of  service  in  excess  of  five  cents.  So  that 
if  it  were  ten  cents  the  car  rider  would  pay  equal  to  7^  cents  and  the  taxpayer  the  balance. 

"I  would  anticipate  great  trouble  with  the  car  riding  public  if  it  was  guaranteed  that  its 
fare  would  be  this  amount  and  no  more  notwithstanding  what  the  company  spent.  I  think 
that  is  a  great  error;  although  I  believe  there  is  a  strong  feeling,  particularly  over  in  our 
community,   that   that   should   be   done. 

"That  fifty-fifty  bill  had  the  support  of  some  of  the  largest  ta.xpaying  corporations  in  the 
.'-tate  of  Massachusetts  who  believed  that  it  w-as  in  the  interest  of  their  employes  that  fares 
'hould  be  kept  down,  and  they  were  willing  to  pay  something  in  addition." 

At  page  1653,  Mr.  Loring  gives  the  sequel : 

"Of  course,  the  fifty-fifty  bill  was  not  pas.sed  by  the  legislature.  They  did  not  pass  it. 
They  turned  it  down.  Since  that  time,  however,  people  who  argued  against  it  there  in  the 
committees  have  come  to  me  and  said  they  felt  that  it  was  the  only  way  that  it  could  be 
done  in  cities  of  moderate  size  where  it  is  perfectly  evident  you  cannot  get  the  cost  of  service 
out  of  the  car  rider." 

The  1919  Street  Railway  Commission  recommended  a  change  in  the  Bay 
State  law  increasing  the  maximum  amount  which  could  be  contributed  by  a  muni- 
cipality to  $2  per  $1000  of  assessed  valuation  in  any  one  year.  The  Street  Rail- 
way Commission  also  recommended  a  provision  for  the  creation  of  transporta- 
tion areas  for  the  public  operation  of  electric  railway  service,  in  case  the  other 
measures  of  relief  recommended  should  prove  to  be  inadequate.  The  plan  of 
control  is  described  at  pages  46  and  47  of  the  report  as  follows : 

"When  a  transportation  area  is  created,  with  the  approval  of  the  Public  Service  Com- 
mission, it  will  be  operated  under  public  control,  which,  in  the  draft  bill  we  submit,  will  be 
exercised  by  the  Public  Service  Commission  through  a  local  manager  of  the  system.  The 
Public  Service  Commission  may  fix  such  rates  as  it  deems  proper,  subject  to  review  upon 
hearing  to  be  given  upon  petition,  .^ny  deficit  arising  in  the  administration  of  the  road, 
including  in  the  cost  of  service  reasonable  dividends  upon  stock  at  a  rate  to  be  determined 
by  the  Public  Service  Commission,  shall  be  made  up  through  the  tax  levy  upon  the  com- 
munities   served." 

With  respect  to  the  indirect  subsidies  involved  in  tax  exemptions  the  Street 
Railway  Commission  said : 

"We  believe  that  the  principle  underlying  any  recommendations  of  relief  .should  be  that 

no  just  tax  upon  street  railway  corporations  should  be  removed  merelv  for  the  purpose  of  an 

indirect  subsidy.  Subsidies   should  be  paid  as   such   and  their  true  character   should  not   be 
obscured." 


314  Electric  Railway  Problem 

State  Senator  John  J.  Walsh,  a  member  of  the  Street  Railway  Commission, 
at  page  1472  of  the  Proceedings,  gives  the  Commission  his  idea  of  the  benefits 
which  would  accrue  from  the  adoption  of  a  proper  subsidy  policy,  as  follows : 

"As  a  matter  of  practical  politics.  I  would  have  in  all  tax  bills  in  the  cities  and  towns 
affected  an  item  called,  for  example,  'transportation  subsidy.'  so  that  the  people  would  know 
just  what  they  were  paying  for  this  service.  This  new  item,  representing  a  daily  actual 
saving  to  each  citizen,  may  be  used  to  justify  economy  in  other  municipal  expenditures,  and 
make  municipal  administrators  keen  against  waste  and  inefficiency.  It  will  force  economies 
in  operation  to  keep  down  the  tax  rate. 

"There  are  now  no  cheery  riders  on  the  Elevated,  no  cheery  employes  and  no  cheery 
managers.  Ever>body  is  sore  and  vindictive  and  they  rail  in  vain  against  the  wrongs  of  the 
irretrievable   past. 

"This  has  been  commented  on  in  your  inquiries  of  Commissioner  MacLeod. 

"The  S-cent  fare  liill  with  the  subsidy  takes  nothing  from  anybody  and  gives  much  to 
everybody.  The  soundest  fare  for  metropolitan  areas  is  the  limit  the  public,  mostly  fairly 
disposed,   will  pay   without   reluctance." 

We  must  not  overlook  the  fact  that  all  these  Massachusetts  subsidy  schemes 
are  based  upon  the  assumption  either  of  public  operation  or  else  of  public  owner- 
ship and  operation." 

Mr.  Lucius  S.  Storrs,  President  of  the  Connecticut  Company,  told  of  the 
voting  of  a  subsidy  by  the  town  meeting  to  prevent  the  discontinuance  of  opera- 
tion on  one  of  his  company's  lines.  Following  the  discussion  in  which  Commis- 
sioner Sweet  brought  out  the  possibility  of  serious  conflict  of  interest  between 
communities  fundamentally  benefited  by  the  uniform  flat  fare  system  and  com- 
panies whose  financial  salvation  depended  upon  the  adoption  of  the  zone  system. 
Conmiissioner  Gadsden  asked  Mr.  Storrs  if  the  solution  of  such  a  conflict  of  in- 
terest was  not  found  in  subsidies.  The  testiniony  at  page  458  of  the  Proceedings 
follows : 

"Commissioner  Gadsden :  Mr.  Storrs,  on  this  matter  of  the  difference  between  a  flat 
rate  and  the  zone  system,  Mr.  Commissioner  Sweet  wanted  to  know  whether  there  was  any 
compromise.  Don't  you  think  you  have  worked  out  the  answer  to  it,  or  they  have  worked 
it  out  in  Massachusetts  that  where  the  community  prefers  a  flat  rate  of  5  cents,  it  agrees  to 
subsidize   the  company    for  the  difference? 

"Mr.  Storrs:     There  is  no  question  about  that. 

"Commissioner  Gadsden:     That  is  the  answer,  is  it  not? 

"Mr.  Storrs:  The  complete  answer  is  the  subsidizing  of  the  property.  There  is  no 
question  about  that. 

"Commissioner  G.idsden  :  If  the  necessary  revenue  for  a  given  piece  of  property  had 
been  properly  ascertained,  a  community  could  very  well  decide,  for  sociological  reasons,  to 
keep  a  5-ccnt  fare,  and  enter  into  a  contract  with  the  company  to  put  up  the  difference  out 
of  general  taxation,  could   it   not? 

"Mr.   Storrs:     There  is  no  question  alxjut  it. 

"Commissioner  Gadsden:  .Xnd  in  that  way  solve  the  question  of  the  flat  rate,  if  it  be 
thought  desirable  to  keep  the  flat  rate? 

"Mr.  Storrs:  Yes.  If  the  theory  on  which  so  many  cities  have  been  developed  has  been 
a  proper  theory  from  the  standpoint  of  the  communities,  the  only  way  to  get  that  is  by  proper 
taxation. 

"Commissioner  Gad.sden :  .^s  a  matter  of  fact,  Mr.  Storrs.  is  it  not  vour  observation 
that  this  solution  of  the  community  problem  of  .America  has  been  worked  oiit  by  the  electric 
railways  at  their  own  expense  so  far? 

"Mr.   .Storrs:     .-Xhsolutely.     There   is  no  question   about  that. 

"Commissioner  G.idsdcn :  Therefore,  if  the  .Vmerican  people  are  wedded  to  this  system, 
would  it  not  be  proper  that  they  should  at  least  come  in  and  pav  the  difference? 

"Mr.   Storrs:     I'nqucstionably." 

Further  on,  at  page  463  of  the  Proceedings,  Mr.  Storrs  discusses  the  pos- 
sible eflfect  of  subsidies  upon  the  movement  for  public  ownership.  Chairman 
Flmquist  and  Mr.  Storrs  have  the  following  colloquy: 


Public    Subsidies  315 

"The  Chairman :  *  *  *  *  Now,  what  will  be  the  ultimate  effect  on  the  street  car 
industry  if  this  automobile  industry  expands  as  rapidly  as  it  has  in  the  past.' 

"Mr.  Storrs :  Recognition  by  the  community  of  the  need  of  transportation  and  the 
subsidizing  of  it  to  meet  that  need.  They  are  subsidizing  the  automobile  utility  now  by 
paving  and  things  of  that   sort,   which  they  are   offering  them   free. 

"The  Chairman:  If  you  reach  that  point,  will  private  capital  be  interested  in  investing 
in  the  street  car  industry? 

"Mr.  Storrs  :     With  a  guaranteed  return,  I  imagine  it  would. 

"The   Chairman:     Well,   if  there  is   not  a  guaranteed   return? 

"Mr.   Storrs;     No;  certainly   not. 

"The  Chairman:  Suppose  the  communities  are  obliged  to  guarantee  a  return  to  the 
street  car  industry.  Do  you  think  that  will  conduce  to  the  continuance  of  private  ownership 
and  operation  of  the  utility? 

"Mr.  Storrs:  It  is  conceivable  that  there  would  be  some  method  of  recognizing  that 
subsidy  that  would  still  give  to  the  management  of  the  industry  and  the  investor  a  method 
of  compensating  them  for  their  initiative  and  ownership. 

"The  Chairman :  Do  you  believe  it  would  create  a  very  pronounced  agitation  for 
municipal  ownership  and  operation? 

"Mr.  Storrs:     Conceivably  so. 

"The  Chairman :  Suppose  we  reached  a  point  where  communities  must  guarantee,  or, 
rather,  subsidize,  this  industry,  do  you  believe  that  private  owiiership  and  operation  or 
municipal   ownership   and  operation   should   be  preferred? 

"Mr.  Storrs :  I  think  that  private  ownership  and  operation  would  be  preferable  from 
all  standpoints — from  the  standpoint  of  the  investor,  because  it  will  recognize  his  energy  and 
initiative  in  the  constantly  increasing  return,  and  from  the  standpoint  of  the  community  in  the 
certainly  declining  rate  of  fare,  as  compared  with  what  would  result  if  the  municipality  itself 
were  tn  operate  the  property. 

"The  Chairman:  Is  there  any  experience  in  this  country  which  would  help  this  Commis- 
sion to  reach  a  conclusion  upon  that  question? 

"Mr.   Storrs:     That   I   am   not  thoroughly  advised  of." 

While  Mr.  Storrs  seems  to  favor  the  subsidy  policy,  Dr.  Thomas  Conway, 
who  has  done  cotisiderable  work  with  him  on  the  Connecticut  fare  problems,  is 
strongly  opposed  to  it  on  principle.  But  both  men  shy  at  public  ownership  as  a 
remedy.  Dr.  Conway's  testimony  on  this  point  is  found  at  page  964  of  the 
Proceedings,  as  follows : 

"The  Chairman :  Now,  assuming  that  a  great  many  commissions  do  raise  rates,  and 
that  the  people  refuse  to  travel,  and  it  does  not  bring  in  revenue  enough  to  pay  the  operating 
expenses  and  fixed  charges,  then  what  have  you  got  to  do? 

"Mr.  Conway:  Then  you  have  pretty  nearly  reached  the  end  of  private  ownership  and 
private  operation  of  the  business. 


"The  Chairman:     Do  you  believe  in  public  subsidy  of  a  private  corporation? 

"Mr.   Conway :     I   do  not.     I   think,   in   principle,    it   is   vicious. 

"The  Chairman :  Then,  if  these  public  utilities  cannot  maintain  themselves,  the  solution 
is  government  ownership? 

"Mr.  Conway :  I  would  not  go  that  far,  but  I  do  say  we  ought  to  give  the  matter  of 
private  ownership  a  thorough  trial,  and  private  operation.  Let  the  initiative  of  the  operator 
have  free  play.  If  he  cannot  work  out  a  problem,  tlien  he  has  a  property  for  sale.  I  do  not 
think  it  makes  any  difference  to  him  whether  the  buyer  is  to  be  the  junkman,  or  whether  it 
is  going  to  be  the  municipality,  if  he  is  satisfied  he  is  through  and  he  cannot  work  it  out; 
but  that  is  the  last  resort,  in  my  opinion,  public  ownership.  I  think  a  subsidy,  in  general 
principle,  is  bad,  because  I  am  a  believer  in  individual  initiative,  and  in  giving  a  reward 
for  efficiency,  and  in  giving  the  railroads  freedom  to  work  out  the  best  methods. 

"Mr.  Warren:  But  don't  you  think  it  may  be  of  such  importance  to  maintain  the  service 
that  the  company  cannot  work  out  its  problem,  and  yet  it  is  a  case  where  the  road  ought 
not  to  be  discontinued,  and  that  in  the  interest  of  the  public  a  subsidy  might  be  advisable 
pending  a  determination  of  whether  the  public  would  in  some  way  take  over  the  property? 

"Mr.  Conway:  I  think  that  is  true;  yes.  In  other  words,  during  these  critical  days,  in 
which,  perhaps,  discouragement  may  come,  because  a  solution  has  not  yet  been  found,  it 
would  pay  the  public  to  support  the  companies,  at  least  for  a  sufficient  period  of  time,  that 
the  entire  problem  be  understood  by  all  parties,  and  the  most  advantageous  solution  found, 
no   matter   what   may   be   the   solution  determined   upon." 


316  Electric  Railway  Problem 

In  this  testimony  Dr.  Conway  seems  to  be  looking  at  the  problem  exclusively 
from  the  point  of  view  of  the  private  investor.  If  the  stockholders  cannot  make 
a  go  of  the  street  railway  business,  then  his  interest  ceases,  and  he  sees  no  choice 
between  the  junkman  and  the  municipality  as  a  successor  in  ownership.  Mean- 
while, we'll  swallow  our  scruples  and  take  a  subsidy ! 

Mr.  James  D.  Mortimer  brought  to  the  Commission  some  important  news 
from  Wisconsin.  Massachusetts,  wiih  all  of  its  street  railway  investigating  com- 
missions, its  extraordinary  experiments  and  its  radical  predictions,  has  held  the 
center  of  the  stage  so  much  during  the  last  few  years  that  the  street  railway  policies 
of  other  states  may  have  received  less  general  consideration  than  ihey  deserve. 
At  any  rate,  what  Mr.  Mortimer  describes  as  the  legislative  outcome  of  the  transit 
situation  in  Kenosha,  Wisconsin,  appears  to  be  a  matter  of  unusual  significance. 
At  pages  782  and  7i<3  of  the  Proceedings,  he  says : 

"The  Wisconsin  Gas  and  Electric  Company  had  indicated  that  it  was  unable  to  provide 
any  additional  facilities  under  the  revenues  and  under  the  type  of  regulation  which  it  had 
been  experiencing. 

"Local  discussion  arose  as  to  the  desirability  of  purchasing  the  electric  railway.  We 
never  indicated  any  opposition  to  that,  because  we  thought  that  would  be  a  very  good  dis- 
position of  it.  They  called  me  to  Kenosha  to  give  them  a  price  on  it.  I  told  them,  in 
substance,  that  we  had  no  objection  to  their  buying  it,  and  thought  it  would  be  a  good  thing, 
and  then  went  on  to  try  to  sell  it  to  them,  but  my  efforts  at  salesmanship  were  very  poor, 
because  the  more  I  talked  in  favor  of  the  advantages  of  their  buying  it.  the  less  they  seemed 
to  want  it.  The  result  was  that  they  asked  if  there  was  not  any  kind  of  a  proposition  that 
we  could  make  that  would  permit  us  to  provide  additional  railway  facilities  in  Kenosha 
by  the  investment  of  private  capital. 

"Wc  then  outlined  the  necessity  of  a  municipal  guaranty,  and  that  led  to  the  enactment 
in  the  closing  days  of  the  legislature  of  a  municipal  guaranty  law.  whereby  municipalities 
can  contract  with  utilities  for  extensions,  for  the  loaning  of  municipal  capital  to  public  utility 
corporations,  or   for  the  guaranty  of  return,  and  i)rofit   sharing. 

"I  had  indicated  that,  as  a  starter,  we  would  require  a  guaranty  of  six  per  cent  annual 
return  upon  the  then  investment  of  approximately  $S(X),0OO.  plus  the  additional  investment 
of  $.S()().(KK).  roughly :  that  any  returns  earned  in  excess  of  six  per  cent  should  be  divided 
forty  per  cent  to  the  municipality,  ten  per  cent  to  the  employes,  and  fifty  per  cent  to  the 
company;  that  all  restrictions  witli  respect  to  the  rates  of  fare  should  be  eliminated:  that  the 
property  should  tie  operated  to  produce  the  maximum  return  by  whatever  scheme  of  fares 
was  deemed  to  tie  advisable,  and  that  the  company  should  have  the  right  to  initiate  the  fares. 
The  fundamental  ideas  were  accepted.  The  original  bill  as  drafted  contemi)Iated  that  this 
law  should  be  applicable  to  all  the  cities  of  the  state,  which  would  have  included  Milwaukee; 
but  the  Tiovernor  limited  it  to  cities  of  the  third  class,  which  included  Kenosha  and  one  other 
of  our  municipalities,   Kacine." 

Referring  to  the  guaranty  contained  in  the  Boston  Elevated  act  and  to  the 
provisions  of  this  Wisconsin  law,  Commissioner  Sweet  asked  Mr.  L.  R.  Nash, 
Stone  &•  Webster's  service-at-cost  expert,  certain  significant  questions  about  the 
effect  of  public  guaranties  upon  credit.  At  page  690  of  the  Proceedings,  the 
following  discussion  occurs: 

"Commissioner  Sweet:  Where  that  can  be  done.  Mr.  Nash.  I  take  it  that  the  investment 
would  Ik'  more  certain  than  it  would  under  the  service-at-cost  plan? 

"Mr.   Nash:     Undoubtedly. 

"Commissioner  Sweet:  if  it  is  backed  up  by  an  organization,  state  or  otherwise,  that 
is  solvent,  so  that  investments  would  he  more  re.idily  made  and  perhaps  would  be  made  at 
a  lower  rate  somewhat  by  reason  of  the  extra  certainty. 

"Mr.   Nash:     .V  materially  lower  rate.  I  think. 

"Commissioner  Sweet:  If  so  guaranteed.  So  that  if  states  had  the  authority,  or  com- 
munities, til  make  such  a  guaranty  that  would  secure  the  investment  more  certainly  than  any 
ether   way   that   has  tieen   proposed,   would   it   not  ? 

"Mr.  Nash:  1  think  that  is  undoubtedly  the  case;  the  securitv  would  be  greater,  and 
the  return  demanded  would  lie  lower." 


Public    Subsidies  317 

Evidently,  the  kind  of  a  guaranty  referred  to  in  this  discussion  is  the  promise 
of  a  subsidy,  if  one  is  needed. 

Before  concluding  this  subject  of  subsidies,  something  must  be  said  with 
respect  to  the  contributions  of  capital  made  by  property  owners  who  put  up  the 
money  for  the  construction  of  street  railway  extensions  into  new  territory. 
Mr.  John  J.  Stanley,  president  of  the  Cleveland  Railway  Company,  refers  to  this 
practice  in  Cleveland  as  one  of  the  causes  for  his  company's  comparative  im- 
munity from  financial  difficulties  during  the  years  when  most  other  companies 
have  been  in  trouble.     At  page  606  of  the  Proceedings,  he  says : 

"Another  thing;  for  the  past  five  or  six  years,  a  great  many  of  our  extensions  have  been 
paid  by  the  real  estate  men. 

"Commissioner   Sweet:     Abutting  owners? 

"Mr.  Stanley :  Yes.  They  have  assessed  the  real  estate  men.  the  abutting  owners,  one 
dollar  to  two  dollars  a  ruiming  foot.  That  money  goes  to  the  railway  company  so  as  to 
make  that  extension,  or  help  to  make  it. 

"Commissioner  Sweet :  You  mean  where  new  extensions  have  been  ordered  by  the 
council  ? 

"Mr.  Stanley :  Exactly.  Out  in  the  country,  where  they  want  an  extension  to  develop 
a  certain  part  of  the  city,  they  come  to  us  and  say,  'We  would  like  to  have  a  road  out  there.' 
We  will  say.  '.-Ml  right:  how  much  can  you  afford  to  pay  toward  it?'  And  in  five  e.xtensions 
that  I  can  name  we  have  been  paid   for  it. 

******** 

"Commissioner  Gadsden:     How  much  did  the  company   put   up? 

"Mr.  Stanley  :  Well,  we  have  taken  these  extensions  and  put,  probably,  a  single  track 
through  it.  Mr.  Gadsden.  *  *  *  where  we  were  developing  the  territory,  so  as  to  have 
the  traffic  there  when  the  time  comes  to  lay  the  second  track." 

Mr.  John  A.  Beeler  indicated  that  in  his  experience  it  was  not  always  ad- 
vantageous for  the  company  to  accept  lines  constructed  by  the  property  owners. 
At  page  1677  of  the  Proceedings,  we  find  the  following: 

"The  Chairman :  There  has  been  a  good  deal  said  here  about  credit,  and  you  also  have 
touched  on  that.  Do  you  believe  that  it  would  be  possible  to  inaugurate  a  system  by  which 
the  benefited  property  and  the  public  generally  should  pay  for  new  construction  of  street 
car  properties,  or   for  e.xtensions? 

"Mr.  Beeler :  There  is  no  doubt  but  what  property  values  have  been  immensely  in- 
creased by  the  construction  and  operation  of  street  railways,  and  the  property  owner  has  been 
almost  the  sole  beneficiary,  except  that  the  community  is  benefited  by  increased  taxes  on 
account  of  the  rise  in  value  of  the  property  served. 

"That  is  a  very  large  question,  as  to  who  should  pay  for  extensions  and  improvements. 
A  great  many  lines  have  been  built  with  subsidies,  where  in  the  past,  they  were  subsidized 
by  property  owners,  in  order  to  build  out  in  this  district,  and  generally  the  property  owners 
put  the  price  of  the  property  up  so  high  that  the  development  was  so  slow  that  the  railway 
had  been  much  better  off  had  it  never  built  the  line.  I  know  of  a  great  many  instances  of 
that   kind,   myself.'' 

Dr.  Milo  R.  Maltbie,  formerly  one  of  the  public  service  commissioners  in  the 
first  New  York  district,  discussed  at  some  length  this  matter  of  the  use  of  special 
assessments  for  the  building  of  street  railway  extensions.  At  page  2099  of  the 
Proceedings,  he  says : 

"Whether  there  is  anything  in  the  special  as.sessment  idea  which  will  immediately  help 
out  in  this  situation  I  am  not  entirely  sure,  but  if  I  may  suggest  it,  it  seems  to  me  it  would 
be  wise   for  you  to  call  attention  to  this  method  of  building  extensions. 

"Now.  I  know  that  is  not  the  thing  that  street  railway  men  are  talking  about  at  the 
present  time  very  much.  It  is  more  a  desire  to  make  a  return  on  what  they  have  got  rather 
than  to  make  a  lot  more  of  what  they  do  not  like.  But  that  is  particularly  apropos  if  there 
is  going  to  be  municipal  ow-nership  of  the  street  railway  lines  with  private  operation  or  if 
there  is  going  to  be  municipal  ownership  and  municipal  operation. 

"Of  course,  the  fundamental  idea  is  that  the  special  assessment  idea,  which  has  been 
applied  to  sewers  and  in  some  cases  to  water-works  and  laying  out  of  streets  and  so  forth. 


318  Electric  Railway  Problem 

should  be  applied  to  the  building  of  new  lines,  and  the  justification  of  it  is  in  my  opinion 
particularly  strong  in  the  case  of  a  transportation  line  because  there  is  not  anything  that  will 
develop  the  value  of  property  if  the  lines  are  properly  selected — there  is  not  anything  that 
will  develop  the  value  of  the  property  so  much  as  the  transportation  system." 

Dr.  Maltbie  then  called  attention  to  the  fact  that  the  construction  of  the 
original  subway  in  New  York  had  apparently  caused  a  much  larger  increase  in 
the  value  of  the  land  adjacent  to  its  two  northern  branches  than  the  entire  cost 
of  its  construction.  At  page  2100  of  the  Proceedings  he  calls  attention  to  the 
fact  that  the  underlying  principle  of  special  assessments  had  been  recognized 
in  the  building  of  the  railroads  in  the  west.     On  this  point,  he  says: 

"Of  course,  you  all  recall  that  when  the  railroads  were  built  in  the  west  many  of  them 
were  built  not  on  the  same  plan,  hut  under  a  plan  which  recognized  the  same  ideas.  Those 
towns  voluntarily  issued  bonds  to  provide  money  to  build  the  lines.  Why?  Because  in  those 
rural  communities  they  foresaw  the  value  of  their  farms  would  go  up,  so  they  could  issue 
these  bonds  and  pay  for  them  and  still  have  a  profit  left.  There  were  some  unfortunate 
instances  where  they  tried  to  evade  payment  of  those  bonds  afterwards,  but  the  idea  was 
recognized  nevertheless." 

This  special  assessment  plan  is  particularly  adapted  to  conditions  under 
public  ownership.  At  pages  2101  and  2102  of  the  Proceedings,  the  question  of 
its  adaptability  to  conditions  under  private  ownership  is  discussed  as  follows: 

"Commissioner  Wehle :  Do  you  not  think  such  a  plan  as  that  could  be  put  into  operation 
also  when  the  public  utility  is  under  proper  regulation  in  a  case  where  you  have  private 
ownership  and  private  operation? 

"Mr.  Maltbie:  Well,  there  is  a  sentimental  factor  there  which  is  pretty  important,  even 
though  it  may  lx>  sentiment.  Property  owners  or  people  generally  do  not  like  to  contribute 
to  something  the  ownership  of  which  is  going  to  pass  to  a  private  corporation.  Now,  if  you 
could  keep  the  ownership  of  that  line  in  the  municipality  or  something  of  that  sort,  you 
might  meet  that  objection.  But  whether  it  works  out  well  or  not  there  is  that  feeling  that 
they  do  not  like  to  contribute  to  something  which  is  going  to  be  turned  over  to  a  private 
corporation. 

"Commissioner  Wehle:  Well,  if  you  made  it  clear  that  the  title  to  the  improvement 
remained  in  the  city  and  that  the  full  right  to  use  and  operate  over  the  improvement  was  in 
the  street  railway  company  luider  regulation,  do  you  not  think  that  by  a  camjiaign  of  education 
in  which  you  would  specially  emphasize  the  fact  that  this  arrangement  enables  the  car  rider 
to  ride  much  more  cheaply  than  he  otherwise  would,  that  such  a  plan  as  that  could  be  put 
into  use  even  where  you  have  private  ownership  and  private  operation? 

"Mr.  Maltbie:  I  think  it  is  possible  to  work  out  a  plan  which  would  cover  that  point 
as  well.  f)f  course,  you  know  many  gas  and  electric  companies  have  done  very  much  tin- 
same  thing  with  land  companies  where  they  own  large  tracts  of  land;  they  have  made  tin 
land  companies  pay  for  the  pipes  and  the  wires,  although  the  private  company  has  kept  the 
ownership  and  control  of  them.  But.  of  course,  that  is  dealing  with  a  few  men  of  large 
business  interests  and  not  with  a  multitude  of  taxpayers  and  voters." 

New  York  City  has  led  the  way  in  the  direction  of  preserving  the  five-cent 
fare  on  its  rapid  transit  lines  through  an  indirect  subsidy  to  the  two  operating 
companies.  In  the  Dual  .Subway  Contracts  executed  in  March.  1913.  after  vears 
of  laborious  and  painful  negotiations,  tlie  city  established  a  partnership  scheme 
under  which  both  tiic  city  and  the  companies  contributed  large  amounts  of  capital 
to  rapid  transit  development.  These  contracts  were  based  upon  the  theory  that 
the  new  rapid  transit  lines  should  be  owned  by  the  city  but  operated  bv  private 
companies.  As  the  city  did  not  have  sufficient  credit  available  under  the  consti- 
tutional debt  limit  to  provide  ail  of  the  required  capital,  it  felt  compelled  to  give 
the  companies  a  preferred  position  in  order  to  induce  them  to  "piece  out"  the 
capital  supplied  by  the  city.  In  advance  of  their  construction,  the  new  rapid 
transit  lines  were  leased  to  the  companies  for  operation  for  a  period  of  49  vears. 
Under  these  lea.ses  the  comjianies  were  permitted  to  pay  out  of  earnings  all  op- 


Public   Subsidies  319 

crating  expenses,  rentals  and  taxes,  and  then  to  take  for  themselves  preferentials 
based  upon  the  amount  of  their  previous  profits,  as  well  as  a  fixed  return  to  cover 
interest  and  amortization  charges  on  the  new  capital  supplied  by  them  to  the  joint 
enterprise,  before  the  city  would  receive  any  return  whatever  upon  the  capital 
which  it  supplied  for  the  construction  of  the  new  lines.  The  practical  efiect  of 
this  arrangement  was  to  put  approximately  $250,000,000  of  public  capital  be- 
tween the  operating  companies  and  loss,  the  principal  consideration  for  this  in- 
direct guaranty  being  the  agreement  of  the  companies  to  supplement  the  city's 
capital  with  some  of  their  own  and  to  operate  the  city's  rapid  transit  lines  as 
extended  at  a  uniform  five-cent  fare  in  conjunction  with  existing  rapid  transit 
lines,  part  of  w-hich  were  privately  owned.  At  the  time  the  Dual  Contracts  were 
executed  it  was  thought  that,  barring  the  possibility  of  a  few  lean  years  imme- 
diately after  the  immense  new  system  of  rapid  transit  came  into  operation,  the 
companies  would  be  absolutely  sure  to  earn  their  preferentials.  In  order  to  give 
them  what  both  sides  believed  to  be  complete  protection,  these  preferentials  were 
made  cumulative,  with  annual  interest  at  6  per  cent  on  temporary  deficiencies, 
compounded  semi-annually. 

After  the  contracts  were  executed  and  the  new  lines  partly  built,  the  war 
came  on,  with  its  enormous  increase  in  the  cost  of  construction  and  of  operation. 
The  estimated  amount  of  capital  required  for  the  construction  and  equipment 
of  the  new  lines  has  been  largely  overrun,  and  the  increase  in  wages  and  in  the 
price  of  coal  and  other  materials  and  supplies  has  made  a  great  difference  in  the 
operating  ratio,  with  the  result  that  even  before  the  rapid  transit  lines  covered 
by  the  contracts  have  been  fully  completed  and  put  into  operation,  it  is  apparent 
that  the  companies  cannot,  at  least  for  a  long  time  to  come,  earn  their  preferen- 
tials, and  that  the  city  may  not  get  anything  whatever  before  the  expiration  of 
the  contracts  in  1968  or  later,  when  the  new  rapid  transit  lines  with  their  equip- 
ment viill  come  into  the  possession  of  the  city  without  further  payment  except 
for  unamortized  additions  and  extensions. 

New  York  City,  in  spite  of  its  enormous  wealth,  nearly  broke  its  back  finan- 
cially by  its  pledges  to  rapid  transit  construction.  This  policy  was  undertaken 
after  long  deliberation  as  a  part  of  the  city  plan  to  relieve  congestion  and,  con- 
versely, to  promote  suburban  development  and  a  better  distribution  of  popula- 
tion. Now,  at  the  very  beginning  of  the  period,  under  the  changed  conditions, 
the  rapid  transit  companies  are  demanding  an  increase  in  the  unit  fare  at  least 
to  eight  cents.  It  is  recognized  that  so  long  as  the  uniform-fare  system  is  in 
effect,  it  would  probably  be  futile  to  increase  fares  on  the  surface  lines  unless 
there  was  a  corresponding  increase  on  the  rapid  transit  lines.  The  city  has  no 
financial  interest  in  the  surface  lines,  and  the  companies  have  no  preferential 
privileges  there  based  upon  the  use  of  city  capital.  As  a  part  of  the  argument  in 
favor  of  an  eight-cent  fare  on  the  rapid  transit  lines,  the  companies  are  urging 
that  this  rate  would  make  the  city's  investment  self-sustaining  and  relieve  the 
taxpayers  from  the  burden  which  they  now  bear  in  the  payment  of  interest  and 
amortization  charges  on  rapid  transit  bonds.  Indeed,  the  bill  prepared  by  the 
New  York  Electric  Railways  Association  and  introduced  in  the  Legislature  April 
1,  1920,  authorized  the  execution  of  service-at-cost  contracts  between  the  muni- 


320  Electric  Railway  Problem 

cipalities  of  the  state  and  the  electric  railway  companies,  based  upon  the  require- 
ment that  the  fares  should  be  sufficient  to  make  the  total  investment  fully  self- 
sustaining.* 

At  the  time  the  Dual  Subway  Contracts  were  executed  in  1913,  they  were 
criticised  by  some  of  those  who  opposed  them  on  the  jjround  that  the  scheme  of 
preferential  payments  to  the  companies  would  destroy  the  incentive  to  efficiency 
and  economy  on  the  part  of  the  private  management,  and.  in  short,  that  the 
scheme  combined  the  most  important  disadvantages  of  private  operation  and  the 
most  important  disadvantages  of  public  operation,  without  preserving  the  advan- 
tages of  either.  In  the  sequel,  as  a  result  of  the  entirely  unexpected  change  in 
economic  conditions  growing  out  of  the  war.  the  rapid  transit  companies  found 
themselves  in  a  straitened  condition  even  under  these  contracts,  which  at  the 
time  of  their  execution  were  regarded  as  very  favorable  to  them.  On  the  other 
hand,  the  city  has  thus  far  been  able  to  retain  the  advantages  of  the  five-cent  fare 
but  faces  the  certainty  that  if  the  contracts  are  unclianged  the  taxpayers  will 
have  to  continue  to  pay  the  interest  and  the  sinking  fund  charges  on  the  city's 
rapid  transit  investment  other  than  tlie  investment  in  the  original  subway,  as  a 
means  of  preserving  the  benefits  of  the  uniform  low  fare. 

It  is  noteworthy  that  the  New  York  Kajjid  Transit  Contracts  do  not  con- 
tain an  absolute  guaranty  to  the  companies  but  merely  a  fixed  contribution  of 
capital  upon  which  the  city  contents  itself  with  a  contingent  return.  The  change 
in  economic  conditions  has  restored  the  companies'  motive  for  economy  in  opera- 
tion even  under  these  contracts  because  even  with  the  city's  free  contribution  of 
capital  the  companies  are  hard  put  to  earn  the  profits  upon  which  their  financial 
structures  are  based.  It  will  be  seen,  however,  that  as  soon  as  the  companies 
felt  the  revival  of  the  motives  that  are  supposed  to  characterize  private  manage- 
ment they  became  dissatisfied  because  the  subsidies  they  enjoyed  were  no  longer 
effectual  to  relieve  them  of  the  fear  of  want.  This  situation  tends  to  prove  that 
under  any  plan  of  ])rivate  operation  with  complete  or  partial  private  ownership 
the  subsidy  policy  will  not  satisfy  the  companies  unless  it  includes  an  effective 
guaranty  of  profits,  and  if  it  includes  that,  then  it  seems  clear  that  the  public  can 
no  longer  depend  u])i>n  private  management  to  supply  of  its  own  volition  the 
initiative  for  economy  and  efiiciency  which  is  claimed  to  be  the  characteristic 
advantage  of  private  as  compared  with  public  operation ;  and  the  community 
under  such  an  arrangtinent  will  have  to  depend  upon  the  power  of  public  regu- 
lation operating  directly  and  from  the  outside  to  make  a  dead  motive  act  like  a 
live  one. 

It  is  clear  that  subsidies  in  one  form  or  another  will  be  necessarv  in  many 
ca.ses  if  the  maximum  usefulness  of  the  street  railways  is  to  be  preserved.  And 
yet  tiicre  are  very  serious  objections  to  the  policy  of  granting  public  subsidies  to 
private  corporations  engaged  in  public  service,  especially  where  they  take  the 
form  of  making  up  tlelicits.  There  is  no  particular  virtue  in  private  manage- 
ment as  such  when  the  risks  of  loss  are  gone.  Of  course,  in  a  pinch  a  private 
company  might  be  granted  certain  exem])tions  or  be  given  certain  fi*;e(l  contribu- 
tions without  its  motive  for  economy  and  efficiency  being  entirely  destroyed. 
In  other  words,  the  policy  of  giving  limited  assistance  may  be  permissible,  if  care 


Public    Subsidies  321 

is  taken  not  to  give  enough  assistance  to  put  the  companies  on  "Easy  Street," 
or  to  guarantee  them  the  return  upon  their  investment.  But  this  is  merely  saying 
that  the  public  should  be  extremely  watchful,  exceedingly  temporary  and  judi- 
ciously niggardly  in  the  help  it  gives  by  way  of  subsidy  under  private  ownership. 
But  a  niggardly  and  uncertain  reward  is  not  calculated  to  reduce  the  cost  of  capi- 
tal, to  stimulate  efficiency  or  to  insure  adequate  service.  The  subsidy  plan  is 
dangerous.  The  trouble  with  it  is  that  it  means  clinging  to  the  fetish  of  the 
superiority  of  private  initiative  after  the  motive  for  private  efficiency  is  paralyzed 
or  killed.  At  the  Commission's  very  first  public  hearing.  Ex-President  Taft 
indicated  in  a  direct  and  simple  way  the  logical  results  of  the  subsidy  policy.  I 
quote  again  what  he  says  at  page  5  of  the  Proceedings : 

"The  public  spends  a  great  deal  of  money  in  keeping  roads  in  condition,  and  those  who 
do  not  have  vehicles  do  not  use  the  roads.  It  is  contended  that  these  electric  railways  only 
fulfil  a  function  of  the  same  kind,  and  that  therefore  the  public  ought  to  meet  the  deficit 
by  taxation;  and  if  it  does,  it  ivill  naturally  take  over  the  management."     (Italics  are  mine.) 

In  my  judgment,  public  subsidies  under  private  management  are  not  the  big' 
remedy.  Public  subsidies  may  be  necessary  to  the  preservation  of  electric  rail- 
way service  in  many  cases,  but  if  so,  public  management  is  also  necessary,  as 
Massachusetts  has  determined.  I  do  not  mean  that  certain  minor  helps  which 
are  really  in  the  nature  of  subsidies  may  not  properly  be  extended  to  the  electric 
railways  in  an  emergency  even  under  private  ownership  and  operation,  but  as 
for  the  policy  of  saying  to  the  companies :  "You  go  ahead  and  run  the  roads,  and 
if  a  deficit  occurs  we'll  pay  it,"  there  is  no  statesmanship  in  it. 


Chapter  XXXV 
ABANDONMENT  OF  UNPROFITABLE  LINES 

It  is  probably  true  that  the  one  subject  with  respect  to  which  the  greatest 
number  of  American  cities  have  had  prolonged  and  bitter  controversies  with  the 
electric  railway  companies  is  the  construction  of  adequate  extensions  to  meet 
what  the  public  considered  the  legitimate  needs  of  the  growing  community.  Un- 
doubtedly some  of  these  controversies  have  been  stimulated  on  the  side  of  the 
public  by  speculative  real  estate  interests.  It  is  obvious  that  the  strongest  com- 
pany in  the  most  favorable  times  might  be  bankrupted  by  an  unlimited  program 
of  extensions  dictated  by  groups  of  real  estate  owners.  The  extent  to  which 
overbuilding  in  certain  parts  of  the  country  has  been  responsible  for  the  low  earn- 
ing power  and  weakened  credit  of  the  electric  railways  has  already  been  dis- 
cussed in  Chapter  XIII  of  this  report.  It  is  also  a  well-known  fact  that  in 
American  cities  generally  the  amount  of  street  railway  trackage  is  nnich  greater 
in  proportion  to  the  population  than  it  is  in  British  cities.  On  the  face  of  the 
matter,  therefore,  taking  the  country  as  a  whole,  it  is  doubtful  w^hether  the  com- 
panies in  this  country  could  properly  be  charged  with  having  been  unduly  dilatory 
in  the  building  of  extensions.  Nevertheless  the  long  series  of  fights  in  practically 
all  the  chief  American  cities  over  the  construction  of  extensions  proves  beyond 
a  doubt  that  the  control  of  extensions  and  of  the  policy  governing  their  con- 
struction has  been  and  still  is  one  of  the  chief  bones  of  contention  between  the 
companies  struggling  to  preserve  and  develop  the  earning  power  of  their  property 
and  the  municipalities  struggling  to  satisfy  the  demands  of  their  expanding  popu- 
lation for  adequate  local  transportation  facilities  according  to  American  stand- 
ards. These  troubles  have  been  in  i)art  due  to  the  limited-term  franchise  policy 
that  has  prevailed  in  many  parts  of  the  coiuitry.  When  a  companv's  franchise 
conies  within  a  few  years  of  expiration  and  it  has  no  assurance  as  to  what  will 
happen  to  its  property  when  the  day  of  expiration  arrives,  conservatism  in  the 
construction  of  new  lines  is  inevitable.  Conditions  like  this  have  caused  an  in- 
finite amount  of  trouble. 

It  may  be  that  the  exaggerated  notions  of  the  profitableness  of  the  street 
railway  business,  shared  alike,  in  former  times,  by  the  promoters,  the  investors 
and  the  ])iiblic,  have  developed  in  the  American  urban  mind  an  extraxagant  stand- 
ard of  public  convenience.  The  tardy  development  of  the  city  planning  move- 
ment in  this  country  and  the  rapid  expansion  of  cities  under  the  spur  of  an 
almost  riotous  individualism  has,  no  doubt,  resulted  in  many  cases  in  an  un- 
economical development  of  cities.  The  failure  to  control  urb.m  development 
from  the  point  of  view  of  the  general  imblic  welfare  has  resulted  sometimes  in 
the  most  extraordinary  congestion  of  population  and  business,  and  again  in  a 

322 


Abandonment  of  Lines  323 

patchy  development  that  is  very  expensive,  very  ugly  and  sometimes  not  even 
conducive  to  public  health.  The  electric  railway  is  the  city's  handmaiden ;  its 
job  is  to  wait  on  the  public  and  to  minister  to  its  needs  and  caprices  so  far  as  they 
relate  to  facilities  for  "getting  around."  While  the  electric  railway  company 
no  longer  enjoys  the  advantages  of  a  monopoly  of  transportation  service  to  the 
same  extent  as  formerly,  it  still  has  a  monopoly  of  that  particular  means  of  ren- 
dering service.  Monopoly  in  a  public  service  undoubtedly  carries  with  it  public 
obligations.  In  the  case  of  urban  transportation  service,  the  primary  obligation 
of  monopoly  is  to  serve  the  community's  needs  not  by  giving  a  service  restricted 
to  lines  that  are  individually  profitable,  but  by  serving  the  entire  community  and 
"taking  the  lean  with  the  fat." 

The  American  Electric  Railway  Association  presented  statistics  to  show 
that  up  to  May  31,  1919,  no  less  than  534.12  miles  of  single  track  had  been  dis- 
mantled and  junked  since  1915  by  an  aggregate  of  sixty-one  companies,  and 
service  had  been  abandoned  on  no  less  than  256.58  miles  of  single  track.  Thus 
it  was  shown  that  during  the  war  period  790.7  miles  of  track,  or  approximately  • 
1.75  per  cent  of  the  total  electric  railway  mileage  of  the  country,  had  gone  out  of 
service.  Undoubtedly,  these  abandoned  tracks  represented,  on  the  whole,  rela- 
tively cheap  construction  and  scant  equipment,  and  no  doubt  also  they  represented 
much  less  service  than  the  average  for  a  like  amount  of  mileage.  It  can  hardly 
be  said  that  these  abandonments  were  sufficient  in  themselves  to  prove  the  finan- 
cial distress  of  the  industry  as  a  whole  or  that  the  suspension  of  the  service  on 
these  few  lines  could  effect  much  in  the  way  of  financial  relief  to  the  industry. 
Still,  the  right  to  abandon  the  operation  of  unprofitable  lines  has  been  suggested 
as  one  of  the  means  of  enabling  the  electric  railways  to  survive.  Even  those 
who  propose  this  policy  recognize  that  in  most  cases  its  adoption  would  conflict 
with  the  public  interest,  and  that  it  should  be  applied  with  caution.  That  the 
cutting  off  of  unprofitable  suburban  service  might  prove  the  financial  salvation 
of  the  companies  in  many  cases  was  brought  out  in  the  testimony  of  Mr.  Francis 
H.  Sisson.  At  the  same  time,  because  of  the  predominant  public  interest  in- 
volved, Mr.  Sisson  did  not  give  this  policy  his  unqualified  approval.  At  pages 
346  and  347  of  the  Proceedings,  we  find  the  following : 

"Mr.  Warren :  You  were  asked  something  about  abandoned  lines,  and  I  think  you 
intimated  that  if  a  h'ne  was  unsuccessful  the  people  who  invested  the  money  ought  to  take 
the  consequence,  which  I  think  as  a  business  proposition  is  no  doubt  true.  Is  it  not.  however, 
a  fact  that  there  are  a  great  many  lines  which  are  not  earning  even  their  operating  expenses 
but  the  abandonment  of  which  would  work  a  very  real  hardship  upon  a  considerable  portion 
of  the  public? 

"Mr.  Sisson:  Yes.  In  answering  that  question  I  made  that  reservation,  that  unless  the 
public  interest  was  involved  clearly.  *  *  *  *  y^pj  j  think  that  is  a  very  important  reserva- 
tion  which  must  be  made  there. 

"Mr.  Warren :  And  in  such  cases  probably  some  method  of  public  ownership  or  public 
support  such  as  has  been  worked  out  in  Massachusetts  to  a  certain  extent  ought  to  be 
resorted  to? 

"Mr.  Sisson  :  Yes.  it  is  entirely  possible  that  the  operation  of  that  line  creates  tax  values 
which  are  a' distinct  source  of  profit  to  the  municipality  which  it  could  well  afford  to  provide 
for  through  the  maintenance  of  the  line. 

"Commissioner  Gad.sden :  In  that  connection,  is  it  not  true  that  most  of  these  lines  that 
are  unproductive  lines  that  we  refer  to  are  tied  in  with  existing  systems? 

"Mr.   Sisson :     Yes. 

"Commissioner  Gadsden:  .^nd  if  the  system  could  lop  off  the  unproductive  suburban 
lines  in  many  cases  the  road  could  probably  take  care  of   itself? 


324  Electric  Railway  Problem 

"Mr.  Sisson :     Yes,  that  is  true  in  a  good  many  instances. 

"Commissioner  Gadsden :  And  under  the  law  they  are  not  permitted  to  cut  off  those 
unproductive   and   unremunerative   lines? 

"Mr.  Sisson:     Yes,  that  is  true  in  New  York  City  today. 

"Commissioner  Gadsden:  If  they  could  get  rid  of  their  extensions  they  probably  could 
get  along  in  many  cases. 

"Mr.  Sisson  :     Yes,  but  it  would  be  opposed  to  the  public  interest. 

"Commissioner  Sweet:  Those  extensions  are  maintained  for  the  benefit  of  the  public 
residing  in  those  outlying  districts? 

"Mr.   Sisson:     Yes. 

"Mr.  Warren:  That  situation  exists  in  a  great  many  places  and  it  is  a  very  important 
public  question,  and  not  one  that  affects  the  street  railways  alone.  In  some  jurisdictions,  in 
Massachusetts,  for  instance,  the  companies  can  abandon  lines,  but  that  does  not  change  the 
public  question  of  whetlier  those  lines  ought  to  be  abandoned  and  the  public  dependent  on 
them  left  hi^h  and  dry,  and  the  industrial  centers  dependent  on  them  be  deprived  of  the 
support  comini;  from  those  lines. 

"Commissioner  Sweet:  Is  it  not  true,  Mr.  Sisson.  *  *  *  *  that  street  railway  com- 
panies have  reached  out  into  districts  that  are  not  directly  profitable  and  are  performing  now 
and  have  been  for  years  a  sort  of  public  service  for  which  the  companies  have  received  no 
coinpensation  or  not  adequate  compensation? 

"Mr.   Sisson;     That  is  entirely   true;  yes,   sir. 

"Commissioner  Sweet :  And  is  not  that  an  additional  reason  for  the  public  and  the 
comi)anies  getting  together  now  ui)on  some  general  basis  which  will  be   fair  and  just? 

"Mr.  Sisson:  It  certainly  is.  The  public  interest  is  greater  than  that  of  the  corporation 
in  many  of  those  instances." 

At  page  16  of  the  Proceedings,  Ex-President  Taft  suggests  reorganization 
and  the  abandonment  of  non-paying  lines  as  a  remedy  for  the  financial  embar- 
rassments of  tile  companies.     lie  says: 

"To  say  the  truth,  I  think  one  step  is  a  reorganization  of  alt  the  companies,  and  the  power 
to  give  up  unprofitable  lines  that  ought  never  to  have  been  built.  That  is  going  on  in 
Massachusetts.  There  was  a  furore  at  one  time  in  building  all  sorts  of  lines  that  never 
ought  to  have  been  built,  and  if  the  street  railway  systems  of  this  country  are  to  t)e  saved, 
1  tiiink  they  have  got  to  cut  to  the  quick  witli  reference  to  many  lines  that  were  unwise  in 
their  projecting,  and  that  it  is  now  unwise  to  continue,  so  that  they  may  get  down  to  a  solid 
foundation,  and  then,  from  that  on,  make  contracts  with  the  public  which  shall  secure  a  fair 
return  on  one  side  and  proper  service  on  the  other;  but  of  course  that  will  inconvenience 
quarters  where  there  is  not  the  business  to  justify  the  railway,  and  will  affect  the  price  of 
property  there ;  but  I  do  not  see  how  that  result  can  be  avoided." 

At  page  436  of  the  Proceedings,  Mr.  Lwcius  S.  Storrs  presented  a  tabulation 
to  illustrate  "the  difTerencc  in  the  facilities  afforded  to  .Xmerican  and  European 
cities  by  electric  railways."  In  this  tabulation  certain  unnamed  cities  of  Cireat 
Britain,  with  a  total  population  of  965.000,  were  compared  with  the  same  num- 
ber of  cities  in  New  F.ngland.  having  a  total  population  of  1,0S3,000.  The  tabu- 
lation showed  for  the  luiglish  cities  156  miles  of  track,  and  for  the  New  England 
cities  695  miles  of  track.  This  gave  a  population  per  mile  of  track  of  6,187  and 
1.560.  respectively.  This  tabulation  showed  that  in  spite  of  the  low  fares  preva- 
lent in  the  Ivigli.sh  cities  their  revenue  per  mile  of  track  was  $16,707  as  com- 
pared with  $13,314  per  mile  of  track  for  the  New  England  cities  with  which  they 
were  compared.  Commenting  upon  this  tabulation  at  page  436  of  the  Proceed- 
ings, Mr.  Storrs  says: 

"The  most  significant  part  of  that  comparison  is  the  fact  of  the  population  per  mile  of 
track.  It  is  a  picture  of  the  whole  British  tramway  conditions,  slender  accommodations, 
deniic  congestion,  slow  service,  low   fares  and  high  earnings   per  mile." 

At  page  437  Mr.  Storrs  explained  that  his  detailed  experience  was  in  con- 
nection with  New  England  iiroperties  and  that  he  could  not  testify  as  to  whether 
or  not   the   intcrurban   systems   in    Illinois,    Indiana   and   Ohio   have   been   over- 


Abandonment  of  Lines  325 

developed.  In  his  comparison  with  the  British  cities  he  had  taken  New  England 
where  the  development  is  "between  the  small  village  and  the  small  town  into  a 
larger  city,"  and  where  population  is  more  dense  and  the  cities  and  towns  closer 
together  than  in  the  Middle  West.  Commissioner  Wehle  brought  out  the  fact  that 
the  English  have  no  electric  railway  development  similar  to  our  interurban  sys- 
tems. From  this  point  on  the  testimony  at  page  437  of  the  Proceedings  is  as 
follows : 

"Mr.  Storrs :  No,  that  is  true.  And  I  was  trying  to  bring  out  that  very  point,  that 
had  we  not  developed  beyond  the  area  of  dense  population  we  would  not  have  reached  the 
difficulties  we  have,  but  it  was  in  the  effort  to  serve  the  large  community  interest  rather  than 
the  local  civic  interest  that  we  have  come  upon  these  rocks,  and  that  by  a  system  of  abandon- 
ment of  lines  and  discontinuance  of  service  we  can  find  that  measure  of  supplying  the  pedes- 
trians which  we  can  meet. 

"Commissioner  Wehle :  The  point  is  that  the  electric  railway  systems  in  New  England 
by  reason  of  their  initiative  have  contributed  a  real  social  service  to  the  cities  bv  preventing 
congestion. 

"Mr.  Storrs.  Yes.  Take  a  great  many  small  country  communities,  they  are  made  up 
entirely  of  operatives  in  the  mills  in  the  larger  cities  and  they  are  given  that  opportunity 
for  a  free  life  and  the  owning  of  little  homes  and  going  out  into  the  country  which  would 
not  have  been  possible  if  there  had  been  no  transportation  facility  of  this  kind. 

"Commissioner  Wehle:  Has  there  been  any  indication  that  popular  sentiment  would 
permit   of   the   discontinuance   of    the    service? 

"Mr.  Storrs :  I  am  afraid  it  is  a  question  of  necessity  rather  than  popular  sentiment 
when  we  get  down  to  the  point  of  income  and  outgo  not  meeting." 

Mr.  W.  D.  George,  one  of  the  receivers  of  the  Pittsburgh  Railways  Com- 
pany, expressed  the  opinion  that  it  would  be  much  better  to  increase  fares  on  the 
system  as  a  whole  than  to  abandon  the  unprofitable  lines,  and  that,  in  his  opinion, 
the  people  would  pay  the  increased  fares  when  they  were  faced  with  the  alterna- 
tive of  an  interruption  of  service  that  is  necessary  to  the  communal  life.  At 
pages  303  and  304  of  the  Proceedings,  he  testifies  as  follows: 

Commissioner  Meeker  ;  *  *  *  *  Would  it  be  possible,  or,  is  it  advisable,  to  discontinue 
some  of  these  outlying  lines?  You  say  that  you  serve  eighty  distinct  boroughs,  townships, 
and  so  forth.  Would  it  be  possible  to  economize  in  the  service  by  cutting  out  some  of  these 
places,   for  instance? 

"Mr.  George:  That,  of  course,  is  what  we  will  have  to  do.  We  will  have  to  reduce  the 
service  to  the  point  where  it  will  support  itself,  and  that  will  no  doubt  result  in  some  com- 
munities being  without  any  service  at  all,  but  that  would  be  an  e.xtreme  case,  it  would  seem 
to  me,  and  it  would  be  very  unfortunate  if  we  would  have  to  resort  to  that. 

"Commissioner  Meeker:  Well,  it  is  a  matter  that  we  have  to  face.  Some  communities 
cannot  support  any  street  car  service,  and  if  service  has  been  extended  to  that  kind  of  com- 
munities, it  would  seem  essential  to  cut  it  out,  would  it  not? 

"Mr.  George :  Oh,  there  is  no  doubt  about  that ;  but  there  is  a  certain  amount  of 
expansion  and  growth  which  is  going  on  in  a  large  community  all  the  time,  and  what  is  taken 
in  one  year  as  a  unit  as  unprofitable  business  may  be  developed  within  a  short  time  to  be 
the  profitable  business,  and  the  question  is  whether  it  is  not  the  duty  of  the  company  so  to 
conduct  itself  that  it  will  cooperate  with  the  growth  and  development  of  the  community. 
That  is  only  possible  if  they  can  secure  cooperation  of  the  community  in  support  of  the 
public  utility,  and  I  cannot  conceive  of  the  people  of  any  community  being  so  blind  that 
they  are  going  to  destroy  a  needed  public  service,  and  in  the  end  they  will  have  to  respond 
in  some  way  to  the  necessities  of  the  public  service.  These  street  car  companies  are  at- 
tempting to  give  that  service. 

"Commissioner  Meeker:  Do  you  think  if  you  had  an  increased  fare  it  would  not  be 
necessary  to  cut  out  the   service  in  any  community? 

"Mr.  George :  I  would  far  rather  increase  the  fare  than  I  would  cut  off  that  service, 
which  is  the  lifeblood  of  the  community.  Why  should  we  as  administrators  of  a  public 
service  corporation  move  in  the  direction  of  destruction  of  property,  in  the  direction  of 
destpjction  of  property  values,  and  handicap  community  life?  Can  we  not  bring  the  lesson 
home  to  them  rather  by  increasing  the  fare  and  telling  the  people  what  the  situation  is. 
and  trying  to  get  them  to  respond  to  it  ?  That  is  my  thought,  and  it  is  the  thought  that  the 
receivers  of  the  railway  company  are  acting  on.     If  the  rate  is  7j4  and  10  cents,  and  we  can 


326  Electric  Railwav  Problem 

justify  ourselves  by  the  necessities  of  the  situation,  we  need  to  offer  no  apology  for  making 
the  attempt,  and  I  believe  the  people  will  respond.  I  think  this  idea  that  you  are  going  to 
destroy  the  revenues  of  the  company  by  increasing  the  rate  of  fare  is  to  a  degree  fallacious, 
and  I  think  we  ought  to  move  in  that  direction,  that  we  ought  to  move  towards  an  increase 
in  the  rates  of  fare  and  towards  the  education  of  the  public  that  they  have  to  pay  a  fair 
return  for  the  service  which  they  are  getting  from  the  transportation  companies. 

"Commissioner  Gadsden :  And  you  believe  that  in  the  long  run  the  people  will  pay 
the  increased  fare,  do  you  not? 

"Mr.    George :     I   do. 

"Commissioner  Gadsden:  And  it  is  simply  a  question  of  waiting?  Can  you  keep  going 
a  long  time? 

"Mr.  George :  You  have  to  ask  them  to  do  it  before  they  will  do  it.  They  won't  say 
voluntarily,  'We  would  like  to  pay  10  cents  rather  than  5  cents.'  but  if  they  can  be  shown 
that  the  necessity  of  the  situation  is  so  great  that  there  is  no  alternative,  that  they  are  face 
to  face  with  a  crisis,  cither  the  interruption  of  service  which  is  necessary  to  the  communal 
life,  or  pay  the  fare.  I  think  they  will  pay  the   fare. 

"Commissioner  W'ohlc :  Mr.  George,  you  have  been  discussing  this  now  from  a  public 
policy  point  of  view? 

"Mr.  George :     Yes.  sir." 

Mr.  James  D.  Mortimer,  in  response  to  a  question  by  Commission  Sweet  as 
to  whether  he  saw  any  means  of  awarding  immediate  relief  to  the  companies 
other  than  an  increase  in  fares,  makes  the  following  reply  at  page  816  of  the 
Proceedings : 

"Well,  as  emergency  measures,  it  would  be  highly  advantageous  to  the  railway  industn,', 
if,  first,  the  unrcmunerativc  capital  and  operating  expense  expenditures  could  be  eliminated. 
I  refer  primarily  to  paving  and  the  other  contributions  which  street  railway  utilities  indi- 
rectly make  to  ta.xes,   sprinkling,  etc. 

"The  second  thing  is  to  abandon  the  operation  of  the  service  over  lines  which  cannot 
be   made   remunerative,   or   which   cannot   otherwise   he   supported. 

"The  third  would  be  to  impose  a  distance  tariff  plan  on  the  outlying  sections  of  long 
lines  or  lines  of  modest  length,  so  as  to  increase  the  revenues  and  minimize  the  losses;  and  the 
fourth  thing  would  be  an  immediate  and  large  increase  in  the  flat  rate  of   fare.     •     «     »     »" 

In  Mr.  John  A.  Beeler's  program  of  possible  operating  economies,  at  page 
1666  of  the  Proceedings,  the  following  paragraph  appears: 

"Some  non-essential,  non-paying  lines,  especially  those  closely  paralleled  by  other  service, 
may  be  abandoned  profitably.  Frequently,  however,  such  lines  can  he  made  to  carry  their 
operating  expenses  when  run  as  shuttle  lines  or  with  one-man  cars,  .\fter  a  line  has  been 
built  and  ef|uipped  it  should  not  t)o  ahandnned  except  when  it  is  impossible  to  earn  operating 
expenses  alone,  as  the  interest  on  the  investment  will  be  lost   in  abandonment  anyway." 

\'icwed  purely  from  the  standpoint  of  the  companies,  the  wholesale  abandon- 
ment of  unprofitable  lines  might  hold  out  some  promise  of  immediate  financial 
relief.  Rut,  as  Mr.  George  and  Mr.  Heeler  point  out,  the  policy  of  abandonment 
needs  to  be  applied  sparingly.  It  is  said  that  during  the  war  the  scrap  value  of 
rails  was  in  some  cases  as  great  as  their  full  original  cost.  When  such  conditions 
prevail  a  company  can  recover  a  considerable  part  of  its  investment  in  unprofit- 
able extensions  if  the  tracks  are  torn  up.  Under  ordinary  conditions,  however, 
when  a  street  railway  is  junked  the  investment  is  almost  wholly  lost.  It  is  clear 
from  the  evidence  before  the  Commission  that  the  abandomiient  of  electric  rail- 
way lines  on  a  large  tnough  scale  to  make  any  material  dilYcrcnce  with  the  finan- 
cial condition  of  the  industry  as  a  whole  would  entail  great  hardships  upon  the 
public,  and,  in  fact,  would  involve  the  abandonment  of  the  theory  that  the  electric 
railways  are  to  be  relied  upon  as  the  principal  means  of  local  transportation  in 
urban  communities.  \\  hen  the  abandonment  of  track  means  also  the  abandon- 
ment of  an  idea,  it  is  necessary  to  consider  the  importance  of  the  idea  before 
suspending  the  ser\'ice. 


i 


Chapter  XXXVI 
FINANCIAL   REORGANIZATION 

As  a  part  of  its  case  to  prove  the  deplorable  financial  condition  of  a  great 
industry,  the  American  Electric  Railway  Association  presented  testimony  show- 
ing that  nearly  6,CK)0  miles  of  electric  railway  track  out  of  a  total  of  44,000  in 
the  country  were  in  the  hands  of  receivers  on  May  31.  1919.  Indeed,  the  letter 
addressed  to  the  President  by  the  Secretary  of  Commerce  and  the  Secretary  of 
Labor,  under  date  of  May  15,  1919,  which  resulted  in  the  appointment  of  this 
Commission,  called  particular  attention  to  the  fact  that  already  fifty  or  more 
urban  electric  railway  systems  were  in  the  hands  of  receivers,  and  that  the  com- 
munities affected  were  among  the  most  important.  The  Secretaries  mentioned 
"New  York,  Providence,  Buffalo,  New  Orleans,  Denver,  St.  Louis,  Birmingham, 
Montgomery-,  Pittsburgh,  Memphis,  Ft.  Wayne,  Des  Moines,  St.  Paul,  Spokane, 
Chattanooga,"'  although  it  does  not  appear  that  the  principal  railway  systems  in 
all  of  these  places  were  in  receivers'  hands.  In  their  letter  the  Secretaries  went 
on  to  say : 

"Other  large  systems  are  on  the  verge  of  insolvency,  for  the  industry  as  a  whole  is 
virtually  bankrupt.  The  continued  shrinkage  in  the  value  of  hundreds  of  millions  of  electric 
railway  securities  held  by  savings  banks,  national  banks,  life  insurance  companies  and  by 
the  public  at  large  threatens  to  embarrass  the  nation's  financial  operations.  Furthermore, 
the  withdrawal  of  this  industry's  buying  power,  which  is  said  to  rank  third  in  magnitude, 
involves  the  unsettlement  of  collateral  industries,  naturally  entailing  labor  dislocation  that 
will  affect  hundreds  of  thousands  of  employes." 

During  the  period  of  active  warfare,  when  no  one  could  foresee  with  cer- 
tainty the  duration  or  even  the  final  outcome  of  the  struggle,  it  was  clearly  of  the 
utmost  importance  that  the  nation's  financial  operations  should  not  be  embar- 
rassed by  the  collapse  of  so  enormous  an  industry  as  the  electric  railways.  Dur- 
ing that  period  many  regulatory  authorities  felt  that  they  were  justified  in  grant- 
ing to  the  companies  emergency  relief  to  an  extent  at  least  sufficient  to  enable 
them  to  meet  their  fixed  charges  and  keep  going  without  reorganization.  It  was 
recognized,  however,  that  notwithstanding  the  changes  in  the  cost  of  service  the 
public  could  not  aftord  to  accept  as  a  permanent  policy  of  regulation  the  granting 
of  increased  fares  or  other  forms  of  financial  relief  to  meet  the  increased  cost  of 
operation  and  the  increased  cost  of  capital  without  reference  to  the  relation  be- 
tween revenues  and  cost  of  service  prior  to  the  era  of  high  prices.  If  the  in- 
creases in  prices  had  come  at  one  time  and  had  been  entirely  uniform,  so  that 
they  could  have  been  measured  accurately  in  terms  of  the  decreased  purchasing 
power  of  the  dollar,  some  uniform  plan  of  temporary  readjustment  without  too 
close  an  inquiry  into  the  status  of  the  industry  in  the  past  might  have  been  feasible. 
It  is  a  fact,  however,  that  prior  to  the  war  the  electric  railways  as  a  whole,  at 
least  so  far  as  their  rates  were  concerned,  had  not  come  to  be  a  regulated  indus- 


328  Electric  Railway  Problem 

try  in  the  ordinary  sense  of  that  term.  In  general,  though  not  quite  universally, 
their  rates  had  been  established  directly  or  indirectly  as  a  result  of  bargaining 
and  contract,  affected  in  great  measure  by  the  standards  of  custom.  Therefore 
it  could  hardly  be  maintained,  except  in  a  great  public  emergency  where  the  re- 
organization of  an  industry  would  be  a  general  calamity,  that  it  would  be  proper  to 
act  upon  the  presumption  that  the  rates  charged  for  the  service  rendered  prior  to 
the  era  of  high  prices  were  just  and  reasonable  rates,  and  that,  therefore,  during  the 
era  of  high  prices  the  rates  should  be  increased  to  meet  the  proven  increase  in  the 
cost  of  service.  The  adoption  of  such  a  policy  would  in  effect  be  putting  the 
seal  of  public  approval  and  jnihlic  guaranty  upon  the  financial  structure  of  an 
industry  without  a  critical  examination  of  it.  In  the  case  of  the  electric  railways, 
it  would  be  equivalent  to  the  approval  and  guaranty  of  a  financial  structure 
notoriously  built  up  through  .-ipcculative  manipulation  that  has  occasioned  one  of 
the  greatest  civic  scandals  of  American  urban  life. 

Unless  it  be  conceded  that  it  is  the  duty  of  the  public  through  the  regulating 
authorities  to  keep  the  street  railway  companies  out  of  receivers'  hands  and  to 
save  them  from  the  necessity  of  reorganization,  the  whole  question  of  over- 
capitalization, excessive  fixed  charges  and  past  earning  power  has  to  be  opened 
up.  Indeed,  it  is  clear  that  in  some  cases  reorganizations  and  the  scaling  down 
of  fixed  charges  would  be  inevitable  even  though  all  the  public  authorities  con- 
cerned were  to  cooperate  to  the  fullest  extent  in  permitting  the  companies  to  in- 
crease their  rates  and  to  decrease  their  expenses.  In  other  words,  there  are  un- 
doubtedly cases  where  it  is  not  economically  possible  for  the  electric  railways, 
at  least  on  the  basis  of  the  present  cost  of  service,  to  become  self-sustaining. 
This  is  clearly  shown  by  the  testimony  of  various  witnesses  representing  cntirclv 
different  points  of  view.  The  matter  has  already  been  discussed  to  some  extent 
in  preceding  chapters  of  this  report. 

The  claim  is  often  made  on  behalf  of  the  public  that  in  the  aggregate  the  electric 
railways  earned  too  much  from  the  nickel  fare  in  the  pre-war  days.  The  experi- 
ence of  Geveland,  Columbus,  Detroit  and  certain  other  cities  where  the  average 
fare  paid  per  revenue  passenger  was  far  below  5  cents  is  cited  as  proof  of  this 
contention.  The  fact  that  electric  railway  companies  were  so  generally  over- 
capitalized and  that  in  the  process  of  consolidation  in  many  cities  extraordinary 
rental  obligations  were  assumed  practically  in  perpetuity  is  also  cited  in  proof. 
The  local  authorities  of  New  York  City  point  to  the  extraordinary  dividend  paid 
by  the  Interborough  Rapid  Transit  Company  for  a  series  of  years  up  to  191.S — 
even  in  that  war  year  the  dividend  paid  was  Uj,  per  cent — and  maintain  that 
as  the  company  is  operating  under  a  contract  covering  a  long  period  of  time  the 
surplus  earned  durini;  its  years  of  unusual  prosperity  should  be  used  to  make  up 
the  deficits  accruing  at  the  ])rcscnt  time.  The  conipany  in  rejoinder  admits  the 
fat  profits  of  the  past,  but  calls  attention  to  the  fact  that  a  man  cannot  work  on 
the  strength  of  "last  year's  beefsteak."  and  alleges  that  no  more  can  a  transit  com- 
pany operate  on  a  past  sur])lus  that  has  been  distrilnited  to  its  stoi-kholders  or 
otherwise  dissipated.  The  issue  raised  is  really  a  double  one.  In  cases  like  that 
of  the  Interborough  Rapid  Transit  Conii)any  very  high  dividends  have  been  paid 
to  the  stockholders.     In  other  cases,  the  operating  companies,  representing  a  con- 


Financial  Reorganization  329 

solidation  of  many  properties,  have  paid  out  their  earnings  from  year  to  year  in 
bond  interest  and  guaranteed  rentals  claimed  by  those  representing  the  public  to 
have  been  excessive.  The  Philadelphia  Rapid  Transit  Company,  the  Public  Serv- 
ice Railway  Company  of  New  Jersey,  and  the  New  York  Railways  Company  and 
its  predecessor,  the  Metropolitan  Street  Railway  Company,  are  noteworthy  illus- 
trations of  this  contention. 

Where  earnings  alleged  to  have  been  e.xcessive  have  been  accumulated  in  the 
form  of  a  cash  surplus  or  where  they  have  been  paid  out  in  the  form  of  cash 
dividends  to  the  common  stockholders,  it  may  be  quite  possible  for  the  public 
authorities  to  enforce  the  terms  of  their  contracts,  or,  as  one  of  the  witnesses 
before  the  Commission  put  it,  "insist  upon  their  pound  of  flesh,"  and  in  such 
cases  the  companies  may  be  able  to  weather  the  emergency,  if  it  does  not  last 
too  long,  without  going  into  bankruptcy.  On  the  other  hand,  where  the  alleged 
excessive  earnings  have  been  distributed  by  the  operating  company  from  year  to 
year  in  the  form  of  bond  interest  and  guaranteed  rentals,  the  company  is  not  in 
a  position  to  withstand  for  any  great  length  of  time  a  shrinkage  in  its  net  income 
without  defaulting  on  its  private  contracts,  and  perhaps  submitting  to  the  disin- 
tegration of  its  system.  In  a  case  of  this  kind,  the  question  to  be  determined 
by  the  public  authorities  responsible  for  the  enforcement  of  contracts  or  the  fixing 
of  rates  is  as  to  whether  the  disadvantages  of  the  financial  disturbance  and  of 
the  possible  disintegration  of  a  unified  electric  railway  system  into  its  underlying 
constituent  parts  more  than  offset  the  advantages  to  be  derived  from  the  enforce- 
ment of  the  contracts  or  the  preservation  of  a  low  unit  fare.  I  am  assuming  in 
both  of  these  cases  that  the  potential  earning  power  of  the  electric  railway  sys- 
tems under  consideration,  if  they  are  permitted  to  increase  their  fares  and  re- 
leased from  other  public  obligations,  is  sufficient  to  enable  them  to  maintain  their 
solvency  without  a  financial  reorganization  and  without  a  scaling  down  of  their 
capitalization  or  fixed  charges.  In  those  cases  where  this  assumption  is  incor- 
rect, a  reorganization  is  inevitable  unless  the  public  authorities  are  legally  and 
politically  able  and  willing  to  support  the  existing  financial  structure  directly 
or  indirectly  by  public  subsidies.  It  is  hardly  worth  while  to  discuss  this  latter 
possibility  in  cases  where  the  railways  fail  to  be  self-supporting  by  rea.son  of 
overcapitalization  or  excessive  fixed  charges. 

To  the  extent,  therefore,  that  electric  railway  systems  have  been  financed 
beyond  the  possibility  of  self-support,  it  may  be  taken  for  granted  that  public 
policy  will  not  step  in  to  interfere  with  their  reorganization,  but  the  issue  remains 
to  be  determined  as  a  question  of  public  policy  with  respect  to  the  other  com- 
panies. The  public  may  insist  that  the  companies  draw  upon  the  surplus  of  past 
years  to  help  pay  the  current  cost  of  service,  or  it  may  insist  merely  that  the  rates 
charged  for  the  service  be  fixed  at  a  point  where  they  will  cover  the  legitimate 
present  cost  of  service  without  necessarily  providing  for  the  excessive  fixed 
charges  which  the  companies  have  voluntarily  assumed.  It  may  be  urged  with 
considerable  force  that  where  an  electric  railway  company  deems  it  necessary 
to  break  its  contract  with  the  municipality  or  the  state,  the  public  ought  not  to 
be  required  to  dig  down  into  its  pockets  to  enable  the  company  to  perform  its 
private  contracts  entered  into  in  the  processes  of   consolidation   and   financing, 


330  Electric  Railway  Problem 

particularly  where  those  contracts  run  for  999  years,  and  were  based  upon  con- 
ditions that  have  entirely  changed.  The  problem  is  not  without  its  difficulties, 
for  it  seems  to  be  a  generally  accepted  fact  that  disadvantageous  contracts  with 
the  public  authorities  can  be  broken  more  easily,  and  with  a  better  show  of  equity, 
than  equally  disadvantageous  contracts  with  other  corporations  or  private  in- 
dividuals. 

In  spite  of  the  considerations  advanced  by  the  utilities  in  their  ajjpeal  to  the 
Federal  Government  for  help  in  securing  higher  rates,  and  in  spite  of  the  con- 
siderations mentioned  by  the  two  Secretaries  in  their  letter  to  the  President,  the 
witnesses  for  the  American  Electric  Railway  Association  in  most  cases  made  no 
claim  that  the  readjustment  of  the  relations  of  the  electric  railway  industry  to  the 
public  should  be  based  upon  the  ])rotection  of  the  outstanding  securities.  True, 
evidence  was  presented  to  show  that  these  securities  are  widely  held  by  just 
ordinary  folks,  as  well  as  by  insurance  companies  and  other  fiduciary  institu- 
tions ;  but  when  it  came  to  the  suggestion  of  a  definite  basis  for  the  fi.xing  of 
electric  railway  rates,  and  the  determination  of  the  measure  of  public  relief  to  be 
granted  to  the  electric  railways,  very  little  was  said  about  the  par  value  of  stocks 
and  bonds. 

It  will  be  recalled  that  according  to  the  special  census  report  for  1917  the 
net  capitalization  of  the  electric  railways  in  that  year,  including  floating  debt  and 
real  estate  mortgages,  amounted  to  $5,056,554,324,  made  up  as  follows : 

Common   capital   stock    $2,01 2.1 89,2?M 

Preferred   capital   stock    -161,657.357 

I'undcd    debt    3,051,179,272 

Real  estate  mortgages   7,197,895 

rioating  debt   166,592,228 

Total $5,698,816,046 

Less  stocks  and  bonds  of  other  electric   railway   companies  and 

treasury   securities    390,489,091 

Net    capitalization $5,308,326,955 

Less  investments  in  other  securities  and  non-railway  properties..  251.772.631 

Net  capitalization  based  on  electric  railways $5,056,554,324 

The  census  report  shows  that  the  road  and  equipment  account  amounted  to 
$5,1.^6,441,599,  or  an  ai)i)arent  excess  of  SSO. 000,000  over  the  net  capitalization. 
It  shows  also  that  dividends  amounting  to  S<>0.772.290  were  paid  at  the  average 
rate  of  6.3  per  cent  upon  $958,305,905  of  common  stock,  leaving  $1,053,S83,389 
of  common  stock  ujion  which  no  dividends  were  paid.  It  also  shows  that  divi- 
dends amounting  to  $12,490,851  were  paid  at  an  average  rate  of  4.8  per  cent  upon 
$260,055,512  of  preferred  stock,  leaving  $201.(i01,845  of  preferred  stock  upon 
which  no  dividends  were  paid.  These  two  items  together  make  a  total  of 
$1.255,485,2,54  of  capital  stock  which  received  no  return.  The  census  sum- 
maries do  not  show  what  proportion  of  the  dividends  and  interest  was  paid  upon 
the  "stocks  and  bonds  of  other  electric  railway  companies  and  treasury  secur- 
ities," so  that  wc  are  unable  to  gel  the  exact  amount  of  the  net  capitalization  ui)on 
which  a  return  in  the  form  of  interest  or  dividends  was  paid.  However,  deduct- 
ing the  $1,255,485.2.U  of  stock  from  the  total  capitalization  we  get  $4.44.5. .^.SO.Sl 2 
as  the  gross  capiialization,  including  real  estate  mortgages  and  floating  debt,  upon 


Financial  Reorganization  331 

which  a  return  was  paid.  The  year  1917  may  be  regarded  as  a  fairly  normal 
year  in  the  street  railway  business.  The  preceding  year  had  been  one  of  unusual 
prosperity,  and  the  increase  of  traffic  and  revenues  from  1916  to  1917  appears 
to  have  been  about  normal,  while  it  was  not  until  well  along  in  1917  that  the 
street  railways  began  to  feel  seriously  the  effects  of  the  increase  in  wages  and 
in  the  prices  of  materials  due  to  our  getting  into  the  war.  It  would  help  materi- 
ally in  the  determination  of  a  just  public  policy  with  respect  to  the  electric  rail- 
way industry  if  the  relation  between  the  earnings  and  the  true  investment  for  the 
year  1917  could  be  ascertained. 

In  a  loose  way  the  capitalization  of  the  industry,  or  its  road  and  equipment 
account,  or,  in  the  case  of  Mr.  Henry  G.  Bradlee.  its  gross  capitalization  and 
current  liabilities,  are  referred  to  as  a  measure  of  the  importance  of  the  industry 
and  of  the  capital  invested  in  it.  The  figures  of  capitalization  and  true  invest- 
ment made  available  for  some  of  the  most  important  street  railway  systems  of 
the  country  through  official  investigations  of  one  kind  or  another  seem  to  indi- 
cate that  a  total  capitalization  double  the  true  investment  value  of  the  existing 
property  cannot  be  regarded  as  anything  extraordinary  outside  of  the  state  of 
Massachusetts,  where  capitalization  has  been  regulated  for  a  great  many  years. 
A  comparison  of  the  figures  representing  capitalization  per  mile  of  track  in 
Massachusetts  with  the  corresponding  figures  for  the  country  at  large,  points  to 
the  same  conclusion.  The  figures  are  cited  at  page  14  of  the  Argument  and  Brief 
submitted  by  Mr.  W.  Jett  Lauck  on  behalf  of  the  employes,  where  he  shows 
that  the  capitalization  per  mile  of  single  track  for  the  country  at  large,  according 
to  the  Federal  Census  of  1912.  was  82  per  cent  in  excess  of  the  capitalization 
per  mile  of  track  in  Massachusetts.  Upon  the  assumption  that  the  Massachu- 
setts capitalization  is  correct,  Mr.  Lauck  reaches  the  conclusion  that  the  aggre- 
gate overcapitalization  of  the  electric  railways  of  the  United  States  in  1912  was 
approximately  $2,119,000,000.  In  our  effort  to  fix  upon  an  equitable  public 
policy  with  respect  to  this  problem  of  financial  reorganization,  the  question  as  to 
whether  or  not  this  estimate  of  overcapitalization  is  reasonably  close  to  the  truth 
is  one  of  tremendous  importance.  Mr.  Lauck's  analysis  of  the  figures  would 
mean  a  cutting  down  of  the  capital  stock  and  funded  debt  of  the  electric  railways 
in  the  aggregate  to  a  55  per  cent  basis.  It  will  be  remembered  that  55  per  cent 
was  the  basis  upon  which  the  capital  stock  of  the  Cleveland  Electric  Railway 
Company  was  recognized  in  the  valuation  used  in  the  Tayler  grant,  inaugurating 
the  service-at-cost  experiment,  and  even  at  that  the  value  of  the  company's  un- 
expired franchises  was  put  in  at  several  million  dollars. 

Mr.  James  D.  Mortimer,  of  the  North  American  Company,  and  Mr.  Francis 
H.  Sisson,  of  the  Guaranty  Trust  Company,  witnesses  for  the  American  Electric 
Railway  Association,  expressed  certain  opinions  with  respect  to  the  bearing  of 
the  "watered  stock"  argument  upon  the  present  problems  of  the  electric  railway 
industry.  At  page  813  of  the  Proceedings,  Mr.  Mortimer  makes  the  following 
statement : 

"Commissioner  Meeker:  What  would  you  say  in  answer  to  the  accusation  that  the 
street  railways  have  been  addicted  to  issuing  watered  stock,  and  that  they  have  been  trying 
to  pay  dividends  upon  water? 

"Mr.  Mortimer:     I  would  say.  in  the  first  place,  speaking  generally,  it  is  an  attack  that 


332  Electric  Railway  Problem 

is  made  primarily  for  the  purpose  of  confusing  the  issues.  The  figures  that  I  have  presented 
to  you  applicable  to  the  Milwaukee  Electric  Railway  and  Light  Company  have  no  bearing 
whatever  with  respect  to  capital  stock  and  bonded  debt,  but  represent  only  the  appraised 
value  of  the  physical  property,  and  if  any  one  of  such  persons  to  whom  you  refer  should 
say  that  the  system  can  be  satisfactorily  operated  and  produce  an  8  per  cent  return,  a  reason- 
able return  upon  the  fair  measure  of  utility  capital,  whereas  we  are  only  to  operate  it  at 
a  2  or  3  per  cent  return  on  the  present  rate  of  fare,  then  I  should  tell  him  that  he  _is  losing 
his  time,  that  he  should  be  in  the  street  railway  business,  and  I  have  a  job  for  him." 

Mr.  Sisson  took  the  position  that  overcapitalization  has  not  been  at  all  re- 
sponsible for  the  present  situation,  except  as  it  has  furnished  a  handle  for  hostile 
agitation.     His  testimony  at  pages  341  and  342  of  the  Proceedings  is  as  follows: 

"Commissioner  Gadsden :  Do  you  consider  that  the  present  condition  of  the  electric 
railways  in  this  country  has  been  brought  about  by  watered  stock? 

"Mr.   Sisson:     No,  I  do  not  think   it  has  had  anything  to  do  with  it. 

"Commissioner  Gadsden :  Can  you  conceive  how  the  present  economic  situation  which 
faces  electric  railways  could  have  been  produced  by  their  issuing  watered  stock  in  times  past? 

"Mr.  Sisson;  I  do  not  think  it  has  had  the  slightest  effect  on  the  present  situation. 
If  they  had  no  stock  issues  at  all  the  situation  would  be  the  same. 

"Commissioner  Gadsden :  Exactly.  .-Xs  a  matter  of  fact  is  not  the  situation  which  faces 
electric  railways  a  question  of  getting  enough   revenue  to  operate? 

"Mr.  Sisson :     Absolutely,  to  pay  their  costs  and  pay  the  money  charges,  unquestioiiably. 

"Commissioner  Gadsden :  Are  not  they  faced  with  a  situation  which  has  practically 
for  the  moment  wiped  out  all  the  value? 

"Mr.    Sisson:     Absolutely. 

"Commissioner  Gadsden:     Bonds  and  stocks? 

"Mr.   Sisson:     In   many   instances. 

"Commissioner  Gadsden:     Many  instances  of   it? 

"Mr.  Sisson :     Vcs. 

"Commissioner  Gadsden:  So  that  the  bad  financial  practices,  if  we  choose  to  so  char- 
acterize them,  in  the  past  cannot  lie  held  responsible  for  the  present  situation,  in  your 
judgment? 

"Mr.  Sisson :  Only  in  .so  far  as  they  have  been  used  as  a  te.vt  for  the  opponents  of 
street  railways  to  create  agitation  and   public  prejudice. 

"Commissioner  Gadsden:     To  prejudice  the  public  mind? 

"Mr.   Sisson :     Yes,  which  has  l)ccn  done  very  extensively  in  certain  communities. 

"Commissioner  Gadsden:     Hut  economically  they  have  not  had  any  eflfect? 

"Mr.  Sisson:     .^s  a  matter  of  economics,  not  at  all." 

That  the  position  taken  by  Mr.  Sisson  in  this  particular  matter  is  not  alto- 
gether correct  seems  to  be  clearly  established  by  the  experience  of  the  Indiana 
Public  Service  Commission,  which  was  explained  by  Mr.  Carl  H.  Mote,  at  that 
time  its  secretary,  at  pages  10S6  and  10S7  of  the  Proceedings,  as  follows: 

"The  Public  Service  Commission  of  Indiana  has  granted  no  increases  in  electric  railway 
rates  without  a  tentative  valuation  of  the  property  involved.  In  some  cases,  we  have  had  to 
face  situations  when-  fixed  charges  exceeded  the  normal  return  that  would  attach  to  the 
valuation  as  made  by  the  Commission.  In  every  case  of  this  character  we  have  been  rather 
explicit  in  suggestions  that  financial  reorganizations  were  necessary.  The  roads  themselves, 
in  a  good  many  instances,  have  responded  to  these  suggestions.  We  have  reached  a  few 
properties  also  in  merger  proceedings  and  accomplished  the  same  end.  In  the  reorganization 
of  the  street  railwav  companies  of  Indianapolis,  the  fixed  charges  were  reduced  more  than 
$,W().(KK)  annually,  and  the  securities  from  $2.\(KI0.000  to  less  than  $I9.(KX),000.  One  of  our 
larger  internrhan  companies  is  now  going  through  a  friendlv  receivership,  as  a  consequence 
of  which  outstanding  ,-ecnrilies  will  be  reduced  from  $18.(XX».(X)0  to  $12,000,000.  This  is  the 
only  receivership  we  have  had  in   Indiana. 

"The   Chairman:     What   is   the   process   of   reducing   these   securities? 

"Mr.  Mole:  If  it  is  bonds,  an  agreement  with  the  iKindholdcrs  is  obtained  through 
the  tru.stcc  and  through  an  actual  canvass  of  the  Ixindholders  to  accept  in  lieu  of  securities 
which  they  bold  at  the  present  time  securities  of  a  new  issue  in  a  lesser  amount  than  those 
previously   outstanding. 

"The  Chairman:     How  about   stock? 

"Mr.  Mote:  Th.if  sanic  way.  In  the  Indianapolis  case  some  of  the  stock  of  the  Indian- 
apolis Traction  and  Terminal  Company,  which  was  the  operating  company  in  Indianapolis, 
was  held  by  the  Terre  Ilaulc.  Indianapolis  &■  Eastern  Traction  Company,  which  was  an 
interurlan    property    sjiecifically    and    strictly    speaking.      The    Terre    Haute.    Indianapolis    & 


Financial  Reorganization  333 

Eastern  had  pledged  this  stock  under  a  mortgage  and  there  was  an  agreement  reached  by 
which  that  stock  should  be  surrendered,  within  the  company  itself,  and  it  was  wholly  volun- 
tary, brought  about  at  the  suggestion  of  our  Commission  but  nevertheless  and  finally  it  was 
voluntarv.  .     . 

"Mr.  Warren :  Mr.  Mote,  was  that  reduction  to  a  figure  that  the  Commission  felt  was 
appro.ximately   the  value  of  the   property? 

"Mr.  Mote:  In  the  case  of  the  Indianapolis  Traction  &  Terminal  Company,  or  rather 
the  Indianapolis  Street  Railway  properties,  we  made  a  tentative  valuation  of  the  property 
and  found  that  the  value  was  anywhere  between  $14,000,000  and  $16,000,000.  We  brought 
the  securities  down  to  $19.000.(XX)  and  actually  they  will  be  subsequently  reduced  to  about 
$18,000,000,   so  that  will  answer  your  question,   1   think. 

"The  Chairman:  Just  one  further  question.  If  you  fixed  the  value  which  you  regard 
as  the  true  value  of  the  property  at  $14,000,000,  how  do  you  permit  a  capitalization  to  be 
rewritten  to  $19,000,000? 

"Mr.  Mote:  Well,  this  v\'as  in  a  merger  proceeding  and  the  law  of  our  state  provides 
that  the  securities  issued  in  case  of  a  merger  shall  not  exceed  the  total  of  the  securities  out- 
standing, and  anyway  the  law  of  our  state  does  not  permit  us  except  in  an  incidental  way 
to  consider  securities  as  a  basis   for  rate-making. 

"Mr.  Warren:     You  consider  the  value? 

"Mr.  Mote :     We  consider  the  value  of  the  property." 

The  Indianapolis  case  appears  even  more  striking,  when  we  refer  to  the  text 
of  the  Indiana  commission's  orders  and  to  the  reports  of  the  three  directors  of 
the  Indianapolis  Traction  and  Terminal  Company,  who  were  designated  to  rep- 
resent the  public  in  working  out  a  satisfactory  financial  program  for  the  company. 
These  three  were  selected,  one  by  the  Governor  of  the  state,  one  by  the  Mayor 
of  the  city,  and  one  by  the  Indianapolis  Chamber  of  Commerce.  After  a  few 
weeks  of  service,  they  resigned  and  submitted  to  the  Public  Service  Commission 
individual  reports  of  the  reasons  why  they  were  unable  to  accomplish  anything  to 
help  the  company.  The  director  designated  by  the  Governor  was  Mr.  Alfred  F. 
Potts,  Vice-President  of  the  Citizens  Gas  Company  of  Indianapolis.  Mr.  Potts, 
in  his  report,  stated  that  the  street  railway  was  burdened  with  fixed  charges,  and 
sinking  fund  payments  amounted  to  31.57  per  cent  of  its  gross  earnings.  With 
respect  to  these  charges,  he  said : 

"As  these  fixed  charges  are  about  double  what  they  would  be  if  the  company  were 
soundly  financed,  we  have  been  unable  to  suggest  any  method  of  financing  the  company's 
needs." 

He  then  described  the  operation  of  the  sinking  funds  as  follows : 

"This  plan,  which  takes  $120,000  a  year  from  the  company's  income  which  should  have 
gone  into  improvements  and  better  service,  was  obviously  devised  for  the  benefit  of  the 
speculators  in  its  stocks  and  bonds.  These  payments  of  $120,000  per  year  must  continue 
until  1933,  while  the  company  must  pay  interest  on  the  full  face  value  of  the  bonds.  In 
other  words,  the  city  has  to  pay  a  rate  of  fare  to  enable  the  Traction  Terminal  Company 
to  pay  off  $11,000,000  of  bonds  and  thereby  enhance  the  value  of  its  stock.  These  payments 
are  made  through  the  income  received  from  fares.  This  means  that  the  people  of  the  city 
will  in  time  pay  off  $11,000,000  of  the  company's  bonded  indebtedness,  leaving  the  stock  freed 
therefrom." 

Mr.  Potts  describes  in  some  detail  the  deals  through  which  the  street  railway 
capitalization  was  built  up,  and,  in  a  supplementar>-  memorandum  filed  with  his 
report,  makes  the  following  statement : 

"The  men  who  did  this  organization  work  fifteen  years  ago  paid  no  attention  to  real 
values.  They  calculated  that  the  growth  of  the  city  would  enable  the  company  to  earn  certain 
profits.  This  prospective  'earning  power'  or  'franchise  value'  was  capitalized  and  stocks 
and  bonds  issued  against  it  for  all  they,  through  the  market,  would  absorb.  At  the  beginning 
it  was  a  stock-jobbing  rather  than  a  street  car  enterprise,  and  has  distributed  several  millions 
of  dollars  in  interest  and  dividends  on  bonds  and  stocks  which  were  founded  chiefly  on 
'prospective  earnings.' 


334  Electric  Railway  Problem 

"Now,  my  contention  is  that  as  the  people  in  those  days  permitted  this  form  of  financing 
to  go  on  and  authorized  the  issuance  of  "watered  stocks'  that  they  must  now  pay  the  price 
up  to  the  real  value  of  the  property,  even  when  it  has  been  increased  from  the  earnings. 
The  holders  of  the  stocks  have  the  right  to  the  profits  if  they  can  be  made  under  the  terms 
of  the  franchise  as  to  rates  and  after  a  strict  compliance  with  all  its  terms  as  to  service 
to  the  public.  But  that  under  no  circumstances  of  stress  or  emergency  from  war  or  other 
cause  should  the  public  be  asked  to  pay  a  farthing  beyond  the  franchise  rate  to  any  public 
utility  to  enable  it  to  make  good  the  'prospectus'  of  its  promoters  who  speculated  in  its  stocks." 

The  Indiana  commission  had  already  acted  under  the  emergency  section  of 
the  state  utilities  law  to  suspend  temporarily  the  rates  of  fare  prescribed  by  the 
Indianapolis  street  railway  franchise,  and  to  permit  the  company  to  charge  a 
straight  5-cent  fare  in  place  of  the  reduced-rate  ticket  fare  stipulated  by  the 
contract.  The  company  was  now  applying  for  a  6-cent  fare,  following  the  resig- 
nation of  the  public  directors.  The  Indiana  commission,  in  its  order  of  Decem- 
ber 28,  1918,  refused  to  grant  a  further  increase,  and  stated  thai  the  continuance 
of  the  emergency  relief  previously  granted  "is  predicated  upon  innnediate  steps 
being  taken  for  readjustments  on  a  basis  of  reasonable  fixed  charges  at  least 
during  the  emergency  period,  and  the  re-building  and  re-equipment  of  the  prop- 
erties." The  Indiana  commission  used  strong  language  in  describing  the  causes 
leading  up  to  the  company's  financial  troubles.-     It  said : 

"The  evidence  shows  conclusively  that  the  present  crisis  in  the  affairs  of  this  company 
has  been  caused  directly  by  the  diversion  of  its  revenues  for  purposes  hurtful  of  its  well- 
being — the  annual  draining  out  of  the  treasury  to  meet  excessive  and  parasitical  fixed  charges 
placed  upon  the  company  by  early  promoters.  .Mways  the  goal  under  these  obligations  has 
iiccn  to  i)ay  excessive  fixed  charges  that  can  not  be  justified  by  the  evidence.  Property  and 
equipment  have  been  permitted  to  depreciate — maintenance  has  been  deferred,  and  service  has 
been  neglected,  all  in  order  that  there  should  be  no  default  in  the  payment  of  these  excessive 
charges.  These  have  been  held  .sacred,  while  the  fundamental  obligation  of  service  has  rested 
lightly  on  petitioner." 

Referring  to  the  emergency  section  of  the  law  imder  which  it  was  acting, 
the  conmiission  said : 

"It  is  inconceivable  that  the  Legislature,  in  the  enactment  of  Section  122,  contemplated 
that  the  State  should  (1)  guarantee,  in  times  of  emergency,  x-alues  which  never  existed; 
(2)  protect  excess  securities:  (.?)  make  good  losses  caused  by  negligence  in  collection  of 
revenues;  or   (4)   reward  a  lack  of  thrift  in  times  of  prosperity." 

Its  order,  continuing  the  straight  five-cent  fare  as  emergency  relief,  is  con- 
cluded as  follows: 

"//  is  I'nrthcr  Ordered.  That,  as  soon  as  possible,  special  meetings  shall  tie  held  of  the 
several  groups  of  t>ond  and  stockholders  of  petitioner  and  allied  and  underlying  companies, 
for  the  purpose  of  considering  and  voluntarily  acting  in  the  matters  of:  (1)  the  emergency 
that  faces  all  of  these  individually  and  collectively;  (2t  their  several  lease,  rentals,  and 
franchise  otiligations :  {i)  reduction  of  underlying  indebtedness  by  retirement  of  bonds 
already  purchased  and  held  in  sinking  funds,  thus  reducing  fixed  charges,  suspension  of 
future  payments  into  sinking  funds,  and  the  use  of  thus  suspended  payments  for  purchase 
of  modern  e(|uipment  and  rehaliilitation  of  their  individual  and  collective  properties  so  that 
these  companies  may  meet  and  discharge  their  francliise  and  lease  obligations  as  to  main- 
tenance of  property  and  .service;  (4)  reduction — at  least  during  periods  of  emergency — (5f 
excessive  fixed  charges  tending  to  impair  the  service  which  all  are  obligated  to  render  the 
city  and  its  people:  and  (5)  all  other  matters  that  should  come  before  said  groups  of  bond 
and  stockhiildcrs  in  order  to  meet  new,  and  more  or  less  permanent,  conditions  created  by 
the  war;  and  it  is  suggested  that  the.se  several  meetings  tie  called  for  the  same  dates  and 
same  city  so  tlial  general  conferences,  if  such  may  be  found  by  the  diversified  interests  to 
be  desiratile.  may  Ih'  held. 

"//  i.f  1-urther  Ordered.  That  continuance  of  relief  herein  granted  shall  tie  contingent  on 
.substantially  improved  service,  collection  of  earned  revenues,  reduction  of  overhe.id  and 
general  expenses,  discontinuance  or  re<luction  of  present  sinking  fund  demands  and  read- 
justment of  interests  and  affairs  of  all  parties  having  interest  and   franchise  obligations  in 


Financial  Reorganization  335 

the  matter  of  street  railway  operation  in  the  city  of  IndianapoHs,  to  the  end  that,  at  least 
during  periods  of  emergency,  fixed  charges  and  other  such  obligations  shall  not  continue  to 
make  unreasonable  demand  on  the  revenues  yielded  by  the  traveling  public  in  consideration 
of  good  and  adequate  street  railway  service." 

I  have  cited  the  Indianapolis  street  railway  case  at  considerable  length  be- 
cause of  its  importance  in  connection  with  the  testimony  before  the  Commission 
with  respect  to  this  matter  of  financial  reorganization  as  a  suggested  remedy  for 
the  troubles  of  the  electric  railways.  In  this  connection,  also,  reference  should 
be  made  to  Mr.  Roger  \V.  Babson's  testimony  already  quoted  in  Chapter  XXII 
of  this  report,  where  in  response  to  questions  by  Commissioner  Gadsden,  he  states 
that  the  shrinkage  in  the  values  of  street  railway  securities  has  been  for  all  of 
the  street  railway  bond  issues  of  the  country  about  25  per  cent  and  for  all  the 
stock  issues  about  75  per  cent,  and  further  states  that  this  shrinkage  in  the  value 
of  securities  "amounts  to  over  a  billion  dollars."  While  Mr.  Babson  does  not 
state  specifically  the  period  within  which  this  shrinkage  has  taken  place,  it  is 
apparent  from  the  context  that  he  refers  to  a  shrinkage  that  has  taken  place 
within  the  past  five  or  six  years.  It  will  be  noted  that  in  the  total  capitalization 
of  the  electric  railway  companies  reported  by  the  Census  Bureau  for  the  year 
1917  the  ratio  of  stock  to  funded  debt  was  approximately  as  5  to  6.  If  we  con- 
fine ourselves  to  securities  upon  which  a  return  was  paid,  the  amount  of  stock 
drawing  dividends  to  the  funded  debt  was  approximately  as  2  to  5.  On  this 
basis  the  total  shrinkage  of  value  described  by  Mr.  Babson  would  figure  out 
about  40  per  cent  on  stock  and  bonds  together,  and  assuming  that  the  shrinkage 
amounted  to  one  billion  dollars,  this  would  mean  that  the  market  value  of  all 
electric  railway  stocks  and  bonds  at  the  time  of  Mr.  Babson's  testimony  was  ap- 
proximately one  billion  five  hundred  million  dollars  as  compared  with  two  billion 
five  hundred  million  dollars  before  the  shrinkage  began.  These  figures  would 
be  increased  in  proportion  to  the  extent  to  which  the  shrinkage  was  "over"  a 
billion  dollars. 

The  Proceedings  do  not  disclose  the  extent  of  the  investigation  referred  to  by 
Commissioner  Gadsden  at  page  1067  of  the  Proceedings  upon  the  basis  of  which 
Mr.  Babson  testified,  and  when  the  significance  of  the  testimony  was  subsequently 
called  to  Mr.  Babson's  attention  in  a  letter  from  the  Executive  Secretary,  he 
threw  no  further  light  on  the  subject.  Suffice  it  to  say  that  the  figure  two  billion 
five  hundred  million  dollars  as  representing  the  market  value  of  all  electric  rail- 
way stocks  and  bonds  before  the  shrinkage  began  is  a  long  way  from  the  claimed 
investment  in  the  industry  with  respect  to  which  figures  from  five  billions  to 
seven  billions  were  used  by  various  witnesses  before  the  Commission.  Upon  this 
point  as  to  the  relation  between  capitalization  and  value,  I  call  attention  to  the 
testimony  of  Mr.  Francis  H.  Sisson,  at  pages  333  and  334  of  the  Proceedings, 
where,  in  answer  to  questions  by  Commissioner  Meeker,  he  discusses  the  matter 
of  investment  out  of  earnings  and  the  extent  to  which  the  physical  property  of 
the  electric  railways  may  have  been  built  up  to  absorb  the  admitted  overcapitali- 
zation of  the  early  days.     His  testimony  follows : 

"Commissioner  Meeker :  You  spoke  of  the  practice  in  financing  street  railways  in 
times  past  whereby  stock  was  issued,  not  for  a  money  payment,  but  as  an  inducement,  as 
a  bonus,  to  bond  buyers.  Do  you  think  the  street  railways  now  represent  in  their  physical 
properties  value  equivalent  to  the  outstanding  bonded  debt  and  stock? 


336  Electric  Railway  Problem 

"Mr.  Sisson  :  Well,  I  cannot  speak  accurately  about  that.  ♦  ♦  ♦  *  I  should  be  sur- 
prised, if  under  their  present  earning  power — because  earning  power  determines  value — I 
should  be  surprised  it  their  value  equaled  their  capitalization.  I  do  not  believe  it  does,  in- 
cluding stocks  and  bonds. 

"Commissioner  Meeker:  When  you  speak  of  value,  do  you  mean  the  value  of  the 
physical  property? 

"Mr.  Sisson:  No;  I  was  speaking  broadly  of  their  whole  value,  because  it  is  the  entire 
value  that  is  capitalized.  l""or  instance,  franchise  values  are  capitalized,  and  are  ta.\ed  in 
New  York  State  definitely  as  property,  and  in  other  places,  I  have  no  doubt,  and  are  distinct 
value,  provided  there  is  earning  power  to  warrant  it.  The  taxation  of  franchises  in  New 
York  State  was  based  upon  the  theory  that  earning  power  derived  from  franchises  was  a 
legitimate  source  of  public  ta.xation.  Now,  if  that  earning  power  does  not  e.\ist,  the  value 
does  not  exist.  In  other  words,  common  stock  values  in  most  street  railways  were  based 
upon  franchise  values  and  earning  power,  and  not  upon  physical  values.  I  do  not  believe 
the  pliysical  value  of  the  railways,  while  I  am  sure  it  is  greater  than  the  bond  obligations, 
has  yet  reached  the  point  where  it  absorbs  stock  obligations. 

"Perhaps  1  can  give  you  a  better  analogy  of  it  in  the  railroad  field.  One  of  the  great 
public  fetishes  today  is  that  railroad  stocks  are  watered,  but  the  sot)er  fact  is,  as  any  student 
of  the  situation  can  determine,  that  the  probabilities  are  that  the  physical  value  of  the 
railroads  today  is  sometliing  like  $1,500,000,000  in  excess  of  the  capitalization.  That  was 
not  true  twenty-five  or  thirty  years  ago,  but  out  of  earning  power  the  railroads  have  put 
back  into  the  property,  year  after  year  and  year  after  year.  For  instance,  the  Pennsylvania 
has  put  back  something  over  three  hundred  million  dollars  out  of  earnings  into  property 
values.  The  New  York  Central  Lines  built  their  Chicago  terminals  out  of  the  surplus 
earnings  on  the  Lake  Shore,  and  that  has  been  true  of  many  of  the  big  railroad  lines.  To 
a  lesser  degree,  that  is  true  of  the  street  car  lines,  but  tliey  have  not  yet  reached  the  point 
where  they  have  absorbed  their  overcapitalization,  if  you  may  call  it  such. 

"Commissioner  Meeker:  What,  in  your  opinion,  sliould  be  done  with  investments  out 
of  earnings  in  that  fashion?  .\re  they  the  property  of  the  street  railway  companies  upon 
which  they  are  entitled  to  a  reasonable  return? 

"Mr.  Sisson:  In  my  judgment,  yes,  because  that  is  the  practice  in  every  business  in 
the  world,  and  I  do  not  know  any  reason  why  investors  in  street  railway  securities  should 
be  discriminated  against.  It  is  true  of  every  industrial  activity.  Henrj-  Ford  starts  a 
factory  with  a  few  thousand  dollars,  and  today  he  is  worth  hundreds  of  millions  out  of 
earnings,  and  we  all  pat  him  on  the  back  and  say  'A  wonderful  job.' 

"Mr.  Warren:     .\nd  buy   h'ord  cars  without  any  protest. 

"Mr.  Sisson:  Yes,  sir;  and  pay  the  price  that  enables  him  to  make  those  profits,  and 
I  do  not  know  of  any  reason  why  we  should  discriminate  against  our  public  service  corpora- 
tions for  having,  in  their  limited  way,  done  what  the  industrial  corporations  and  financial 
institutions  and  every  other  class  of  business  do  without  protest.  In  other  words,  it  is  the 
legitimate  reward  that  comes  to  business  venture.  That  has  been  true  according  to  all  of 
the  old  theories  of  doing  business.     W'e  may  change  that  in  the   future. 

"Commissioner  Meeker:  You  think  that  public  opinion  has  not  changed  in  reference  to 
public  utilities? 

"Mr.  Sisson :  I  think  it  has  to  a  certain  extent.  I  think  it  has  been  becoming  definitely 
socialized  in  a  great  many  places." 

F"urther  on,  at  pages  3^S  and  339  of  the  Proceedings,  in  answer  to  questions 
by  Commissioner  Sweet  and  Commissioner  Meeker,  Mr.  Sisson  takes  the  position 
that  the  fate  of  outstanding  securities  must  be  determined  by  a  valuation  of  the 
property  and  an  equitable  arrangement  between  the  companies  and  the  public. 
His  testimony  follows: 

"Commissioner  Sweet :  Have  you  considered  this  phase  of  the  question :  In  the  early 
days  you  said  the  5-ccnt  fare  more  than  compensated,  so  that  we  will  assume  in  most  cases 
their  dividends  were  paid  to  the  holders  of  common  stock.  And  then  the  interest  as  agreed 
upon  was  paid  uiviii  the  Ivmds  or  preferred  stock.  Now,  if  the  5-cent  fare  named  in  the 
original  franchises  produced  more  than  enough  to  meet  those  requirements,  so  that  a  certain 
part  of  the  nickel  could  l>e  devoted  to  extensions,  is  not  that  evidence  to  your  mind  that  the 
nickel  as  il  was  originally  agreed  ujion  between  the  companies  and  the  municipalities  was 
more  than  it  ought  to  have  Ik-cu? 

"Mr.   Sisson:     In  some  instances  that   is  undoubtedly  true;  yes,  sir. 

"Commissioner  Sw^eet :  Now,  if  in  the  future  or  under  the  present  situation  the  public 
is  to  be  asked  to  provide  a  direct  or  indirect  form  of  guaranty  upon  profits  from  this  time 
on,  is  it  fair  that  the  public  should  be  asked  to  pay  more  or  to  allow  more  by  reason  of  the 
companies  having  had  the  advantage  in  the  earlier  stages  of  this  proceeding? 

"Mr.  Sisson:     I   should  say  that  is  a  matter  of  equity  in  which  you  could  hardly  make 


Financial  Reorganization  337 

a  flat  ruling.  I  think  there  are  instances  when  the  public  should  allow  those  values  to  accrue 
to  the  stockholders.  There  may  be  instances  where  those  values  are  greater  than  they  ought 
to  be  in  the  public  interest.     I  do  not  believe  you  could  generalize  on  that  subject,  sir. 

"Commissioner  Meeker:  That  could  be  taken  care  of  in  the  process  of  valuing  the 
properties? 

"Mr.   Sisson :     Absolutely,  and   that   is   what   I   have  had   in   mind. 

"Commissioner  Meeker;     You  think  that  is  the  way  it  should  be  taken  care  of? 

"Mr.  Sisson:     I  do. 

"Commissioner  Meeker :  And  an  equitable  arrangement  be  made  whereby  this  business 
which  is  in  a  bad  way  now  can  go  on  without  obligating  the  public  to  pay  more  than  it 
ought  to  pay? 

"Mr.  Sisson :  Exactly,  I  think  that  is  a  pure  matter  of  equitable  arrangement  between 
the  public  and  the  owners,  in  the  fixing  of  values." 

Some  of  the  most  extraordinary  testimony  found  in  the  entire  Proceedings  is 
that  given  by  Mr.  J.  K.  Newman,  a  witness  for  the  American  Electric  Railway  Asso- 
ciation, in  his  discussion  of  the  problems  of  reorganization.  As  a  street  railway 
promoter,  engineer  and  banker,  Mr.  Newman  appears  to  have  had  wide  experi- 
ence with  street  railways  in  the  south,  having  been  interested  in  the  New  Orleans, 
Birmingham,  Knoxville,  Nashville,  Little  Rock,  St.  Louis  and  Dallas  properties. 
He  testified  that  within  a  year  he  had  been  connected  with  the  putting  of  half 
a  dozen  properties  into  receivers'  hands  in  the  process  of  reorganization.  As  the 
numerous  quotations  from  his  testimony  already  made  have  in  part  shown,  Mr. 
Newman  favors  a  service-at-cost  plan  with  a  10  per  cent  return  upon  the  capital 
value  and  with  a  10-cent  fare,  if  necessary,  as  the  proper  solution  of  existing 
electric  railway  difficulties.  He  does  not  think  that  it  would  be  wise  for  the 
electric  railways  to  complicate  the  issue  by  laying  claim  to  exemption  from  taxa- 
tion and  relief  from  paving  obligations,  knowing  full  well  that  under  the  plan 
he  advocates,  street  railway  taxes  and  paving  burdens  would  be  definitely  in- 
cluded in  the  cost  of  service  and  would  be  passed  on  to  the  public  in  the  rates. 
He  frankly  recognizes  the  fact  of  overcapitalization  and  takes  the  position  that 
the  public  must  be  convinced  that  the  hocus-pocus  methods  of  the  past  have  been 
forever  discarded.  His  service-at-cost  plan  involves  a  valuation  of  the  property. 
His  reasons  for  having  an  interest,  notwithstanding  that  fact,  in  the  amount  of 
securities  to  be  issued  are  explained  at  pages  573  and  574  of  the  Proceedings, 
as  follows : 

"Commissioner  Meeker:  The  thing  that  I  am  really  interested  in  is  the  outstanding 
capital,  whether  bonds  or  stock.  Are  you  much  concerned  with  the  control  of  the  issuance 
of  such  securities?  What  I  mean  is  this,  does  it  make  much  difference  whether  such  secur- 
ities be  controlled  by  a  commission  as  long  as  you  are  limited  to  a  fair  return  upon  invest- 
ment ? 

"Mr.  Newman :  That  is  correct,  but  you  must  put — let  me  explain  this.  It  does  not 
make  any  difference  under  this  plan  we  are  discussing  what  the  securities  are  out  against 
the  property,  whether  bonds  or  stocks.  I  say  ignore  it  absolutely  and  let  the  security  holders 
fight  that  out  among  themselves.  The  authorities  have  nothing  to  do  with  that  capitalization 
and  ought  to  ignore  it  entirely,  except  for  one  reason.  The  roads  must  be  financed  in  the 
future,  and  you  must  have  a  sound  financial  plan  by  which  you  are  going  to  float  your 
securities  at  the  lowest  possible  rate  in  the  future.  E.xcept  for  that  one  reason  the  city 
authorities  are  not  concerned  as  to  what  amount  of  securities  is  outstanding,  whether  bonds 
or  stocks. 

"Commissioner  Meeker:  You  think  there  should  be  some  public  control  of  the  issuance 
of  securities  so  as  to  protect  the  credit  of  the  street  railway  company? 

"Mr.   Newman :     .Absolutely. 

"Commissioner  Meeker:     So  it  can  get  the  capital  it  needs  at  the  lowest  rate  of  interest? 

"Mr.  Newman :  Yes.  and  I  go  further  than  that.  I  say  that  before  the  cities  make 
these  new  concessions,  this  new  franchise  arrangement  with  the  property  owners,  they  should 
demand  that  they  fix  up  their  capitalization  in  such  shape  that  they  will  not  only  have  secur- 


338  Electric  Railway  Problem 

ities  that  can  be  sold  to  take  care  of  the  properties  in  the  future,  but  that  will  take  care  of 
them  in  a  way  that  will  do  it  at  the  lowest  rate  of  interest.  You  have  got  to  reestablish  the 
credit  for  these  roads  and  in  my  judgment  you  cannot  do  it  wtthout  a  complete  financial 
reconstruction,  and  the  cities  are  interested  that  that  reconstruction  takes  place. 

"The  Chairman:     Which  would  require  reorganization  of  the  company? 

"Mr.  Newman :     Yes. 

"The  Chairman:     Throwing  out  all  the  old  stock  and  reissuing  new? 

"Mr.   Newman :     Yes." 

Mr.  Newman  hopes,  however,  to  save  something  out  of  the  wreck  for  the 
common  stockholders,  except  in  the  most  extreme  cases.  He  explained  his  plan 
with  considerable  hesitation.  It  is  this.  By  getting  a  valuation  of  the  property 
and  by  securing  a  10  per  cent  allowed  return  upon  it,  a  street  railway  can  take 
care  of  bonds  and  preferred  stock,  the  par  value  of  which  will  be  equal  or  nearly 
equal  to  the  entire  value  of  the  property,  but  it  will  still  have  left  out  of  its  10 
per  cent  a  handsome  surplus  over  and  above  the  bond  interest  and  the  preferred 
stock  dividends,  with  which  it  can  reward  the  present  common  stockholders  or 
their  residuary  legatees  in  the  reorganization.  Mr.  Newman's  testimony,  at 
pages  575  to  579  of  the  Proceedings,  is  a  story  of  absorbing  interest.  I  quote  it 
in  full  as  follows: 

"Commissioner  Gadsden:  Mr.  Newman,  referring  to  what  you  said  about  the  public 
.authorities  having  no  concern  with  the  capitalization  of  these  companies,  do  you  not  think 
that  consideration  would  probably  have  to  be  given  by  public  authorities  to  the  innocent  , 
holders  of  these  securities  that  the  bankers  and  street  railroad  people  to  whom  you  referred 
issued  some  twenty  years  ago?  What  is  going  to  become  of  the  innocent  third  party,  we 
will  say,  who  is  holding  some  millions  of  these  securities  now?  Is  the  public  conscience 
going  to  stand  for  just  depriving  these  people  of  their  property?  They  did  not  do  any  harm, 
did  they?  They  bought  them  from  bankers,  we  will  say,  in  the  ordinary  course  of  business. 
Now,  are  you  going  to  take  the  position  before  this  Commission  that  those  people's  property, 
widows,  orphans,  trust  companies  and  savings  I>anks — that  those  securities  are  going  to  be 
sacrificed  because  twenty  years  ago  a  lot  of  bankers  issued  watered  stock  and  inflated 
securities? 

"Mr.  Newman :     Now  I  am  going  to  say  yes,  but   with  a  tremendous  qualification. 

"Commissioner  Gadsden:     I  want  the  qualification,  that   is  what  I  am  after. 

"Mr.  Newman:     Yes,   I  am  going  to  give  you  that. 

"Commissioner  Gadsden:  Before  you  go  ahead,  here  is  the  thought  in  my  mind.  I  want 
you  to  get  my  full  thought.  If  this  confiscation  were  carried  out.  would  not  that  of  itself 
still  further  destroy  credit  on  the  part  of  investors  in  any  security  which  the  public  had 
control  of? 

"Mr.  Newman:  .Ml  right.  I  want  you  to  get  what  I  am  saying  and  get  it  ver>'  care- 
fully. I  have  taken  the  position  in  all  of  our  reorganizations  that  the  bondholder  who  wants 
to  exercise  his  full  measure  will  have  to  work  without  me.  I  will  fight  him  to  a  finish ;  that 
the  securities  in  the  first  to  the  tenth  position  are  all  part  of  the  system,  and  when  the 
reorganization  comes  I  want  all  of  them  to  be  dealt  with  fairly  so  that  no  one  security 
holder  can  get  ad\-antage  of  this  new  city  contract  to  the  detriment  of  the  other.  I  do  not 
mind  confessing  to  you  that  part  of  the  scheme  that  I  have  in  my  mind  is  to  withhold  this 
franchise  right  from  the  bankers  or  from  any  class  of  securities  and  make  them  adopt  a 
reorganization  scheme.  The  basis  of  that  is  sound,  because  it  must  take  care  of  future 
financing  and  it  makes  them  deal  with  all  classes  of  securities  and  agree  upon  a  reorganization. 
Now  in  some  instances,  take  the  New  Orleans  case,  where  the  common  stock  of  $20.00l).000 
is  ab.solutelv  worthless,  there  is  no  chance  for  that  stock  to  have  any  intrinsic  value  whatever. 

"The  Chairman:     Is  that  stock  all  water? 

"Mr,  Newman :     Yes.     It  is  going  to  work  a  great  hardship  on  some  people,  but  is 

"Commissioner  Gadsden  :     Then  it   is  all  held  in   New  Orleans,  is  it  not  ? 

"Mr.  Newman :  No,  there  is  a  holding  company,  but  there  is  some  minority  interest 
out.standing.  I  am  very  sorry  for  those  people,  hut  you  cannot  bring  that  into  this  problem. 
But  there  is  another  way  of  throwing  equity  to  those  common  stockholders.  Take  the  case 
of  .'>t.  Louis.  Detroit  and  New  Orleans ;  St.  Louis  has  a  4  per  cent  Mnd  which  matures  in 
IQ.M;  New  Orleans  has  a  A' j  per  cent  l>ond  maturing  in  lO.U.  and  Detroit  a  AYi  per  cent 
liond  maturing  in  lO.U  or  19.15,  all  about  the  same  peritKl.  The  St.  Louis  bond  is  selling  at 
about  .'i.';.  the  New  Orleans  bond  is  selling  at  about  67  and  the  Detroit  bond  is  selling  at  76. 
Now.  if  you  precipitate  these  reorganizations  these  fellows  who  hold  those  bonds  who  have 
made  a  loan  for  IS  years  arc  going  to  come  in  and  say,  'Give  me  my  money  now."     A  dollar 


Financial  Reorganization  339 

at  4  per  cent  payable  in  IS  years  is  not  worth  par  today.  So  when  you  get  this  valuation 
of  the  property,  take  St.  Louis  with  $12,000,000  underlying  and  $30,000,(XX)  4's,  with  $30,- 
000.000,000  of  bonds.  That  $30,000,000  of  bonds  has  got  to  be  converted,  say,  into  a  6  per 
cent  bond  which  would  give  it  ultimately  66  %  per  cent  value,  and  you  cut  $10,000,000  out 
of  that  and  that  $10,000,000  capitalization  moves  down.  And  the  fair  bankers  who  are  in 
this  reorganization  are  not  going  to  demand  their  pound  of  flesh  on  these  strangle-hold  secur- 
ities at  the  top,  but  are  going  to  pass  the  equity  all  the  way  down,  and  if  they  attempt  to  do 
otherwise  they  are  the  ones  you  want  to  complain  about,  they  are  the  ones  who  will  be  to 
blame.     Is  that  clear? 

"Commissioner  Gadsden :  I  am  looking  at  it  now  and  the  Commission  is  going  to  look 
at  it  from  the  standpoint  of  the  public  and  not  from  the  railroad  company  or  the  holders 
of  the  first  securities.  I  am  asking  you  from  the  standpoint  of  the  general  good  of  this 
great  public,  have  we  not  got  to  take  into  consideration  a  situation  where  there  are  millions 
of  securities  in  the  hands  of  innocent  third  parties?  The  same  is  true  of  the  steam  railroads, 
is  it  not? 

"Mr.  Newman :    Yes. 

"Commissioner  Gadsden  :  Do  you  think  this  country  can  face  the  catastrophe  of  wiping 
that  stock  out  altogether?     Do  you  think  your  banking  system  would  stand  that? 

"Mr.  Newman  :  Well,  you  are  putting  a  question  to  me  that  is  not  going  to  be  a  real 
one.  I  am  quite  an  optimist  on  the  street  railroad  situation  because  I  believe  in  the  fairness 
of  the  American  public  and  I  believe  they  are  going  to  come  around  and  straighten  it  up 
for  us  when  the  time  comes  that  we  get  on  a  right  basis. 

"Commissioner  Gadsden :     But  they  have  to  have  your  help  and  that  of  others  to  do  that. 

"Mr.  Newman  :  But  the  bonds  that  are  in  the  trust  companies  and  insurance  companies 
and  so  forth  will  be  taken  care  of.  It  is  only  the  watered  stocks  in  most  instances  that  will 
be  affected  and  they  will  get  some  by  virtue  of  their  voting  power  and  control,  and  the  fair 
banker  is  going  to  pass  a  little  of  the  plum  all  the  way  down ;  there  are  going  to  be  several 
bites  of  the  plum. 

"Commissioner  Gadsden:  That  is  true,  but  is  it  not  true  that  a  lot  of  that  admittedly 
watered  stock  has  gone  into  the  hands  of  innocent  people? 

"Mr.  Newman :     Yes. 

"Commissioner    Gadsden:     What   are   you   going  to   do   about    it? 

"Mr.  Newman :  Well,  it  is  very  unfortunate,  but  I  think  some  of  them  will  have  to 
take  their  loss.     I  hate  to  say  this,  but  it   is  necessarily  true. 

"Commissioner  Sweet :  Did  you  not  .say  that  in  getting  the  valuation  of  these  properties 
you  thought  that  the  question  as  to  what  it  would  cost  now  to  replace  them  ought  to  be  taken 
into  account? 

"Mr.   Newman:     Yes. 

"Commissioner  Sw-eet :  To  replace  rails  and  cars  and  electrical  equipment  at  the  present 
prices  would  mean  a  tremendous  addition,  would  it  not,  or  produce  a  tremendous  excess  over 
the   original   cost  ? 

"Mr.  Newman:  Yes,  but  they  will  never  stand  for  it;  they  are  not  willing  to  look  at 
the  cost  when  it  means  something  for  us,  but  they  are  w'illing  to  look  at  the  cost  when  it 
means  something  against  us.     That  is  the  attitude  of  the  city  authority. 

"Mr.  Warren  :  The  valuation  has  to  be  made  on  the  best  fair  basis  it  can,  has  it  not, 
^Ir.  Newman,  by  agreement  between  the  parties? 

"Mr.  Newman :  Yes.  but  there  are  parties  in  line  today  who  will  determine  that  amount, 
there  are  men  who  are  following  that  as  a  business  who  will  do  it. 

"Commissioner  Sweet:  My  idea  was  this,  that  in  fixing  the  valuation  of  these  com- 
panies the  cost  of  replacement  at  present  high  prices  ought  to  be  a  factor ;  that  possibly 
enough  would  be  derived  to  more  than  take  care  of  the  bonds  and  what  you  might  call  the 
senior  securities  and  something  might  be  left   for  the  common  stock. 

"Mr.  Newman:  May  I  explain  this  to  you,  on  this  problem  of  value?  No  systern  has 
been  devised  for  getting  at  that  value  and  there  is  never  going  to  be  any  system,  either. 
There  are  no  engineers  in  the  country  competent  enough,  and  no  group  of  engineers  in  this 
country  competent  enough,  to  know  the  absolute  cost  of  that  system  or  its  past  history,  which 
is  not  available.  It  has  to  be  a  compromise  situation,  and  every  situation  I  have  seen,  it  is 
just  a  backward  and  forward  trade  until  you  get  a  happy  compromise  or  an  unhappy  com- 
promise  for  the  street  railroads  usually. 

"Commissioner  Sweet:  Well,  it  has  to  be  on  a  satisfactory  basis  to  the  city  anyway. 
In  other  words,  they  have  to  feel  that  it  is  substantially  correct  and  fair. 

"Mr.   Newman :     Yes. 

"Commissioner   Sweet :     Or  else   they   will   not  agree   to   it. 

"Mr.   Newman :     Yes. 

"The  Chairman :  Perhaps  we  can  get  your  idea  of  the  reorganization  of  the  company 
and  the  actual  effect  which  it  will  have  upon  the  stockholders  if  I  can  present  an  illustration 
to  you.     I  know  figures  are  a  little  misleading,  but  I  am  quite  sure  you  will  grasp  this. 

"Let  us  assume  that  vou  own  a  property  which  has  a  capitalization  of  $10,000,000; 
$3,000,000  is   in   bonds,   $4,000,000   in   preferred   stock   and  $3,000,000   common   stock.     This 


340  Elf.ctric  Railway  Problem 

common  stock  is  water.  A  physical  valuation  is  made  of  the  property  and  it  is  determined 
by  competent  tribunals  that  that  property  is  worth  $6,000,000  and  that  value  is  established 
by  the  courts.  Now  your  plan  is  to  perfect  a  reorganization  and  to  rewrite  the  securities 
down  to  the  value  of  the  property.  Tell  me  in  that  scheme  of  reorganization  how  the  com- 
mon stockholder  is  going  to  be  given  any  consideration. 

"Mr.  Newman  :  In  the  first  place,  these  bonds  may  be  2  per  cent  bonds  due  in  50  years. 
Now  what  is  the  value  of  a  2  per  cent  bond  due  in  SO  years.  Certainly  not  par,  so  those 
$3,0(X),0(X)  may  be  cut  to  SO  cents  on  the  dollar.  The  preferred  stock  may  have  had  a  5-cent 
franchise  and  been  earning  nothing  on  it,  but  with  the  new  rate  from  the  city  it  may  be  able 
to  earn  .something.  But  the  common  stockholders  say,  "No,  we  will  not  join  in  this  unless  you 
will  share  with  us.'  .\nd  they  usually  do  share,  the  common  stockholders,  where  fair  bankers 
have  got  the  situation  in  hand.     Now  there  is  another  place 

"The  Chairman ;  Well,  then,  the  only  way  by  which  the  common  stockholders  can 
share  in  that  reorganization  is  through  their  voting  power? 

"Mr.   Newman ;     No.  there   is  another  way.     That   is  one  way. 

"The  Chairman:     What  is  it? 

"Mr.  Newman:  1  had  hoped  to  avoid  this  discussion.  The  rate  of  return  on  that 
property — now  let  us  say  we  would  get  10  per  cent  return  on  tlie  property,  which  to  my 
mind  is  not  excessive,  knowing  the  business  and  the  miseries  of  it  as  I  do.  I  would  not 
want  to  live  through  it  another  24  years  for  10  per  cent.  The  (Kinds  may  be  5  per  cent  bonds, 
the  preferred  stock  may  be  a  5  per  cent  preferred  stock,  and  many  of  them  are. 

"Commissioner  Meeker:     This  is  under  the  reorganization? 

"Mr.  Newman  :  No,  the  old  securities.  Now  it  only  absorbs  part  of  that  10  per  cent 
return  on  your  investment.  You  pay  that  5  and  5  and  you  might  capitalize  the  common  stock 
for  one  dollar  and  issue  certificates  of  participation  in  that  dollar  and  yet  have  a  substantial 
amount  to  divide  without  having  the  capitalization.  You  might  have  no  par  value  a  share. 
Do  you  see  that? 

"The  Chairman :     I  do  not  know  what   I  see.     I  am  asking  you  questions. 

"Mr.  Newman:  Yes.  Well.  I  have  answered  it,  or  I  think  I  have,  and  I  will  repeat  it. 
Take  your  proposition  of  $J,0OO.0(X)  Ixinds,  1  will  make  it  concrete  for  you,  and  $4,000,000 
preferred  and  $3,0(X).000  common.  I  will  make  this  calculation  in  a  hurry  for  you.  Now 
you  have  $6,000,000  value  and  say  that  ought  to  get  10  per  cent  for  the  risk  and  worry  of 
the  business.  That  gives  us  $600.(XK)  a  vear.  \\'e  have  to  cut  our  capitalization  to  six 
million.  These  $3.0(X).0tX)  bonds  are  4"s  an'd  are  entitled  to  $2.0<X1.000  of  the  new  6's.  The 
preferred  stock  of  four  million  will  be  entitled  to  three  million  of  new  7  per  cent  preferred 
stock.  That  is  120.0(X)  and  210.0(X).  is  .WO.(XX)  from  60O.(XX).  and  we  have  an  equity  of 
270.0(X)  to  pay  the  one  million  common  stock  which  I  can  issue  within  my  capitalization,  or 
27  per  cent. 

"The  Chairman:  Of  course,  that  is  a  hopeful  future.  I  think  that  is  an  exceedingly 
valuable  contribution  to  the  record.     I  may  want  to  go  into  the  public  utility  business. 

"Mr.  Warren:     You  first  have  to  catch  your  10  per  cent. 

"Mr.  Newman:  If  we  get  the  10  per  cent  you  had  better  go  into  it,  at  the  present 
value  of  the  security." 

Mv  own  testimony  before  the  Coninii.ssion  came  later  tli;iii  Mr.  Xcwman's. 
and  without  having  had  my  attention  called  to  his  reortjanization  theories,  I 
touched  upon  the  point  the  discussion  of  which  he  said  he  had  hoped  to  avoid. 
Speaking  from  the  public  point  of  view,  at  page  1244  of  the  Proceedings,  I  say: 

"Public  utility  commissions  ought,  I  think,  to  adopt  the  rule,  in  all  rate  cases,  that  where 
the  fair  present  value  of  the  pro|)erty  is  no  greater  than  the  par  value  of  the  Ixinds  and  other 
obligations  outstanding  upon  which  fixed  charges  are  paid,  the  rate  of  return  allowed  upon 
the  investment  shall  be  no  greater  than  the  rate  of  interest  paid  on  such  bonds,  and  other 
obligations,  to  the  end  that  stockholders  having  no  capital  investment  represented  in  the 
present  value  of  the  proix-rty  shall  have  no  share  in  the  return  on  capital. 

"I  think  that  is  important  for  this  reason.  We  have,  as  I  .said  tixl.iy.  a  good  many  cases 
of  gross  overcapitalization.  The  men  who  are  now  in  control  come  forward  and  try  to  save 
their  positions  in  two  ways :  I-'ir.st.  by  finding  all  kinds  of  imaginary  value,  making  the 
property  appear  to  lie  worth  a  great  deal  more  than  it  is;  that  is.  that  is  my  opinion,  from 
the  public  jMiint  of  view — trying  to  make  it  appear  to  Ix-  worth  a  great  deal  more  than  it  is. 
That,  of  course,  will  tend  to  cover  up.  if  they  can  get  away  with  it — to  cover  up  the  over- 
capitalization. Hut  if  that  does  not  go.  they  .say:  'Give  us  an  8  per  cent  return';  and  an 
8  per  cent  return  upon  $SO,(XX).0(X)  that  is  represented  by  $.=;0.000.(XX>  of  bonds,  upon  which 
interest  is  paid  at  5.  or  at  the  outside  (>  per  cent,  leaves  a  margin  of  l^  or  '4.  as  the  case 
may  Iw.  of  the  return  upon  the  investment  to  be  capitalized,  or  to  he  taken  by  the  stockholders 
as  an  eciuity  which,  from  the  capital  standpoint,  does  not  exist.  I  do  not  think  that  where 
the  |iar  value  of  lx)nds,  obligations  which  must  ultimately  be  met.  is  equal  to  the   full   v.ilue 


Financial  Reorganization  341 

of  the  property,  the  stockholders  or  the  managers  should  be  allowed  anything  for  themselves 
in  the  form  of  a  return  upon  capital.  They  have  no  capital  interest  in  the  industry,  and 
their  return  or  reward  ought  to  be  just  like  that  of  any  other  managers — the  salaries  they 
get;  or,  if  you  adopt  the  system  of  some  scheme  of  bonus  for  good  management,  that  bonus, 
or  that  reward,  should  not  attach  to  capital  as  such,  but  to  management  as  such.  I  think 
that  should  he  recognized  clearly,  because  the  trouble,  when  we  try  to  come  to  an  agreement 
on  these  public  utility  matters,  is  that  the  companies  are  all  the  time  trying  to  put  something 
over  on  the  public,  and  the  public  in  some  cases,  is  trying  to  put  something  over  on  the 
utility ;  but  to  take  the  plan  and  say :  'AH  right,  we  agree  to  that,'  and  then  to  fix  it  so  that 
the  result  is  not  the  result  that  was  intended,  does  not  promote  a  final  solution,  and  does 
not  promote  good  relations." 

In  his  testimony  before  the  Commission,  Mr.  Morris  L.  Cooke  touches  upon 
the  relation  of  capitalization  to  value  at  the  beginning  of  the  World  War.  At  page 
1689  of  the  Proceedings,  he  says: 

"As  a  result  of  my  contacts  with  the  utility  situation  in  nearly  all  the  large  cities  of 
the  country,  I  estimate  that  on  July  1,  1914,  the  face  value  of  the  outstanding  securities  of 
these  municipal  undertakings  represented  almost  twice  what  might  be  considered  the  fair 
value  as  estimated  by  fair  men,  unschooled  in  the  equivocations  and  mirages  so  assiduously 
conceived  by  versatile  lawyers  and  valuation  experts  during  the  last  twenty  years.  While  my 
inquiries  in  the  street  railroad  field  had  not  been  as  conclusive  as  in  the  electrical  field, 
everything  points  to  alleged  value  bearing  to  real  value  a  ratio  of  at  least  two  to  one." 

Further  on,  Mr.  Cooke  discusses  the  pros  and  cons  of  the  receivership  as  a 
remedy  for  overcapitalization,  and  points  out  that  efficient  management,  aided 
by  war  prices,  may  be  able  to  absorb  some  of  the  "water"  in  electric  railway 
capitalization  without  resort  to  bankruptcy  proceedings.  At  pages  1694  and  1695 
of  the  Proceedings,  he  says : 

"The  question  of  what  shall  be  done  about  the  excessive  valuation  or  watered  stock 
remains  to  be  answered.  Where  there  is  an  excessive  difference  to  be  absorbed,  as  is  the 
case  in  many  cities,  I  suppose  there  is  nothing  to  do  but  'Let  Nature  take  her  course.'  In  any 
such  case  the  readjustments  incident  to  a  receivership  and  a  reduction  in  the  property  invest- 
ment account  will  come  as  the  inevitable  retribution  for  past  mistakes.  It  will  be  found  that 
our  old  time  friend,  the  'widow  and  orphan,'  will  not  suffer  as  much  in  this  as  we  are  some- 
times led  to  believe.  Some  years  ago  I  examined  the  investment  lists  of  four  of  the  largest 
savings  funds  in  Philadelphia  and  found  that  among  investments  totaling  hundreds  of 
millions,  there  was  not  one  dollar  in  municipal  utility  securities.  In  other  words,  careful 
investors  have  been  on  notice  for  some  time. 

"But  where  the  excessive  valuation  is  not  too  great  and  where  efficient  management  has 
been  installed,  adjustments  reasonably  fair  to  all  concerned  and  not  involving  too  radical 
readjustments  should  be  possible.  Here,  again,  we  can  turn  to  Philadelphia  for  an  illustration. 
Everyone  knows  that  there  is  in  the  P.  R.  T.  a  large  underlying  layer  of  the  purest  water, 
running  into  the  tens  of  millions.  I  think  it  is  a  fair  statement  that  as  the  result  of  the 
past  ten  years  of  careful  management  a  part  of  this  overcapitalization  may  be  said  to  have 
been  absorbed.  If  Mr.  Mitten  continues  his  activities  and  along  the  most  promising  lines, 
I  think  it  will  be  altogether  possible  for  him  to  further  reduce  the  discrepancy  between  real 
and  alleged  value.  If  present  prices  are  maintained,  of  course,  his  task  will  be  the  easier. 
I  can  then  conceive  that  at  some  future  date  there  can  be  reached  some  conclusion  as  to  what 
the  shortage  is  and  that  this  can  be  in  part  validated  in  an  open  and  above  board  manner 
by  a  public  which  is  not  without  some  measure  of  responsibility  for  its  existence,  and  in  part 
covered  by  a  cancellation  of  outstanding  securities.  After  all,  neither  the  city  nor  the  security 
holders  should  advocate  the  revolutionary  route  of  a  receivership  if  the  necessary  adjustments 
can  be  made  by  a  more  orderly  process.  Any  such  settlement  is  contingent  upon  full  evidence 
of  good  faith  on  the  part  of  the  company  and  the  establishment  of  a  progressive  and  efficient 
management  of  the  property.  In  this  Philadelphia  situation,  unless  the  adjustment  is  reached 
by  some  such  method  as  suggested,  the  community  will  ultimately  insist  upon  a  valuation  made 
very  largely  for  the  purpose  of  exposing  past  wrongs,  and  without  any  desire  to  give  the 
management  even  a  sporting  chance." 

This  matter  of  the  treatment  of  outstanding  securities  presents  one  of  the 
knottiest  problems  in  the  whole  discussion  of  the  future  of  the  electric  railways. 
It  is  sometimes  urged  that  a  failure  on  the  part  of  the  community  to  protect 
existing  security  holders,  the  so-called   "innocent   investors,"   regardless   of   the 


342  Electric  Railway  Problem 

intrinsic  value  which  their  stocks  and  bonds  represent,  would  give  street  railway 
credit  a  worse  black  eve  than  it  now  has,  and  that,  tlierefore,  any  scheme  for  the 
rehabilitation  of  credit  as  a  means  of  securing  new  capital  must  tirst  take  care 
of  the  capital  already  in  the  business.  Of  course,  any  policies  that  tend  to  prove 
bad  faith  on  the  part  of  the  public  in  dealing  with  street  railway  investors  cannot 
help  making  future  credit  based  upon  the  conununity's  faith  more  precarious. 
But  the  argument  that  the  good  faith  of  the  community  is  involved  in  the  preser- 
vation intact  of  the  existing  financial  structure  of  the  electric  railways  is  specious, 
to  say  the  least.  Undoubtedly,  the  element  of  good  faith  may  be  involved  to  a 
limited  extent  in  some  communities,  but  the  usual  test  of  good  faith  in  business 
relations  is  the  scrupulous  fulfillment  of  contracts,  except  to  the  extent  that  such 
contracts  are  shown  to  be  contrary  to  public  policy.  In  my  judgment  the  restor- 
ation of  street  railway  credit  depends  more  upon  the  reorganization  and  re- 
building of  the  financial  structure  of  the  industry  on  a  sound  basis  than  upon  the 
restoration  to  the  old  security  holders  of  the  values  which  they  have  already  lost 
under  the  terms  of  their  contracts.  In  other  words,  while  I  recognize  that  re- 
ceiverships are  a  painful  remedy,  I  see  no  sufficient  reason  for  pennitting  the 
entire  policy  of  the  public  with  respect  to  the  electric  railways  to  be  dictated  by 
the  fear  of  them.  Heroic  treatment  is  often  necessary  to  save  the  life  of  a 
patient.  It  is  very  doubtful  whether  the  companies  should  be  "coddled"  along 
with  distilled  water  and  homeopathic  pills  when  everybody  knows  that  a  dose 
of  castor  oil  or  the  surgeon's  knife  is  what  is  needed.  The  public  can  well  afford 
to  do  almost  anything  to  preserve  the  electric  railway  industry  as  such;  it  has 
much  less  interest  in  saving  the  present  managements.  If  credit  is  to  be  re- 
established and  maintained,  a  new  foundation  for  it  will  have  to  be  laid  in  very 
many  cases. 


Chapter  XXXVII 
NO  ONE  REMEDY  SUFFICIENT 

In  the  discussion  in  the  first  chapters  of  tliis  report,  I  pointed  out  the  general 
consensus  of  opinion  that  the  solution  of  the  electric  railway  problem  depends 
upon  a  restoration  of  the  credit  of  the  industry.  After  analyzing  the  causes  that 
led  to  the  collapse  of  street  railway  credit,  I  have  analyzed  the  most  important 
of  the  affirmative  suggestions  put  forward  as  to  means  for  restoring  it.  These 
suggestions  in  the  order  of  their  discussion  are:  (1)  an  increase  in  unit  fares, 
(2j  the  adoption  of  the  zone  system  or  distance  tarifY,  (3)  relief  from  taxation 
and  other  public  burdens,  (4)  efficiency  in  management  and  economies  in  opera- 
tion, (5)  control  or  abolishment  of  jitney  competition,  (6)  cooperative  relations 
between  management  and  men.  (7)  public  subsidies,  (8)  abandonment  of  un- 
profitable lines  and  (9)  financial  reorganization. 

No  one  of  these  proposals  necessarily  implies  a  complete  change  in  the  public 
relations  of  the  industry,  although  some  of  them  point  in  that  direction.  The 
analysis  of  the  evidence  before  the  Commission  points  unerringly  to  the  conclu- 
sion that  no  one  of  these  proposed  remedies  and  perhaps  no  combination  of  them 
will  be  sufficient  to  put  the  electric  railway  industry  upon  a  sotmd  basis  from 
the  point  of  view  of  private  ownership  and  management,  while  at  the  same  time 
preserving  and  developing  its  characteristics  as  an  essential  public  utility. 

I  have  not  discussed  in  detail  certain  minor  suggestions  such  as  the  develop- 
ment of  the  freight  business  of  the  electric  railways  as  a  supplementary  source 
of  revenue  and  for  the  better  utilization  of  the  existing  plant.  I  do  not  wish 
to  gloss  over  possibilities  such  as  this,  but  the  evidence  before  the  Commission 
does  not  warrant  a  consideration  of  freight  development  as  a  major  remedy  for 
the  strictly  urban  lines.  The  fact  is.  as  I  have  already  pointed  out,  that  the  con- 
sensus of  opinion  seems  to  point  to  an  entirely  new  deal  in  the  status  of  the 
industry  with  respect  to  public  restrictions  and  public  control  as  essential  to  any 
thorough-going  rehabilitation  of  street  railway  credit. 

In  Chapter  XXIV  I  presented  the  pros  and  cons  of  public  ownership  as  set 
forth  in  the  testimony  of  numerous  witnesses,  for  the  purpose  of  showing 
whether  or  not  so  radical  a  change  in  the  status  of  the  industry  would  be  accept- 
able as  an  alternative  to  its  destruction,  if  the  issue  should  come  to  that.  I 
pointed  out  that  even  those  who  oppose  public  ownership  in  theory  admit  in  most 
cases  that  it  would  solve  the  problem  of  credit  and  that  as  a  means  of  avoiding 
the  complete  collapse  of  electric  railway  service,  it  would  be  better  than  no  remedy 
at  all.  We  have  now  reached  the  stage  in  the  analysis  of  the  problem  of  credit 
where  it  is  necessary  to  point  out  the  essential  steps  to  be  taken  before  a  "new 
deal"  can  be  put  through,  and  to  consider,   from  the  standpoint  of  credit,  the 

343 


344  Electric  Railway  Problem 

fundamental  characteristics  of  the  new  relations  to  be  established  between  the 
public  and  the  electric  railways.  The  amount  of  the  investment  and  the  fair 
rate  of  return  are  the  two  complementary  factors  that  must  be  determined  at  the 
threshold  of  the  new  dispensation.  Then  we  shall  have  to  consider  continuous 
public  regulation  and  semi-automatic  regulation  through  service-at-cost  contracts 
as  the  alternative  methods  of  administering  the  public  relations  of  the  electric 
railways  with  a  view  to  the  restoration  and  maintenance  of  their  credit  under 
private  ownership.  After  that  we  shall  come  to  a  further  discussion  of  public 
operation  or  of  public  ow-nership  and  operation  in  their  relation  to  credit.  These 
several  matters  will  be  taken  up  in  order  in  the  succeeding  chapters. 


Chapter  XXXVIII 
THE  VALUATION 

The  determination  of  the  amount  of  the  investment  upon  which  an  electric 
railway  company  is  entitled  to  earn  a  fair  return  while  it  continues  to  serve  the 
public  is  fundamental  to  the  establishment  of  the  new  deal  about  which  so  much 
was  said  by  the  witnesses  before  the  Commission.  Nevertheless,  it  appears  that 
the  American  Electric  Railway  Association  did  not  include  definite  and  complete 
testimony  on  the  principles  of  valuation  as  a  part  of  its  case.  That  the  policy 
adopted  by  it  was  based  upon  the  assumption  that  the  Commission  would  not 
pass  in  a  definite  way  upon  the  question  of  valuation,  is  shown  by  a  brief  discus- 
sion which  took  jlace  near  the  close  of  the  very  last  of  the  public  hearings,  just 
as  Mr.  Bently  W.  Warren,  counsel  for  the  Association,  was  about  to  leave.  At 
pages  2122  and  2123  of  the  Proceedings,  the  following  appears: 

"Mr.  Warren :  As  I  understood,  the  question  of  valuation  is  not  going  to  be  passed 
upon  in  any  definite  way  by  the  Commission,  as  we  did  not  introduce  evidence  on  it.  *  *  *  * 

"Commissioner  Wehle :  Excuse  me,  just  a  moment,  but  before  you  leave,  lest  there  be  any 
misunderstanding  on  the  question  of  expressions  by  the  Commission  in  its  report  on  the 
question  of  valuation,  I  think  before  Mr.  Warren  leaves  I  should  like  to  hear  what  the  Chair- 
man has  to  say  about  it;  because,  although  we  did  not  go  into  the  discussion  of  valuation 
here,  it  was  my  understanding  that  reference  might  be  made  to  any  previous  investigation. 

"Mr.  Warren :     We  should  welcome  that. 

"Commissioner  Wehle :     -\nd  that   recommendations  might  be  made  by  the  Commission. 

"The  Chairman :  The  Chair  believes  that  this  Commission  is  not  in  a  position,  from 
this  record,  to  undertake  to  make  a  definite  pronouncement  upon  the  kind  of  a  valuation 
which  should  be  made,  or  the  principles  which  should  apply.  Just  in  what  form  our  recom- 
mendation should  be  made  upon  that  subject — and,  of  course,  one  must  be  made — is  a  matter 
for  us  to  dispose  of  in  our  executive  sessions. 

"Mr,  Warren:  Of  course,  the  more  fully  you  set  out  the  different  forms  of  valuation, 
I  think  the  more  valuable  the  report  would  be." 

Notwithstanding  Mr.  Warren's  remark  referring  to  the  question  of  valuation 
that  "we  did  not  introduce  evidence  on  it,"  an  examination  of  the  Proceedings 
shows  that  considerable  testimony  with  respect  to  the  general  principles  of  valua- 
tion was  given  by  the  witnesses,  including  some  of  the  principal  witnesses  who 
testified  on  behalf  of  the  Association.  Moreover,  among  the  pamphlets  filed  by  the 
Association  with  the  Commission  was  included  a  "Report  of  Conmuttee  on  Valua- 
tion," approved  by  the  Executive  Committee  of  the  American  Electric  Railway 
Association,  and  presented  at  the  Convention  of  the  Association  held  in  Atlantic 
City  in  October,  1919.  Mr.  Philip  J.  Kealy,  President  of  the  Kansas  City  Rail- 
ways Company,  was  the  chairman  of  this  committee  on  valuation.  The  other 
members  of  the  committee  were  George  Weston  (since  deceased),  W.  H.  Sawyer, 
Martin  Schreiber,  B.  E.  Tilton,  W.  J.  Harvie,  J.  N.  Shannahan  and  Charles  E. 
Bailey.  The  report  itself  does  not  disclose  the  official  connections  and  qualifi- 
cations of  the  several  gentlemen  who  participated  in  the  preparation  of  the  re- 
port, but  under  date  of  February  26,  1920,  the  report  was  introduced  in  evidence 

345 


346  Electric  Railway  Problem 

in  the  Public  Service  Railway  valuation  case  pending  before  the  New  Jersey 
Board  of  Public  Utility  Commissioners  by  Mr.  Martin  Schreiber,  chief  engineer 
of  the  Public  Service  Railway  Company,  who,  as  will  be  noted,  was  one  of  the 
members  of  the  committee.  Mr.  Schreiber  testified  that  the  report  was  prepared 
by  Mr.  Kealy  and  that  Mr.  Kealy  was  the  engineer  in  charge  of  the  valuation 
of  the  Metropolitan  Street  Railway  Company  of  Kansas  City  in  1912  under 
Bion  J.  .\rnold  of  Chicago.  He  described  the  qualifications  of  the  other  mem- 
bers of  the  committee,  stating  that  the  late  Mr.  Weston  had  been  for  a  period 
of  si.x  and  one  half  years  up  to  January  1,  1919,  the  representative  of  the  City 
of  Chicago  on  the  Board  of  Supervising  Engineers — Chicago  Traction ;  that 
Mr.  \V.  J.  Harvie.  \'ice-Prcsident  and  General  Manager  of  the  Auburn  and  Syra- 
cuse Electric  Railway  Company  and  a  past  president  of  the  .\merican  Electric 
Railway  Engineering  Association,  had  been  at  one  time  chief  engineer  of  the 
Syracuse  Rapid  Transit  Company,  and  later  railway  manager  for  the  J.  G.  W'hite 
Company;  that  B.  E.  Tilton,  Vice-President  and  General  Manager  of  the  New 
York  State  Railways  Company  had  been  at  various  times  construction  engineer 
for  the  Pennsylvania  Railroad,  engineer  of  maintenance  of  way  of  the  Cleveland 
Electric  Railway  Company  and  engineer  of  maintenance  of  way  of  the  Rochester 
Railway  and  Light  Company;  that  Mr.  J.  N.  Shannahan  was  President  of  the 
Peck,  Shannahan,  Cherr\-  Com])any.  which  is  engaged  in  financing,  constructing 
and  operating  utilities,  and  that  in  the  course  of  his  career  he  had  been  at  one 
time  railway  manager  of  the  J.  G.  White  Company;  that  W.  H.  Sawyer  was  Vice- 
]^resident  and  executive  in  charge  of  railway  and  light  companies  of  the  E.  W. 
Clark  Management  Corporation  of  Philadelphia  and,  among  other  things,  had 
served  six  years  with  the  General  Electric  Company  and  four  years  as  manager 
of  the  New  York  office  of  Ford,  Bacon  &  Davis;  that  Mr.  Charles  E.  Bailey  was 
engineer  in  charge  of  the  reports  of  the  J.  G.  White  Company ;  and  that  the 
witness,  Mr.  Martin  Schreiber,  was  a  past  president  of  the  American  Electric 
Railway  Association  and  had  been  for  sixteen  years  connected  with  the  Public 
Service  Railway  Company  of  New  Jersey,  serving  successively  as  engineer  in 
charge  of  buildings  and  track  extensions,  engineer  of  the  mechanical  department, 
engineer  of  maintenance  of  way  and  chief  engineer.  I  refer  to  Mr.  Schreiber's 
testimony  in  the  Public  Service  Railway  valuation  case  for  the  purpose  of  show- 
ing that  the  Report  of  the  Committee  on  Valuation  filed  with  this  Commission 
is  a  well-considered  and  authoritative  statement  of  the  position  of  the  Electric 
Railway  Association,  intended  to  be  used  in  a  definite  and  practical  way  in  sup- 
port of  the  contentions  of  individual  electric  railway  companies  in  valuation  cases. 
Besides  this  report,  which  was  filed  with  the  Commission  in  pamphlet  form, 
though  not  formally  introduced  in  evidence,  the  record  discloses  that  the  Com- 
mission had  the  benefit  of  extended  testimony  by  Professor  Mortimer  E.  Cooley, 
Dean  of  the  School  of  Engineering  and  .Xrchitecture  of  the  University  of  Michi- 
gan, whose  experience  in  valuation  work  extends  over  a  period  of  more  than 
twenty  years  and  includes  several  street  railway  properties  of  great  magnitude, 
nt)tably  the  Chicago,  Milwaukee,  Cleveland,  Detroit,  Michigan  United  Railways 
and  New  Jersey  properties;  also  that  General  Guy  E.  Tripp,  chairman  of  the 
Committee  of  One  Hundred,  appointed  to  prepare  and  present  the  case  of  the 


Valuation  347 

American  Electric  Railway  Association,  Mr.  Henry  L.  Doherty,  Mr.  James  D. 
Mortimer,  Mr.  Henry  G.  Bradlee,  Mr.  Francis  H.  Sisson  and  Mr.  J.  K.  Newman, 
among  the  leading  witnesses  on  behalf  of  the  Association,  went  into  the  qnestion 
of  valuation  to  a  greater  or  less  extent.  The  subject  also  received  a  certain 
amount  of  attention  from  other  witnesses. 

That  the  valuation  is  the  rock  of  stumbling  in  all  efforts  for  a  readjustment 
of  the  public  relations  of  the  electric  railways  is  proven  by  experience,  by  the 
general  consensus  of  opinion,  and  by  the  necessities  inherent  in  the  situation  as 
soon  as  we  get  away  from  the  theory  that  the  capital  value  to  be  recognized  in 
the  adjustment  of  these  relations  is  to  be  determined  on  the  basis  of  the  actual 
amount  of  money  furnished  by  private  investors  for  use  in  the  public  service. 
A  plan  for  the  solution  of  the  electric  railwaj-  problem  that  does  not  include  a 
plan  for  the  determination  of  the  amount  of  the  company's  investment  to  be 
recognized  for  all  public  purposes  essential  to  such  solution,  lacks  the  spark  of 
life  that  distinguishes  a  man  from  a  manikin.  A  carefully  worked-out  plan  of 
public  relations,  accepted  in  every  detail  by  the  public  and  by  the  companies,  and 
complete  with  the  exception  that  neither  the  valuation  nor  the  method  of  arriving 
at  it  is  detennined,  would  leave  the  public  and  the  companies  substantially  as  far 
apart  as  ever.     In  other  words,  the  valuation  is  "IT." 

In  view  of  the  fact  that  the  present  status  of  the  electric  railway  industry 
and  its  need  for  relief  at  the  hands  of  the  public  was  presented  affirmatively  to 
the  Commission  by  the  American  Electric  Railway  Association,  it  is  fitting  in  our 
discussion  of  the  valuation  question  to  begin  with  a  statement  of  the  Association's 
valuation  program  as  it  has  been  definitely  formulated  and  officially  promulgated. 
The  Committee  on  Valuation,  recognizing  the  importance  and  difficulty  of  its 
problem,  nevertheless  exhibited  considerable  optimism  with  respect  to  the  desire 
of  everybody  concerned  to  reach  a  fair  and  practical  solution  of  it.  At  pages  3 
and  4  of  its  printed  report,  it  says : 

"In  view  of  the  great  importance  of  the  item  of  'fair  value'  in  rate  making  negotiations, 
the  .'\ssociation  has  requested  the  Valuation  Committee  to  prepare  a  report,  at  the  earliest 
possible  date,  setting  forth  its  recommendations  as  to  the  proper  procedure  to  follow  in 
determining  'fair  value'  in  the  hope  that  through  the  work  of  this  Committee,  representing 
practically  all  of  the  Street  Railway  Companies  in  the  United  States,  there  could  be  a  method 
of  valuation  evolved  based  upon  safe  economic  principles  acceptable  to  the  investors  and  to 
the  various  Public  Utility  Commissions  and  other  rate  making  bodies  representing  the  public. 

"In  attacking  this  problem  your  Committee  realizes  the  many  conflicting  opinions  that 
have  prevailed  and  the  many  mistakes  that  have  been  incorporated  in  public  valuations  of  the 
past,  but  it  is  the  unanimous  opinion  of  the  Committee  that  it  is  undoubtedly  the  earnest 
desire  of  all  interested  parties,  the  Courts,  Public  Utility  Commissions,  Municipalities  and 
other  governing  bodies,  as  well  as  the  companies,  to  evolve  a  method  of  arriving  at  the  fair 
amount  of  capital  upon  which  to  base  a  return  and  that  this  can  be  accomplished  through  the 
application  to  the  problem  of  common  sense  business  methods  between  common  sense  business 
men." 

The  committee  lays  down  as  its  first  premise  that  the  investor  is  entitled  to 
a  fair  return  upon  his  investment  until  he  gets  it  back.  Starting  from  this  assump- 
tion, the  committee  works  out  a  general  statement  of  principles  governing  the  use 
of  the  two  leading  methods  of  valuation,  referred  to  as  the  "original  investment" 
method  and  the  "cost  to  reproduce  new"  method,  respectively.  At  page  4  of  its 
report,  the  committee  says  : 

"There  can  be  no  question  but  that  tlie  investor  in  any  public  utility  serving  the  public, 
is  entitled  to  a  fair  return  upon  his  investment  until  it  has  been  returned  to  him. 


348  Electric  Railway  Problem 

"Accepting  this  principle  as  an  'axiom,'  every  dollar  spent  in  creating  the  property,  in- 
cluding the  individual  effort  (the  equivalent  of  money)  of  the  promoters  and  organizers  and 
builders  of  the  property,  including  superseded  property  unamortized  out  of  the  earnings  of 
the  road,  should  be  included  in  'fair  value.'  And  in  addition  the  investor  in  the  company  is 
entitled  to  a  reasonable  return  upon  his  actual  original  investment,  plus  the  appreciation  of 
the  property  including  its  value  as  a  "going  concern'  as  compensation  for  the  'initial  risk'  or 
'hazard'  and  his  skill  in  successfully  operating  the  property.  In  other  words  an  increase 
in  capital  value  is  the  same  as  an  increase  of  new  capital. 

"\\  ith  these  general  premises  in  mind  the  Committee  makes  the  following  statement  of 
general  principles  involved : 

"(1)  Where  'original  investment'  is  used  upon  which  to  base  'fair  value'  and  full 
complete  'original  cost'  data  is  available  covering  all  expenditures  including  promotion, 
organization,  cost  of  financing,  contingencies,  etc..  there  should  tx;  added  to  these  original  cost 
figures  any  appreciation  including  a  fair  value  for  'going  concern'  and  there  should  be  no 
deduction  for  unamortized  superseded  property  or  for  accrued  physical  depreciation  in  a  well 
maintained  property. 

"(2)  That  where  full  and  complete  original  cost  data  is  not  available  the  'cost  to 
reproduce  new'  method  should  be  used.  That  an  inventory  of  the  existing  property  be  made 
at  prices  as  of  the  date  of  the  inventory,  which  date  should  coincide  with  the  time  the 
valuation  is  being  made  and  expressed  herein  as  'prices  of  today.'  To  this  bare  bones  inventory 
and  unit  price  summation  should  be  added  the  proper  'overhead'  percentages,  'going  value'  and 
other  development  costs  to  complete  a  full  'fair  value'  for  'rate  making'  purposes  and  there 
should  be  no  deduction  for  accrued  physical  depreciation  in  a  well  maintained  property." 

The  committee  enumerates  the  "items  to  be  considered  in  estimating  fair 
value  for  rate  making,"  but  later  on  recommend.s  its  conclusions  to  the  member 
companies  of  the  Association,  to  tlic  state  utility  commissions,  to  the  Interstate 
Commerce  Commission,  and  to  "other  national,  state  and  municipal  governing, 
regulating  and  supervising  bodies"  in  connection  with  the  determination  of  fair 
value  not  only  for  rate-making  purposes  but  also  "for  sale  to  a  municijiality,  state 
or  government."  In  our  discussion  of  the  committee's  definitions  and  conclu- 
sions, therefore,  we  must  regard  them  as  intended  to  apply  equally  to  rate  making 
and  public  acquisition,  the  two  great  purposes  for  which  a  valuation  is  required 
in  connection  with  the  adjustment  of  the  companies'  public  relations.'  The 
"items"  listed  by  the  cominittee  are  the  following: 

"(a)     Promotion  expense 

"(b)     Organization   expense 

"(c)     Brokerage 

"(d)  Construction  costs  (based  upon  actual  property  inventory  at  prices  as  of  the  day 
and  date  of  inventory). 

"(e)  Overhead  direct  charges  not  included  in  (d) — Engineering  and  superintendence; 
storeroom  expenses,  cost  of  handling  materials,  clerks,  general  office  help,  contingencies; 
contractors'  profit ;  carrying  charges  during  construction ;  taxes  during  construction ;  insurance 
during  construction. 

"(f)     Going  Concern 

(1)  Cost  of  consolidation 

(2)  Superseded  property 

(3)  Created  value 

(4)  Development  costs. 
"(b)     Working  Capital." 

The  committee  then  takes  up  the  definition  of  the  terms  used  in  this  list  of 
items.     It  defines  "promotion  expense"  as  follows: 

"The  initial  work  necessary  to  start  a  public  utility  enterprise  requires  the  time,  efTort 
and  work  of  capable  men  to  |)lan  the  proix)sed  service,  to  show  its  public  necessity,  to  estimate 
the  possible  business  and  prepare  construction  costs,  gross  receipts  and  operation  expense 
statements,  prepare  the  preliminary  work  necessary  to  procure  franchises,  etc.  This  work  is 
a  service  of  value  to  the  public  and  represents  a  money  value  properly  chargeable  to  capital 
account.'' 


Valuation  349 

"Organization  expense"  is  next  defined: 

"An  eflicieiit  organization  must  be  carried  during  the  formation  and  construction  period 
consisting  of  legal,  financial  and  business  experience  and  ability  to  arrange  for  and  carry 
on  the  details  of  company  organization  and  the  creation  and  construction  of  the  property. 
This  expenditure  is  a  proper  charge  to  capital  account." 

"Brokerage"  is  described  next: 

"The  money  necessary  to  create  the  properties  must  be  arranged  for  through  sales  of 
stock  and  bonds,  and  bankers  or  brokers  are  generally  engaged  to  place  the  securities  and 
collect  the  money  as  required.     This  means, 

The  payment  of  commissions 

Preparation  of  mortgage 

Service  of  registrar,  corporate  and  individual 

Service  of  trustees 

Cost  of  certification 

Revenue  stamps 

Cost  of  Recording  Mortgage 

Public  Service  Commission  Costs  for  Approval 

.Advertising, 

and  other  expenses,  and  this  brokerage  cost   should  be  included   in  any   investment   estimate 
for  rate  making." 

Up  to  this  point  the  several  items  described  relate  to  preliminary  expenses. 
The  ne.xt  item  is  "construction  costs,"  which  are  defined  as  follows : 

"A  detailed  inventory  and  classification  of  the  existing  physical  property  forms  the 
basis  of  all  'Cost  to  Reproduce  New  Valuations'  to  which  should  be  applied  unit  prices  and 
costs  or  values  as  of  the  date  of  inventory.  The  value  based  upon  present  day  prices  is  then 
in  accord  with  current  rates  of  wages,  current  cost  of  material  and  the  current  value  of  a 
dollar  and  is  economically  sound.  To  the  'bare  bones'  inventory  at  unit  prices  must  be  added 
the  direct  and  indirect  overhead  charges  not  included  in  the  unit  prices  for  rails,  other  con- 
struction materials,  labor  costs,  etc.,  all  as  enumerated.'' 

The  committee  then  states  that  "the  items  of  direct  overhead  charges  enum- 
erated should  require  no  further  explanation" ;  but,  owing  perhaps  to  its  recog- 
nition of  the  perversity  of  the  public  mind  when  overhead  charges  are  the  subject 
of  thought,  the  committee  goes  on  to  explain  them  nevertheless,  as  follows : 

"The  purchasing  of  the  materials,  their  transportation,  sub-delivery,  accounting,  inspec- 
tion, etc..  require  supervision  and  direction  and  the  effort  of  large  forces  of  storeroom  and 
general  office  help,  inspectors  and  checkers,  the  cost  of  which  is  not  included  in  unit  prices. 

"The  general  and  detail  design  of  all  parts  of  the  property  require  the  work  of  engineers 
and  architects  and  their  assistants  to  make  drawings,  bills  of  material,  working  specifications, 
and  prepare  purchase  contracts,  the  general  direction  of  the  work  in  the  field,  the  making 
of  estimates  of  cost,  progress  estimates,  partial  payment  estimates  for  all  contracts  and  the 
general  supervision  and  progress  of  all  parts  of  the  construction,  the  cost  of  which  could  not 
be  included  in  unit  prices. 

"During  the  progress  of  the  work,  cash  must  be  provided  to  pay  the  current  labor, 
material  costs  and  partial  payment  contract  estimates  and  interest  must  be  paid  upon  this 
capital  as  it  is  invested  during  the  period  of  construction  and  before  the  property  can  earn  a 
return.  The  same  is  true  of  taxes,  and  insurance,  including  fire  and  accident.  Interest,  taxes 
and  insurance  during  the  construction  period  are  a  part  of  construction  costs  and  should  be 
a  capital  charge. 

"In  the  building  and  erection  of  a  large  property  many  contracts  are  entered  into  for 
specific  kinds  of  materials  in  quantities,  special  machinery,  track  work,  buildings,  etc.,  and  the 
item  of  contractors'  profit  is  one  of  the  construction  costs  that  must  be  included  in  'fair  value' 
for  rate  making. 

"The  item  of  contingencies  is  an  important  one  in  any  cost  estimate  whether  it  be  to 
furnish  advance  information  to  financiers  and  promoters,  or  in  connection  with  any  large 
public  improvement,  or  our  own  problem  'the  establishment  of  a  reasonable  and  just  invest- 
ment value'  and  covers  the  uncertainties,  omissions,  additions,  extras,  attendant  upon  any 
construction  job,  large  or  small,  and  among  many  others,  includes  the  following  unforeseen 
but  ever  present   items   of  delay:   removal  of   obstructions,   the  appearance   of   conglomerate. 


350  Electric  Railway  Problem 

hard  pan,  or  solid  rock  in  excavations  where  earth  had  been  estimated,  slides  in  open  cuts, 
the  removal  and  restorations  of  water  pipes,  gas  pipes,  electric  wires  and  other  underground 
improvements,  underpinning  of  buildings,  etc.  »  »  »  *  This  item  of  contingencies 
is  a  real  item  of  cost  in  every  job  and  ranges  from  10  to  SO  per  cent  of  the  total  cost  and 
in  some  hazardous  undertakings  such  as  under-water  tunnel  or  foundation  work  the  actual 
cost  is  sometimes  many  times  greater  than  the  "bare  bones'  bill  of  material  contract-specifi- 
cation estimate  of  costs." 

Then  the  Committee  goes  on  to  describe  "going  concern."'  a  term  which  it 
translates,  in  parentheses,  as  "HeaUh  of  the  Property."  In  this  there  is  cause 
for  public  cheer,  as  under  the  evidence  presented  before  the  Commission  the 
electric  railways  at  the  present  time  have  very  little  "health"  to  be  valued  and 
capitalized.  Still,  this  may  be  a  weasel  word,  leaving  the  door  open  to  treat 
"going  concern"  either  as  good  health  or  as  ill  health.  At  any  rate,  the  Com- 
mittee says  that  "going  concern" — 

"Represents  the  value  that  exists  in  a  completed,  matured,  successfully  operated  property 
and  embraces  the  items  of  'readiness  to  serve.'  a  'built  up  successful  business.'  etc.,  as  com- 
pared with  a  new  property  in  the  course  of  construction,  or  the  immature  condition  usually 
prevalent  at  the  beginning  of  its  operation  and  other  development  costs  including  an  amount 
equal  to  the  deficiency  of  net  earnings  below  a  fair  return  upon  the  fair  investment  due  solely 
to  the  time  and  expenditure  reasonably  necessary  and  proper  to  the  development  of  the  business 
and  property  to  its  present  stage  and  not  comprised  in  the  valuation  of  the  physical  property." 

The  committee  then  describes  and  defines  three  of  the  four  specified  ele- 
ments of  "going  concern"  as  follows : 

"Item   (f)    1.     Cost  of  Consolidation 

"In  the  past,  competing  companies  were  granted  franchises  in  the  same  community  and 
duplication  of  operating  organizations  and  other  expenses  resulted,  and  the  service  to  the 
public  was  less  efficient  and  more  expensive.  Under  one  management  the  public  has 
benefited  by  a  lower  average  fare,  the  more  direct  routing  of  cars  and  an  extension  of  service 
for  a  single  fare.  Much  time,  effort  and  expense  is  usually  involved  in  bringing  about  a 
consolidation.  This  development  expense  is  of  value  to  the  public,  and  its  cost  is  a  proper 
charge  to  Capital  .Account. 
"Item   (f)  2.     Superseded  Property 

"A  public  utility  property  is  entitled  to  repayment  for  all  of  its  property  consumed  in 
the  service  of  the  public. 

"The  ordinary  replacement  or  renewal  of  property  actually  worn  out  in  the  service  is 
charged  to  operating  expense  and  is  therefore  amortized  out  of  earnings.  It  is  only  when 
large  replacements  of  property  arc  mad"c  necessar\-  by  extraordinary  changes  of  motive  power, 
such  as  from  horse  car  to  cable,  or  electricity,  or  both,  or  wreckage  due  to  violent  storms, 
earthquakes  or  other  unusually  destructive  calamities,  or  when  due  to  improvements  in  the 
.■\rt,  the  general  type  of  car,  or  other  property  in  service  is  replaced  in  large  quantities,  that 
it  becomes  impracticable  to  immediately  amortize  out  of  earnings  and  new  capital  must  be 
used,  and  this  new  capital  should  be  included  in  'fair  value'  upon  which  to  base  a  return  until 
such  time  as  it  has  been  amortized. 
"Item   (i)  3.     Created  Value 

"This  item  covers  an  important  element  of  value  that  may  properly  he  a  part  of  'Going 
Concern  \'aUie'  and  represents  the  value  due  to  the  utility  having  been  brought  into  existence 
and  becoming  alive  and  a  vital  part  of  the  community.  Having  pioneered  the  growth  of  the 
city  or  Commonwealth  and  enhanced  the  value  of  both  private  and  public  property,  the  utility 
itself  should  be  justly  credited  with  part  at  least  of  the  value  it  so  created." 

The  committee  gives  no  separate  definition  of  "development  costs,"  the  fourth 
sub-item  under  "going  concern." 

The  last  "item"  in  the  list  is  "Working  Capital,"  which  the  committee  de- 
fines as  follows : 

"Every  business  should  have  a  'Cash  Reserve'  or  'Working  Capital'  to  'cushion'  the  rise 
and  fall  between  income  and  expenditures,  to  carry  materials  and  supplies  account,  and 
especially  to  fortify  it  against  any  reasonable  financial  emergency  that  may  arise.  .-Xn  ade- 
quate allowance  for  this  item  .should  be  included  in  capitalization." 


Valuation  351 

"Bond  Discount"  is  referred  to  by  the  committee  as  an  item  not  to  be  capital- 
ized.    The  report  says : 

"This  item  has  been  set  up  as  one  of  the  problems  to  be  considered  in  'rate  making.' 
A  new  public  utility  seldom  sells  its  securities  at  par,  but  bond  interest  is  paid  upon  par  value 
and  must  be  included  in  the  rate  of  return.  The  question  of  'Bond  Discount'  has  been  con- 
sidered in  many  public  service  rate  cases  and  has  been  allowed  as  capital  in  some  instances, 
but  in  the  majority  [of]  cases  has  been  considered  to  represent  prepaid  interest  and  is  a  matter 
to  be  included  in  rate  of  return   rather  than  to  be  capitalized." 

Upon  the  subject  of  depreciation,  so  much  mooted  in  all  valuation  proceed- 
ings, the  committee  takes  an  unequivocal  stand  against  making  any  deduction  for 
accrued  depreciation  in  the  case  of  a  well  maintained  property,  whether  the  valu- 
ation is  being  made  for  rate  purposes  or  for  sale  to  "a  municipality,  state  or  gov- 
ernment." The  subject  is  discussed  at  pages  9  and  10  of  the  committee's  report, 
as  follows : 

"The  prevailing  practice  in  making  valuations  for  rate  making  or  upon  which  to  apply 
rate  of  return,  adopted  by  Public  Service  Commissions  and  other  public  utility  supervising 
bodies  in  the  past  has  been  'cost  to  reproduce  new,  less  depreciation.' 

"There  has  been  little  argument  between  the  companies  and  those  representing  the  public 
about  correctness  of  inventories.  More  differences  have  arisen  with  respect  to  proper  unit 
prices  to  apply  and  differences  of  opinion  respecting  proper  overhead  and  'going  value'  per- 
centages, also  with  the  method  of  determining  the  amount  of  depreciation  to  be  deducted, 
if  any. 

"Depreciation  has  been  classed  by  all  students  of  the  subject  to  be  an  operating  charge 
and  not  a  capital  account  item.  The  only  provision  that  can  be  made  to  take  care  of  deprecia- 
tion is  by  making  proper  repairs  and  proper  renewals  when  necessary,  and  these  expenditures 
should  be  charged  as  an  operating  expense :  that  is,  in  the  case  of  renewals  the  original  cost 
of  the  thing  replaced  should  be  charged  to  renewals  and  any  excess  or  betterment  is  a  proper 
charge  against  capital.  The  integrity  of  the  capital  investment  is  thereby  maintained  against 
depreciation  to  the  extent  practicable  or  economically  possible.  An  exact  standard  of  per- 
centage physically  good  to  apply  to  any  well  maintained  electric  railway  property  is  difficult 
to  establish  because  this  percentage  will  vary  in  different  properties  influenced  by  different 
types  of  property  and  equipment,  the  physical  characteristics  of  soil  and  other  local  conditions 
and  usage.  A  property  consisting  of  a  large  percentage  of  elevated  or  subway  construction 
will  show  a  much  higher  percentage  physically  good  of  the  total  investment  than  a  surface 
electric  railway  property. 

"Every  public  utility  property  should  be  maintained  at  lOO'/f  operating  condition,  but  it 
is  both  impractical  and  uneconomical  to  maintain  any  property  approximately  100%  physically 
good.  This  for  the  reason  that  the  physical  per  cent  good  of  any  property  will  vary  from 
approximately  100%.  in  the  case  of  a  new  property,  to  80%  or  less,  in  an  older  property, 
depending  upon  the  age,  the  different  stages  of  renewal  cycles  through  which  the  property 
has  passed,  and  the  amount  of  additions  and  betterments  which  have  been  added. 

"There  is  a  certain  amount  of  total  accrued  depreciation  that  never  can  be  taken  care 
of  in  any  operating,  growing  property.  In  other  words,  as  stated  above,  the  only  practicable, 
economical  expenditure  that  can  be  made  to  offset  depreciation  is  to  make  repairs  and  renewals 
w'hen  physically  necessary.  There  can  be  no  fairness  or  logic  in  attempting  to  penalize  a 
company  because  it  has  not  done  the  impossible.  The  full  original  investment  remains  in 
the  property  and  the  investor  is  entitled  to  a  return  upon  every  dollar  until  the  investment 
is  repaid  to  him.  Where  a  property  has  not  been  kept  in  good  physical  condition  and  there 
is  unmistakable  evidence  of  'deferred  maintenance'  found  in  any  property  the  subject  should 
receive  special  consideration  and  if  the  property  being  valued  has  been  a  prosperous  one  in 
the  past  and  the  fact  is  in  evidence  that  the  money  that  should  have  been  expended  for 
renewals  and  repairs  has  been  diverted  to  other  uses  of  benefit  to  the  company,  the  company 
should  be  required  to  make  good  this  deferred  maintenance,  the  cost  to  be  charged  to  its 
individual   account   and   not   to   operating   expense. 

"If,  on  the  other  hand,  it  can  be  shown  that  any  company  carrying  'deferred'  maintenance 
has  been  well  managed  but  that  the  income  has  not  been  sufficient  to  pay  the  increased  costs 
of  operation,  franchise  obligations  and  interest  and.  in  addition,  to  properly  maintain  the 
property,  then  provision  should  be  made  in  any  rate  adjustment  to  permit  the  company  to 
earn  the  amount  necessary  to  put  the  property  in  good  operating  condition. 

"Your  committee  wishes  to  emphasize  its  conclusions  with  respect  to  the  subject  of 
accrued  depreciation  in  the  strongest  manner  possible,  as  follows : 

"Where  a  property  has  been  maintained  in  good  operating  condition  and  an  appraisal  is 
being  made  to  determine  investment  value  for  'rate  making'  or  for  sale  to  municipality,  state 
or  government,  no  deduction  should  be  made  for  accrued  depreciation." 


352  Electric  Railway  Problem 

Particular  attention  should  be  called  to  the  outstanding  features  of  the 
committee's  recommendations  so  far  as  they  relate  to  controversial  subjects.  It 
will  be  observed  that  although  the  committee  recognizes  that  the  "original  invest- 
ment" method  of  determining  fair  value  is  a  legitimate  one  where  a  complete  and 
reliable  record  of  total  actual  expenditures  is  available,  its  discussion  relates  almost 
exclusively  to  the  "cost  to  reproduce  new"  method.  The  committee  says,  at 
page  4  of  its  report,  that  "it  has  become  the  almost  universal  practice  to  inven- 
tory the  existing  property  and  apply  unit  prices  to  the  difTerent  items  of  construc- 
tion." The  first  outstanding  feature  of  the  committee's  recommendations,  there- 
fore, is  that  the  reproduction-cost  method  is  the  one  to  be  used  in  almost  all  cases. 
Indeed,  in  its  general  statement  of  principles  to  be  applied  where  the  "original 
investment"  method  is  used,  it  says  that  to  the  complete  original  cost  figures 
should  be  added  "any  appreciation  including  a  fair  value  for  'going  concern,' "' 
and  that  no  deduction  should  be  ntade  for  "unamortized  superseded  property" 
or  for  "accrued  physical  depreciation  in  a  well  maintained  property."  The  in- 
clusion of  "appreciation"  in  an  original  cost  appraisal  tends  to  make  this  method 
very  nearly  equivalent  in  result  to  the  reproduction-cost-new  method. 

The  second  outstanding  feature  of  the  recommendations  is  that  in  the  appli- 
cation of  the  reproduction-cost-new  method  unit  prices  should  be  taken  as  of 
the  date  of  the  appraisal,  not  as  average  prices  extending  over  a  period  of  years 
nor  as  prices  of  some  past  time  which  might  be  regarded  as  more  nearly  normal 
than  the  present.     Right  now,  this  means  prices  substantially  at  the  war  peak. 

The  third  outstanding  feature  of  the  recommendations  is  the  flat-footed  and 
emphatic  declaration  that  accrued  depreciation  in  a  well  maintained  property 
should  in  no  case  be  deducted  from  cost  new  in  arriving  at  a  basis  for  rate  making 
or  for  sale  to  a  public  body. 

The  fourth  outstanding  feature  of  the  recommendations  is  that  "going  con- 
cern" value  is  interpreted  to  include  not  only  deficiency  of  net  earnings  and  super- 
seded property,  but  also  "cost  of  consolidation"  and  "created  value."  It  is  note- 
worthy that  while  "developmt-nt  costs"  are  listed  as  a  sub-item  under  "going 
concern."  they  are  not  separately  defined.  It  must  be  presumed,  however,  that 
this  sub-item  represents  something  different  from,  and  in  addition  to,  the  three 
elements  of  "going  concern"  which  are  separately  defined. 

In  its  discussion  of  overhead  charges  and  going  concern,  the  committee  does 
not  attempt  to  fix  percentages  or  amounts,  on  the  theory  that  "thev  will  vary 
in  diflferent  properties,  and  therefore  must  be  separately  determined  for  each 
particular  property."  Perhaps  the  most  striking  feature  of  the  entire  program 
of  valuation  recommended  by  the  committee  is  the  claim  for  "creatcil  value." 
The  theory  is  that  transportation  facilities  are  beneficial  to  the  community  and 
enhance  the  value  of  real  estate,  and  that,  therefore,  the  owners  of  the  transpor- 
tation lines  should  get  not  only  the  full  rcproduction-cost-new  value  of  their  own 
property,  but  also  a  share  in  the  increased  value  of  other  holdings. 

In  view  of  Mr.  Warren's  statement  that  the  Klectric  Railway  Association 
"did  not  introduce  evidence"  on  the  subject  of  valuation,  it  might  be  considered 
that  the  testimony  on  this  subject  given  by  the  various  witnesses  for  the  Associa- 
tion is  to  be  regarded  as  incidental,  personal  and  unauthoritative.     For  example. 


Valuation  353 

General  Tripp,  in  advocating  a  theory  of  valuation  that  appears  to  be  quite  dif- 
ferent from  that  outlined  by  the  Committee  on  \'aluation,  took  particular  pains 
to  say  that  lie  was  speaking  for  himself  and  that  his  testimony  should  not  be 
regarded  as  binding  the  Committee  of  One  Hundred,  of  which  he  was  chairman. 
Nevertheless,  it  is  necessary  to  analyze  the  testimony  of  the  individual  witnesses 
upon  this  all-important  subject,  and  so  far  as  Professor  Cooley's  testimony  is 
concerned,  it  cannot  be  regarded  as  other  than  a  definite  part  of  the  Association's 
case. 

Mr.  Warren,  after  he  had  qualified  Professor  Cooley  as  a  valuation  expert, 
asked  him  this  question : 

"What  would  you  say  was  the  keynote  of  the  troubles  so  far  as  you  have  found  troubles 
— and  I  assume  you  have — in  this  valuation  question?" 

Professor  Cooley's  reply,  found  at  pages  249  and  250  of  the  Proceedings,  indi- 
cates that  in  his  opinion  ignorance  is  the  keynote  of  valuation  troubles.  He 
says: 

"There  is  not  very  much  trouble  now  in  valuing  a  property.  Valuation  has  been  very 
much  simplified,  very  much  organized,  and  it  is  not  a  dllficult  matter  to  procure  results  and 
they  are  reasonably  accurate;  but  the  great  difficulty — and  I  myself  think  it  is  the  keynote 
of  all  our  trouble  today — is  ignorance,  sheer  ignorance  and  lack  of  understanding  by  the 
public,  very  largely,  but  not  confined  to  the  public — a  lack  of  understanding  by  the  railroads 
themselves  of  the  fundamental  principles  that  are  involved  in  all  questions  of  valuing  prop- 
erty, and  especially  all  questions  that  are  involved  in  fi.xing  rates.  If  we  could  have  a 
campaign  of  education  which  will  make  perfectly  clear  these  things  that  are  now  misunder- 
stood, I  think  the  trouble  would  disappear  almost  wholly. 

"I  am  convinced  of  that,  and  I  have  been  trying  to  do  my  part  in  dispelling  that  igno- 
rance, but  it  is  very  difficult.  The  attitude  of  the  public  mind  is  such  that  you  cannot 
approach  them;  you  cannot  make  them  listen  to  you;  they  won't  believe  you,  and  I  do  not 
know  that  they  are  to  be  altogether  blamed  for  it.  because  they  have  been  sorely  tempted 
in  the  past.  1  think  the  public  utility  companies  all  admit  today  that  their  own  conduct  in 
the  past  has,  to  some  e-xtent,  merited  the  difficulties  that  they  now  find  themselves  in.  I 
make  no  defense,  and  the  utilities  themselves  make  no  defense,  of  the  mistakes  that  they  have 
made  in  the  past,  but  the  utility  companies,  as  a  rule,  now  see  what  mistakes  they  have  made, 
and  are  trying  their  best  to  remedy  them.  But  the  public  is  not  yet  willing  to  meet  them 
anywhere  near  half  way;  and  so  I  say  it  is  a  case  of  ignorance — a  greater  amount  of  igno- 
rance on  the  part  of  the  public  than  it  is  on  the  side  of  the  utility." 

Mr.  Warren's  next  question  is  as  to  whether  "as  a  general  proposition  the 
factors  in  any  valuation  are  the  same  as  in  other  cases";  to  which  Professor 
Cooley,  at  page  250  of  the  Proceedings,  replies  as  follows: 

"I  think  myself  that  the  factors  that  enter  into  a  valuation  of  any  kind  of  a  utility 
property  are  just  the  same  in  the  case  of  a  steam  or  electric  road  or  a  gas  or  water-works 
property,  or  a  telephone  or  telegraph  property.  They  are  all  practically  the  same,  the  same 
fundamental  principles,  the  same  fundamental  elements ;  and  when  you  have  described  the 
process  of  valuation  of  one  property,  and  have  all  the  factors  in  connection  with  that  property, 
you  have  them  all  in  connection  with  the  other  property.  There  are  about  eighteen  or  twenty 
of  them,  depending  upon  how  much  subdivision  you  give  all  factors  that  you  cannot  fail  to 
take  into  consideration  in  every  rate-making  case." 

As  a  setting  to  Professor  Cooley's  further  testimony,  the  following  ex- 
changes at  pages  250  and  251  of  the  Proceedings  are  perhaps  important: 

"Mr.  Warren :  I  hesitate  to  ask  you  questions,  because  I  know  you  know  so  much  more 
about  the  subject,   Professor  Cooley,   than   I  do. 

"Mr.  Cooley:  It  is  rather  difficult  to  talk  on  this  subject,  because  it  is  so  easy  to  talk; 
what  I  mean  is  that  there  is  so  much  that  can  be  said,  and  that  one  can  talk  a  very  long  time, 
and  I  would  like  very  much  to  confine  myself  to  the  particular  things  about  which  the 
information    I   can   give    would   be    wanted. 

"Mr.   Warren :     Well,   it  has  been  suggested  here  that   in   case  the   Commission   should 


354  Electric  Railway  Problem 

make  recommendations  along  certain  lines,  as,  for  instance,  possibly  a  servicc-at-cost  recom- 
mendation, that  might  involve,  perhaps  necessitate,  a  basis  for  any  such  plan  for  any  partic- 
ular company,  and  the  valuation  question  has  arisen  and  has  been  discussed  by  some  of  the 
witnesses  as  to  what  sort  of  a  valuation  and  upon  what  basis  it  should  be  made. 

"Mr.  Cooley :  Then,  perhaps,  1  might  start  by  discussing  what  we  will  call  factors 
determining  a  reasonable  charge   for  public  utility  service. 

"Mr.  Warren:     I  think  that  would  be  very  useful. 

"Mr.  Cooley:  That  will  not  involve  my  going  into  the  details  of  valuation,  unless  it 
be  desired. 

"The  Chairman:  Let  me  make  this  suggestion:  Perhaps,  the  Commission  should  give 
some  consideration  to  the  question  as  to  whether  we  should  enter  into  a  very  full  develop- 
ment of  the  proper  principles  of  valuation.  It  is  a  question  whether  our  Commission  shall 
make  any  finding,  or  even  should  make  a  finding,  as  to  the  proper  elements  which  should  be 
included  in  the  physical  valuation  of  a  plant.  We  are  dealing  with  fundamental  principles 
and   fundamental  evils. 

"Mr.  Cooley:  I  will  endeavor  to  take  up  what  I  understand  to  be  your  point,  but  what 
I  did  not  want  to  do  here  was  to  go  into  the  detail  of  physical  valuation  and  take  up  the 
value  of  ties,  rails  and  cars  and  different  elements  of  the  physical  property. 

"Mr.  Warren  :  I  might  suggest,  Mr.  Chairman,  that  1  suppose  that  is  a  matter  which 
the  Commission  will  consider  in  executive  session,  as  to  whether  they  will  make  any  recom- 
mendation about  the  valuation  or  as  to  the  elements  entering  into  it  or  the  basis  upon  which 
it  should  be  made.  It  might  help  the  Commission  in  its  consideration  of  that  question  if 
they  themselves,  you  and  other  nicmtters  of  the  Commission,  were  to  ask  Professor  Cooley 
any  questions  that  seem  to  have  particular  pertinence  to  your  decision  on  that  question. 

"The  Chairman:  There  is  so  much  to  be  said  on  that  subject  of  valuation  that,  if  we 
go  into  it,  we  can  occupy  a  whole  month  in  just  taking  that  testimony  alone." 

Professor  Cooley  then  undertook  to  describe  the  genesis  of  a  railroad  prop- 
erty in  order  to  iinpress  upon  the  Commission  the  items  of  preliminary  and  over- 
head costs  which  are  not  always  apparent  to  the  public.  In  the  course  of  his 
discussion  he  referred  to  the  item  of  contingencies  which  he  said  might  vary  all 
the  way  from  2  per  cent  up  to  25  per  cent  or  30  per  cent  and  would  average 
"inside  of  10  per  cent,  5  per  cent  on  the  inside  in  connection  with  the  details  and 
5  per  cent  on  the  outside,  spread  over."  At  this  point  it  developed  that  tlie 
witness  was  not  very  familiar  with  the  details  of  the  Interstate  Commerce  Com- 
mission's findings  in  the  railroad  valuation  cases,  as  he  did  not  know  that  the 
item  of  contingencies  had  been  ruled  out  in  the  Texas-Midland  case.  His  testi- 
mony at  page  255  of  the  Proceedings  is  as  follows: 

"Mr.  Warren:  When  you  give  that  figure.  Professor  Cooley,  you  base  it  on  experience 
in  actual  cases,  do  you  ? 

"Mr.  Cooley:  Yes;  I  do,  out  of  a  very  great  deal  of  experience,  and  not  only  that,  but 
I  base  it  upon  actual  exjienditures  as  the>'  have  been  found  by  the  vouchers.  It  is  not  a  guess 
any  longer.    It  was  a  guess  in  the  first  place,  but  it  has  gotten  beyond  the  guessing  st^e. 

"The  Chairman:  This  question  of  contingencies  has  lieon  argued  before  the  Interstate 
Commerce  Commission  in  the  railway  matter  for  a  long  time. 

"Mr.   Cooley:     Yes,   sir. 

"The  Chairman  :  Are  you  aware  of  the  finding  which  was  made  upon  that  question  in 
the  Texas-Midland  case? 

"Mr.  Cooley:     No:   I  am  not,  I  am  sorry  to  say. 

"The  Chairman:  Perhaps,  it  may  be  of  interest  to  you  to  know  that  the  Interstate 
Commerce  Commission  did  not  fix  any  value  for  contingency  in  cither  the  Texas-Midland 
or  the  A.  B.  &  A.  case." 

Professor  Cooley  then  explained  that  where  the  historical  cost  of  the  prop- 
erty can  be  found,  it  is  unnecessary  to  fix  a  contingency  item,  and  went  on  to 
say  that  in  his  opinion  the  complete  historical  cost,  if  it  could  be  ascertained, 
would  be  greater  than  the  co.st  of  reproduction  in  normal  times.  His  testimony 
on  this  point  is  found  at  pages  255  and  256  of  the  Proceedings,  as  follows: 

"You  would  not  have  to  fix  any  contingency  item  at  all  if  you  could  get  the  historical 
cost  of  the  |)ropcrly,  if  you  knew  what  the  property  first  cost,  starting  from  the  very  begin- 


\'aluation  355 

ning.  You  can  take  that  cost  out  of  the  books,  and  that,  of  course,  is  the  thing  to  take, 
because  it  represents  the  money  invested;  but,  unfortunately,  you  cannot  do  that  with  the 
old  properties,  at  least.  You  may  do  it  with  the  newer  properties.  So,  we  proceed  in  the 
best  way  we  know  how,  to  approximate  that  cost,  and  it  is  my  belief  that  this  so-called  cost 
of  reproduction  method  is  the  fairest  approximation  to  what  would  have  been  the  book  costs 
if  you  could  have  had  them,  if  you  could  get  them. 

"Commissioner  Meeker:  Suppose,  in  the  meantime,  the  costs  of  labor  and  material  have 
advanced  from  50  to  lOO^'r  ? 

"Mr.  Cooley :  Yes ;  I  am  very  glad  you  mention  that  right  here.  I  was  going  to  speak 
of  it  a  little  later,  but  right  there  that  leads  nie  to  say  that  in  making  the  statement  that  I 
just  now  made,  I  was  assuming  normal  times,  normal  conditions,  conditions  that  existed 
well  before  the  war,  and  did  not  have  in  mind  the  extreme  costs  of  labor  and  materials  that 
we  now  have  to  bear. 

"I  think  I  should  not  fail  to  make  this  point,  which  is  not  usually  conceded,  I  may  also 
say,  and  which  has  to  be  in  the  nature  of  an  expression  of  opinion.  I  have  frequently  said 
that,  in  my  opinion,  if  we  could  have  the  so-called  book  costs,  the  historical  costs,  and  have 
all  of  them,  going  back  to  the  very  day  you  gentlemen  thought  of  this  project  and  decided 
to  go  into  it.  it  is  my  belief  that  that  cost  would  be  greater  than  the  cost  of  reproduction 
in  normal  times,  and  the  common  opinion  is,  or  the  common  belief  is,  that  it  would  be  very 
much  less.     I  believe  it  would  be  more. 

"Now.  1  do  not  believe  I  can  prove  that,  but  that  is  a  belief  that  has  crept  in  upon  me, 
in  view  of  mj-  study  of  this  problem  during  all  of  these  years. 

"Commissioner  Meeker :  Well,  it  is  a  matter  of  common  observation  that  improvements 
in  construction  and  all  of  the  other  items  that  you  have  mentioned  have  come  about  with 
the  passage  of  time;  so  that  it  would  seem  to  be  a  rather  foregone  conclusion  that  the  cost 
of  reproduction  in  normal  times,  barring  cataclysmic  world  wars,  would  be  less  than  the 
cost  of  actual  construction. 

"Mr.  Cooley :  I  am  verv-  glad  to  hear  that  statement.  It  is  the  most  consoling  thing 
that  I  have  heard  in  a  long,  long  time.     I  thought  I  was  alone." 

After  taking  up  the  items  of  contractor's  profit,  taxes  during  construction, 
and  organization,  administration  and  legal  expenses.  Professor  Cooley  goes  on 
to  discuss,  at  page  257  of  the  Proceedings,  the  question  of  promotion  costs  and 
watered  stock,  with  respect  to  which  he  says: 

"The  question  of  the  promotion  of  an  enterprise  and  of  promoter's  profits,  is  another 
red  rag  to  the  bull,  and  it  is  in  connection  with  these  promotion  costs  and  promotion  profits 
that  the  public  thinks  tiiat  a  good  deal  of  the  water  has  gotten  into  the  capital  account.  And 
I  suppose  there  is  water  there  in  a  great  many  cases,  but  there  is  very,  very  little  water  in 
recent  cases,  as  far  as  my  observation  goes,  and  much  less  water  in  the  older  cases  than 
the  public  believes,  because,  when  you  write  your  securities,  the  bonds  are  protected  by  a 
mortgage  on  the  physical  property.  The  face  of  the  bonds  is  not  equal  to  the  cost  of  the 
physical  property,  but  some  percentage  of  it.  It  may  be  50,  75  or  85%.  The  practice  was 
to  allow  85%    in  one  case  that  I  knew  about. 

"Now,  that  85%,  we  will  say,  is  written  in  the  form  of  bonds  protected  by  a  mortgage. 
As  soon  as  you  have'  taken  the  precaution  to  get  into  the  cost  of  the  property  all  of  these 
preliminary  costs  and  all  of  these  other  costs  that  I  have  been  discussing  or  will  discuss, 
you  are  not  going  to  have  anywhere  near  the  full  cost  of  that  property  represented  by  the 
mortgage  and  by  the  bonds.  Now-,  you  must  raise  the  rest  of  the  capital  in  some  other  way 
— by  stock,  or  whatever  it  may  be.  But  say  it  is  stoclv.  If  we  have  got  75%  of  the  cost  of 
the  property  in  the  form  of  bonds,  protected  by  a  mortgage,  there  must  be  at  least  25%  more 
in  the  form  of  stock,  as  we  ordinarily  think  of  our  property,  that  is,  just  the  physical  prop- 
erty, as  the  public  sees  it;  but,  in  addition  to  that,  we  have  got  to  have  another  25%r,  it  may 
be,  to  cover  all  of  these  tilings  that  you  gentlemen  know  about,  expenses  which  you  have 
incurred,   and  w-hich  do  not  appear   in  the  valuation  at  all. 

"So  I  say.  to  some  extent,  this  so-called  water  in  the  capital  account  is  fully  and  amply 
justified.  Remember,  I  say  to  some  extent.  I  do  not  say  it  is  all  justified,  for  I  do  not  think 
it  is  in  all  cases." 

The  witness  then  goes  on  to  discuss  the  "cost  of  money,"  "promoter's 
profits"  and  the  item  of  "interest  during  construction,"  and  gives  his  view  as 
to  the  need  for  "working  capital"  when  the  construction  of  the  physical  property 
has  been  completed.     On  this  last  point,  at  page  261  of  the  Proceedings,  he  says : 

"Now,  when  you  have  this  property  all  done  *  *  *  *  you  have  got  the  tracks 
laid  and  the  power  houses  built  and  the  cars  bought,  and  you  have  at  the  very  end  bought 


356  Electric  Railway  Problem 

stores  and  supplies,  and  you  liave  already  arranged  for  your  quarters,  or  you  may  have  to 
rent  quarters  at  the  outset,  or  you  may  build  your  own  building,  and  if  you  rent  it,  the  rent, 
becomes  an  operating  expense,  and  if  you  build  it,  it  is  a  part  of  the  property,  and  it  becornes 
a  capital  charge.  Then,  the  very  last  thing  you  do  before  you  turn  a  wheel  is  to  provide 
what  wc  call  a  working  capital.     That  is  another  red  rag. 

"Now,  of  course,  it  does  not  need  any  great  amount  of  sense  to  know  that  when  you  start 
to  do  a  thing,  in  which  you  buy  materials  and  hire  help,  you  have,  at  the  end  of  the  week  or 
at  the  end  of  the  month,  to  have  a  payroll.  That  is  going  to  be  the  working  capital  for  that 
payroll.  That  takes  care  of  the  payroll,  and  that  working  capital,  gentlemen,  is  that  fund 
of  money  that  lies  idle  in  the  bank,  subject  to  check  all  the  time.  It  is  the  amount  of  money 
that  the  company  has  found  necessary  in  order  to  do  its  business  from  day  to  day,  and  I 
take  that  from  the  books.  I  do  not  estimate  that.  1  just  take  that.  We  go  back  over  a 
period  of  years,  and  we  find  what  has  been  the  average  amount  required  to  do  business,  and 
wc  put  it  in.  Yet  everybody  comes  along  and  takes  it  out.  I  say  'everybody' ;  I  mean  the 
public.  "Why  should  we  pay  for  that?'  That  is  cash,  but  it  is  idle  money,  and  if  it  does 
not  bear  interest  in  the  banks,  it  earns  an  interest  through  the  rate." 

In  order  to  place  before  the  Commission  the  specific  implications  of  Pro- 
fessor Cooley's  testimony  up  to  this  point,  Mr.  Warren  asked  hini  this  question: 
"Could  you  state  any  general  figure  or  limits  for  a  general  figure  of  those  over- 
head items?"  Professor  Cooley's  answer  appears  at  pages  261  and  262  of  the 
Proceedings,  where  he  says: 

'"'Yes,  I  can  do  that,  and  you  may  be  surprised  when  I  get  through  with  you.  You  will 
be  very  much  surprised. 

"VVhat  the  gentleman  means  by  this  overhead  is  something  over  and  above  the  actual 
money  that  you  invested  for  materials  and  labor  in  the  physical  property.  That  is  what 
he  means. 

"You  buy  materials,  and  you  buy  labor  and  you  put  those  costs  into  the  physical  property, 
and  it  is  what  we  call  the  base  figure.  Now,  how  much  in  addition  to  that  base  figure  must 
you  add  for  organization,  legal  expenses,  engineering,  interest  on  the  cost  of  money,  and 
for  this  thing  and  for  that  thing,  all  of  which  are  overheads,  and  which  cannot  be  figured 
directly?     They  cannot  be  inventoried. 

"These  overheads  will  vary  not  only  with  the  size  of  the  property,  but  with  the  location 
of  the  property.  Out  in  my  little  town,  or  in  any  little  town,  the  overhead  might  be  very 
small,  ten  or  twelve  per  cent,  perhaps;  maybe  not  over  eight  or  ten  per  cent,  de|)ending  upon 
conditions.  In  the  City  of  New  York,  they  might  be  sixty  per  cent.  1  heard  a  gentleman, 
a  very  prominent  engineer,  testify  before  Judge  Tayler  that,  under  certain  conditions  in  the 
City  of  New  York,  the  overheads  were  sixty  per  cent.  I  did  not  know  it.  I  was  just  as 
much  surprised  as  Judge  Taylor  was. 

"Now.  let  us  see  how  that  figures  out. 

"Certain  items  of  overheads  today,  instead  of  being  put  on  overhead,  are  put  inside  in 
connection  w-ith  the  item.  \  certain  percentage  for  overheads  comes  in  with  grading.  A 
certain  percentage  for  track-laying,  and  a  certain  percentage  for  this  thing  and  that  thing. 
It  comes  into  unit  costs,  and  disappears  as  a  part  of  unit  costs.  That  is  happening,  and  some 
engineers  arc  very  adroit,  enough  so  that  they  can  conceal  a  very  large  proportion  of  the 
overhead,  and  nolwdy  will  ever  know.  That  is  being  done.  That  is  the  way  they  keep  their 
ovcrhe.ids  down;  but  if  you  will  l>e  honest  about  it  and  put  your  overheads  where  they  belong 
— and  hy  'overheads'  I  mean  the  contingency  items,  the  engineering  item,  the  legal  item,  the 
organization  item,  the  interest  during  course  of  construction — and  not  yet  consider  cost  of  de- 
veloping the  project,  costs  of  money,  or  promoters'  profit,  but  leaving  those  out,  thoy  amount  to 
ll'/i  per  cent — they  nm  from  l.S  to  18  per  cent  up  to  25  or  30  per  cent.  Now,  if  you  add  all 
of  these  other  things,  they  actually  come  up  to  between  .W  and  40  per  cent,  and  in  certain 
instances,  as  high  as  50  or  60  per  cent,  as  this  gentleman  testified  to  in  the  Citv  of  New 
York." 

I  have  already  cited  and  discussed  in  Chapter  XI  of  this  report  Professor 

Cooley's  theories  of  depreciation  as  set  forth  in  his  testimony  and  so  need  not 

describe   them   here.     Mr.    Warren's   final   question    in   his   direct   e.xamination 

called   for  "just  a  word  about  the  different  methods  of  valuation."     Professor 

Cooley's  answer  is  found  at  pages  265  and  2(V)  of  the  Proceedings,  as  follows: 

"In  talking  about  the  valuation  we  arc  asked,  'What  do  you  mean  by  valuation?'  Well, 
of  course,  we  have  the  historical  valuation  or  the  book  valuation  or  the  cost  of  reproduction 
method  or  the  cost  of  rcpnKluctinn  less  depreciation;  the  cost  of  reproduction  less  depreciation 
being   frequently  spoken  of  as  the  present   value,  a  very  misleading  term. 


Valuation  357 

"Now,  what  I  have  just  said  ahout  depreciation  distinguishes  the  difference  between  the 
cost  of  reproduction  and  the  cost  of  reproduction  less  depreciation,  because  the  cost  of 
reproduction  less  depreciation  is  about  85  per  cent,  so  I  do  not  need  to  say  anything  more 
about  that.  Now  the  historical  method,  of  course,  does  not  need  any  discussion,  because  that 
means  just  what  it  says  ;  likewise  the  book  account.     Those  are  the  different  ones. 

"Now,  we  do  not  have  the  historical  value.  If  the  property  is  old  and  the  books  have 
been  lost  we  do  not  have  the  book  value.  So  we  attempt  to  get  at  them  in  the  only  practical 
way  that  we  seem  to  know  anything  about,  namely,  by  estimating  the  cost  of  reproducing 
the  property  under  normal  conditions  or  under  the  conditions  as  nearly  as  may  be  which 
existed  at  the  time  the  property  was  built  with  respect  to  the  purchasing  power,  of  a  dollar." 

In  his  discussion  of  depreciation  Professor  Cooley  had  referred  to  the  fact 
that  the  Detroit  United  Railway  scrapped  its  old  single-truck  cars  when  they 
stood  "at  a  physical  condition  close  onto  eighty  per  cent."  At  the  close  of  his 
direct  examination,  Commissioner  Gadsden  asked  Professor  Cooley  to  "say  a 
few  words  on  the  subject  of  obsolescence."  This  led  to  his  testimony  found  at 
pages  266  and  267  of  the  Proceedings,  where  he  says: 

"Take  the  electric  street  railway  art  as  an  example  and  compare  it,  if  you  like,  with  the 
art  of  gas  making.  Now  the  electric  street  railway  art  represents  an  art  which  has  been 
changing  very,  very  rapidly  in  the  last  quarter  of  a  century,  whereas  the  gas-making  art, 
which  has  existed  for  seventy-five  or  one  hundred  years  or  more,  has  been  changing  but  the 
changes  have  been  relatively  slight.  In  other  words,  the  gas-making  art  in  comparison  with 
the  electric  is  a  fi.xed  art  and  there  is  not  much  obsolescence.  Take  the  street  railway  and 
take  its  history.  We  all  of  us  remember  horse-car  days  and  remember  how  the  horse-car 
was  changed  into  the  cable  road,  in  San  Francisco,  Grand  Rapids,  Chicago  and  elsewhere. 
And  then  came  the  electric  road  back  in  the  late  80's  and  early  90's.  And  perhaps  as  good  a 
practical  illustration  as  any  I  can  give  is  the  situation  in  Grand  Rapids,  Michigan,  Succeed- 
ing the  horse-car  days  they  built  there  a  cable  road  up  those  hills.  I  do  not  think  they 
operated  that  cable  road  more  than  a  year,  perhaps  not  as  long  as  that,  but  a  very  short 
time,  when  they  recognized  the  handwriting  on  the  wall  and  they  then  scrapped  that  whole 
cable  road  and  converted  it  into  an  electric  road,  the  boldest  and  bravest  bit  of  financing  I  have 
ever  known  anything  about.  Now,  there  was  a  case  of  obsolescence.  The  property  had  only 
been  running  a  year  or  so.  it  was  practically  new,  and  yet  it  was  scrapped  for  obsolescence, 
and  so  far  as  the  duct  and  the  cable  machinery  was  concerned  it  was  pretty  nearly  100  per 
cent  obsolescent. 

"The  Chariman  :     Did  the  company  stand  that  loss  or  did  they  amortize  part  of  it? 

"Mr.  Cooley:     I  have  never  heard.     I  have  often  wondered. 

"Commissioner  Gadsden:     How  ought  it  to  be  treated  economically? 

"Mr.  Cooley :  Treated  economically,  of  course,  they  went  into  it  in  the  best  faith  in 
the  world  and  with  the  knowledge  and  consent  of  everyone,  and  economically,  or  morally 
at  least,  they  should  be  permitted  to  earn  on  that  investment  until  they  could  wipe  it  out; 
that  is,  they  should  be  permitted  to  earn  enough  so  they  could  gradually  wipe  out  that 
tremendous  investment.  .\nd  so  far  as  my  experience  with  commissions  goes,  they  are  per- 
mitted to  earn  it  and  wipe  it  out. 

"Take  another  case  right  there  in  Michigan — the  Commonwealth  Power  Company  built  a 
high  transmission  line  from  one  of  the  dams  up  the  Muskegon,  I  think  it  is,  and  carried  the 
current  into  Grand  Rapids  and  the  southern  towns.  They  went  into  the  market  for  copper. 
They  t.hought  copper  was  going  up,  everybody  thought  copper  was  going  up,  and  they  paid 
30  or  31  cents,  say,  for  copper,  and  bought  enough  for  the  whole  job  so  as  to  have  it  on 
hand,  thinking  thereby  to  profit  by  the  market.  But  before  they  got  that  line  erected,  copper 
dropped  to  16  or  18  cents  and  there  was  \i  or  14  cents.  What  would  we  do  with  it?  We 
were  valuing  the  property  under  the  Michigan  Railroad  Commission,  and  the  Commission 
had  a  special  hearing  on  it  and  the  facts  were  related  to  them  and  they  said,  'Gentlemen,  we 
will  allow  them  30  cents  for  the  copper,  what  they  paid  for  it.  They  invested  their  money 
honestly,  and  it  was  simply  one  of  the  turns  nobody  could  anticipate,'  and  it  went  into  the 
capital  or  was  set  up  in  a  fund  to  be  amortized. 

"Commissioner  Meeker:  But  if  the  amount  paid  had  been  subject  to  the  suspicion  that 
not  good  judgment  had  been  used  in  making  the  purchase,  would  the  amount  have  been 
allowed   just  the  same? 

"Mr.  Cooley:     Well,  you  say  good  judgment.     In   my 

"Commissioner  Meeker:     What  the  courts  usually  term  ordinary   business  judgment. 

"Mr.  Cooley:  Well,  I  do  not  know  just  where  we  would  draw  the  line  there  as  to  what 
would  be  good  judgment. 

"Commissioner  Meeker :     There  is  a  difference  of  principle  there  that  I  want  to  get  at. 

"Mr.  Cooley  :     T  would  say  this,   if  the  contract  had  been  carelessly  made  or  they  had 


358  Electric  Railway  Problem 

not  properly  looked  into  the  question  and  just  simply  went  in  without  any  foresight  and  did 
it,  they  should  stand  lor  it.     But  the  investigation  showed  it  was  honestly  done. 

"Now  take  one  of  the  best  illustrations  of  this  obsolescence — those  street  cars  in  Detroit, 
which  I  cited  a  moment  ago.  splendid  cars.  They  maintained  them  out  of  operating  expenses 
up  to  this  very  high  condition,  and  they  were  maintained  in  that  condition  up  to  the  day 
they  were  scrapped  and  double-truck  cars  took  their  place. 

"Now  take  the  electric  art,  going  back  to  the  early  days  when  we  had  the  little  high-speed 
engine  driving  our  belted  dynamo,  it  was  not  long,  it  was  in  1893.  at  the  time  of  the  World's 
Fair,  when  we  had  the  direct  unit  still,  a  small  unit.  It  was  not  very  long  until  we  began  to 
build  big  dynamos  and  hook  them  onto  slow  moving  engines;  and  in  a  few  years,  say,  along 
towards  1900,  I  do  not  rememt)cr  the  date,  came  the  steam  turbine  and  small  units,  first  used 
as  e.xciters  for  the  dynamos  driven  by  steam  engines,  a  few  kilowatts  capacity,  now  thrown 
up  to  60.000  kilowatts  capacity  with  the  steam  turbine,  and  all  that  since  1890,  say. 
Now,  that  shows  a  succession  of  scrapping  of  mpchinery  and  street  car  material  through 
obsolescence." 

It  will  be  observed  that  up  to  this  point  Professor  Cooley's  testimony  with 
respect  to  valuation  relates  to  the  cost  of  construction,  the  preliminary  and  over- 
head expenses  and  the  provision  of  working  capital,  bringing  the  property  up  to 
the  point  where  operation  commences.  After  the  Professor's  discussion  of 
obsolescence  which  I  have  just  quoted.  .Mr.  Warren  took  up  the  question  of  de- 
velopment cost  as  a  possible  element  in  the  valuation.  The  testimony  on  this 
point  is  found  at  pages  267  to  269  of  the  Proceedings,  as  follows : 

"Mr.  Warren  :  Is  the  cost  of  establishing  the  business  a  capital  charge  or  an  operating 
charge  ? 

"Mr.  Cooley:     I  think  it  has  up  to  very  recently  been  considered  a  capital  charge. 

"Mr.  Warren:     In  that  case  it  enters  into  the  valuation  and  I  want  to  ask  you  about  it. 

"Mr.  Cooley:  Yes,  but  I  think  the  modern  tendency  is  to  carry  the  cost  of  establishing 
the  business  as  a  floating  debt  and  amortize  it.  In  other  words,  it  partakes  more  of  the 
nature  of  an  operating  expense  in  these  days  than  it  did  a  few  years  ago. 

"Mr.  Warren:     How  substantial  is  it  in  an  ordinary  case? 

"Mr.  Cooley:  It  is  a  very,  very  substantial  item.  It  is  so  substantial  that  in  a  great 
many  cases  it  runs  from  25  to  35  per  cent  of  the  cost  of  the  physical  property.  It  is  so  big  an 
item  as  that,  so  it  is  very,  very  important.  I  know  one  property  in  Milwaukee,  for  instance; 
it  is  the  heating  property  uwncd  by  the  Milwaukee  Klectric  Light  &  Railway  Com|)any.  They 
have  kept  the  books  sejiarate  for  that  business.  When  1  made  the  first  analysis  of  it  in 
1907  they  had  ten  or  liftcen  years  of  life  and  they  must  now  have  twenty-five  or  thirty 
years'  life.  They  were  plotting  the  curves  for  those  earnings  and  for  oix^rating  expenses. 
It  looked  at  the  time  as  if  it  would  take  ten  or  fifteen  years  for  the  earnings  from  that 
company  to  reach  the  operating  expenses.  That  is.  a  period  of  twenty-five  years,  we  will 
say.  has  licen  reiiuired  to  make  the  business  what  we  call  a  going  concern,  by  that  meaning 
a  concern  in  which  the  earnings  of  the  company,  the  income,  is  sufficient  to  meet  all  of  the 
outgoes. 

"So  I  would  emphasize  the  necessity  of  taking  into  consideration  the  cost  of  establishing 
the  business.  It  has  several  names.  That  I  think  is  the  clearest  name.  I  would  emphasize 
it  particularly,  as  the  tendency  today  seems  to  be  to  treat  it  as  an  operating  expense. 

"Mr.  Warren:     How  would  you  define  it,   Professor  Cooley? 

"Mr.  Cooley:  Well.  I  think  the  Wisconsin  definition  is  perhaps  the  best  or  most  generally 
accepted.  It  is  really  a  summation,  if  you  like,  of  the  early  deficits,  that  is,  a  sum  of  the 
losses  that  the  company  encounters  up  to  the  time  its  income  meets  its  outgoes,  and  it  is 
very  hard  to  obtain  it.  Iiecause  companies  until  recent  years  have  not  appreciated  the  necessity 
of  so  keeping  their  books  that  the  items  of  loss  can  l)e  actually  taken  out.  So  it  is  a  vcr>- 
difficult  thing  to  sustain  in  dollars  and  cents.  But  in  the  future  it  probably  will  be  a  well 
known  factor,  no  doubt  about  it  at  all,  because  they  are  keeping  their  books  now  so  as  to 
tell  us  what  it  is. 

******** 

"Now  I  might  .say  just  a  word  on  that.  Now.  for  example,  when  before  luncheon  we 
had  completed  our  physical  structure  and  were  ready  to  start  the  property  into  operation,  we 
had  just  .secured  stores  and  supplies  and  working  capital  to  cnalile  us  to  begin  to  turn  the 
wheels.  We  start  in  and  it  may  take  six  months  or  a  year  before  we  get  that  property 
settled  so  that  the  machinen,-  all  works  well  and  get  the  wrinkles  ironed  out.  It  is  the  same 
kind  of  treatment  of  the  property  that  we  have  to  make  with  a  locomotive.  When  we  buy 
it  and  put  it  on  a  steam  railroad  we  have  to  run  it  a  few  weeks  under  easy  conditions, 
we  will  say.  so  as  to  work  out  the  troubles,  precisely  the  same  thing  you  have  to  do  on 
iKiard  a  battleship  after  it  comes   from  the  yard;  it  has  to  be  run  and  tuned  up.     All  those 


Valuation  359 

things  have  to  he  done  before  your  property  is  in  final  shape  for  operation.  Now  that  all 
costs  money,  and  when  you  start  to  earn  you  do  not  earn  anything  the  first  day — or  the  day 
before  the  first  day  it  is  zero.  Then  as  you  begin  to  operate  your  business  the  earnings 
begin  to  mount.  Aicantime  you  are  carrj'ing  along  as  expenses  all  these  daily  operating 
expenses  of  whatever  character,  including  ta.xes  and  interest  on  the  cost  and — well,  perhaps 
you  would  not  start  any  sinking  fund  or  depreciation  fund  at  that  time,  but  if  you  did  that 
would  also  come  in.  And  of  course  the  earnings  are  almost  nothing,  we  will  say,  the  first 
week  or  two  or  three  weeks  and  the  operating  expenses  are  very  large.  Now  the  difference 
or  that  deficiency  is  one  element  of  this  so-called  cost  of  establishing  the  business.  And 
when  you  aggregate  those  losses  for  a  period  of  years  up  to  the  time  the  gross  earnings 
line  crosses  the  gross  operating  e.xpense  line,  and  when  you  sum  up  all  of  those  losses  you 
have  the  cost  of  establishing  the  business  as  it  is  ordinarily  understood. 

"Now,  it  is  frequently  argued,  and  apparently  with  a  good  deal  of  sense,  that  the 
greater  these  early  losses  the  more  valuable  your  property,  because  with  every  loss  you  are 
adding  to  the  cost  of  the  property,  if  it  goes  into  capital.  But  that  is  fallacious,  it  seems 
to  me,  because  tlie  utility  when  it  is  built  is  built  to  meet  a  public  necessity.  Now  the  public 
knows  that  that  property  is  not  going  to  pay  to  start  with,  if  they  know  anything  about  it  at 
all,  and  that  property  has  been  built  and  accepted  by  the  public  with  full  knowledge  it  has 
got  to  grow  into  its  business  and  with  a  full  knowledge  that  these  early  losses  are  to  be 
there;  therefore  they  are  a  proper  cost  of  the  property." 

It  will  be  noted  that  in  Professor  Cooley's  earlier  testimony  he  treats  the 
reproduction-cost-new  method  practically  as  a  substitute  for  the  historical-cost 
method  of  arriving  at  the  fair  value  of  an  electric  railway  property,  upon  the 
assumption  that  in  most  cases  complete  records  of  historical  cost  are  not  avail- 
able; also  that  in  his  opinion  the  full  historical  cost  would  be  greater  than  the 
reproduction  cost  new  in  normal  times.  It  appears,  however,  that  at  the  present 
time  when  prices  are  abnormally  high,  primarily  as  a  result  of  the  depreciation 
in  the  purchasing  power  of  money.  Professor  Cooley  thinks  that  the  historical- 
cost  method  is  no  longer  applicable  and  that  the  reproduction-cost-new  method 
should  be  used.  His  discussion  of  this  phase  of  the  valuation  problem  is  found 
at  pages  270  and  271  of  the  Proceedings,  as  follows : 

"That  brings  up  the  question  whether  we  should  use  present-day  costs  or  before  the  war, 
in  other  words,  whether  we  should  use  the  costs  of  reproduction  today  or  the  historical  cost. 
I  think  that  is  answered  splendidly  by  comparing  the  purchasing  power  of  a  dollar  today 
with  what  it  was  when  the  property  was  built.  I  have  frequently  said  that  our  dollar  of  today 
was  the  50-cent  piece  prior  to  the  war.  So  if  you  are  going  to  build  a  property  today  you 
will  have  to  build  it  so  far  as  purchasing  power  is  concerned  out  of  SO-cent  pieces. 

"Mr.  Warren  :  That  has  been  the  experience  of  the  Boston  Elevated.  They  have  just 
been  double  what  they  were  in  the  past. 

"Mr.  Cooley :  Well,  as  I  understand  it,  the  purchasing  power  of  the  dollar  is  about 
50  cents;  so  if  a  property  were  valued  before  the  war  at  about  around  $100,000,000  it  would 
today  be  valued  around  $200,000,000;  if  you  are  allowed  to  earn  the  same  percentage  on  the 
$200,000,000  of  course   it  would  double  the  income,  we  will  say. 

"Commissioner  Meeker:  But  the  answer  is  not  quite  clear  to  me,  however.  If  you  are 
arriving  at  a  fair  valuation  on  which  earnings  are  to  be  allowed,  would  you  depend  upon  the 
cost  of  reproduction  today  or  would  you  take  the  historical  cost  or  what  would  you  do? 

"Mr.  Cooley:  I  do  not  think  it  would  make  any  difiference,  if  you  will  keep  in  mind 
the  purchasing  power  of  the  dollar  and  let  your  earnings  vary  with  the  purchasing  power 
of  the  dollar,  that  is  what  I  mean.     For  example 

"Commissioner  Meeker:  It  seems  to  me  the  difference  between  $100,000,000  and 
$200,000,000  is  quite  considerable. 

"Mr.  Cooley:  True,  it  is  quite  considerable,  but  the  $200,000,000  is  precisely  equal  to 
the  $100,000,000  as  we  are  taking  it.  They  are  different  figures  but  they  are  not  different 
quantities. 

"Commissioner  Meeker :  That  is,  the  company  should  be  allowed  to  earn  upon  the  value 
of  the  property  valued  upon  the  cost  of  reproducing  under  current  prices? 

"Mr.  Cooley :     Yes. 

"Commissioner  Meeker:  Does  that  exactly  jibe  with  your  statement  made  this  forenoon 
that  the  original  cost  should  be  taken  as  the  basis?  For  example,  the  tunnel  through  the 
Detroit  River  which  eventually  became  the  tunnel  under  the  Detroit  River;  there  was  about 
100  per  cent,  was  it.  of  contingency  or  SO  per  cent? 

"Mr.  Cooley  :     \'ery  large. 


360  Electric  Railway  Problem 

"Commissioner  Meeker:     Very  large? 

"Mr.  Cooley  :     Yes,  1  have  forgotten  which. 

"Commissioner  Meeker :  $1,000,000,  which  was  actually  spent,  and  that  should  not  be 
disregarded  in  valuing  the  property  today,  but  the  original  cost  should  be  taken  into  account. 

"Mr.  Cooley:  That  is  all  right.  Suppose  we  do  take  in  the  original  cost,  and  I  think 
fundamentally  that  is  of  course  right,  there  cannot  be  any  question  about  that.  You  should 
take  in  what  your  investment  is.  that  is,  what  the  proper  investment  is,  I  mean.  Now  prior 
to  the  war  that  investment  w-as  permitted  to  earn  say  S  per  cent,  and  we  got  5  per  cent  and 
we  were  satisfied  and  we  were  able  to  do  everything  we  wanted  with  it,  everything  that  we 
had  to  do.  Now  today  what  would  that  5  per  cent  do?  It  would  do  only  half  the  things 
we  have  to  do.  So  if  you  arc  going  to  hang  onto  the  original  cost  that  we  have  been  dis- 
cussing, the  investment  cost,  you  have  to  allow  twice  the  nicome  from  it  or  else  you  have 
got  to  double  the  value  and  take  the  same  rate  of  per  cent,  both  being  precisely  equal." 

Commissioner  Meeker  asked  Professor  Cooley  how  improvements  and  ex- 
tensions made  out  of  earnings  should  be  treated.  The  witness's  reply  is  found 
at  page  272  of  the  Proceedings,  where  he  says : 

"If  they  are  made  out  of  earnings — the  answer  has  to  be  a  double-barreled  one — if  they 
are  made  out  of  earnings  which  ordinarily  would  go  into  the  pockets  of  the  people  who  have 
their  money  invested  in  the  property,  it  is  equivalent  to  new  capital.  If.  on  the  other  hand, 
the  earnings  have  been  very  large,  far  in  e.xcess  of  what  would  be  regarded  today  as  proper 
earnings,  then  I  do  not  think  it  ought  to  go  into  capital,  except  there  be  some  legal  phases 
which  would  require  it. 

"Commissioner  Meeker  :     You  think 

"Mr.  Cooley:  I  hope  I  make  that  clear.  Say  an  8  per  cent  earning  is  permissible  and 
all  right  and  suppose  the  earnings  have  been  20  per  cent;  if  in  the  first  case  you  have  got 
your  8  per  cent  and  have  taken  some  part  of  that  8  per  cent  and  invested  it  in  new  property, 
it  belongs  to  capital. 

"Commissioner  Meeker:     Some  part  of  a  reasonable  return? 

"Mr.  Cooley  :     Yes,  surely. 

"Commissioner  Meeker :  But  anything  in  excess  of  what  might  be  regarded  as  a  reason- 
able return,  you  think  that  should  not  be  counted  as  a  part  of  the  original  investment  upon 
which  the  company  is  entitled  to  earn? 

"Mr,  Cooley :  No,  I  would  call  that  investment  by  the  public,  except  there  be  some 
legal  requirement  which  of  course  might  control." 

At   page   273,   Commissioner   Gadsden   asked    Professor   Cooley    the    following 
question : 

"Take  a  railway — I  think  it  is  entirely  a  hypothetical  question  as  applicable  to  street 
railroads,  because  in  my  judgment  none  of  them  ever  made  a  fair  return  on  any  proper 
valuation — but  do  you  mean  to  say  that  a  railroad  which  had  a  franchise  with  the  city  and 
a  fixed  fare  of  5  cents — suppose  such  a  railroad  made,  wc  will  say,  12  per  cent  net  return 
after  operating  expenses  and  fixed  charges,  amortization  and  depreciation — do  you  mean  to 
say  that  4  per  cent  of  that,  say,  ought  to  go  back  into  the  property?" 

This  question  led  to  considerable  discussion,  in  the  course  of  which  Profes- 
sor Cooley  made  a  distinction  between  the  moral  right  of  the  public  to  the  benefit 
of  property  constructed  out  of  excessive  earnings  and  the  legal  right  of  the  com- 
pany to  claim  this  property  so  long  as  the  earnings  were  derived  from  rates 
legally  fixed  or  permitted  by  public  authorities.  At  page  275  of  the  Proceedings, 
the  witness  states  his  position  as  follows: 

"If  the  net  earnings  have  been  sufficient  to  give  what  wc  are  speaking  of  as  a  fair 
return,  meaning  by  that  as  much  of  a  return  as  would  be  necessary  to  induce  capital  to  come 
into  the  business,  then  1  should  think  all  this  new  property  built  out  of  gross  earnings  should 
belong  to  the  public  who  contributed  the  money  for  it,  if  it  could  \x  done  legally." 

Further  on,  at  page  277,  Professor  Cooley  says: 

"I  firmly  Ix-licvc  that  a  public  utility  should  lie  permitted  to  earn  enough  to  make  it  able 
to  serve  the  public  in  the  way  it  wants  to  be  served  and  to  bring  the  investor  a  sufficient 
amount  to  satisfy  him  and  enable  him  to  do  all  the  things  he  has  to  do.  and  being  a  public 
utility  1  should  not  want  them  to  earn  any  more  than  that.  Now  that  is  my  own  view. 
Of  course,  there  comes  the  legal  question  as  to  right,  and  that  is  another  matter." 


Valuation  361 

It  turned  out,  however,  that  the  witness  regarded  the  question  of  the  treat- 
ment of  investment  out  of  excess  earnings  as  hypothetical  so  far  as  the  electric 
railways  are  concerned,  as  he  was  tmable  to  cite  any  case  where  an  electric  rail- 
way had  built  up  its  property  in  that  way. 

It  will  be  observed  that  Professor  Cooky's  theory  of  valuation  as  outlined 
by  him  corresponds  very  closely  with  the  recommendations  of  the  Committee  on 
Valuation  of  the  American  Electric  Railways  Association.  Like  that  committee, 
he  favors  the  reproduction-cost-new  method  based  on  the  prices  of  today,  reject- 
ing unequivocally  the  idea  that  accrued  depreciation  should  be  deducted  in  the 
case  of  a  well-maintained  property.  He  is  also  a  great  "booster"  for  overheads, 
working  capital,  and  development  costs,  although  he  concedes  that  it  is  now  re- 
garded as  better  practice  to  carry  operating  deficits  as  a  floating  debt  to  be  amor- 
tized out  of  earnings,  and  not  permanently  capitalized.  He  does  not  claim  "cre- 
ated value"  as  a  part  of  railway  property.  He  thinks  that  valuation  is  compara- 
tively simple  and  valuation  methods  comparatively  accurate,  but  that  the  public 
is  discourgingly  ignorant  and  not  disposed  to  be  reasonable  with  the  electric  rail- 
way companies.  In  the  valuation  of  the  Public  Service  Railway  and  the  Public 
Service  Railroad  properties  in  New  Jersey,  consisting  of  about  900  miles  of  track. 
Professor  Cooley  used  general  overhead  percentages  aggregating  29.94  per  cent 
on  land,  35.19  per  cent  on  "equipment"  and  46.67  per  cent  on  "way  and  struc- 
tures" exclusive  of  land,  figured  out  in  each  case  in  terms  of  "base  cost."  The 
base  cost  itself  was  built  up  from  unit  prices  in  which  insurance,  omissions, 
specific  contingencies  and  contractor's  profit  had  been  included.  In  the  case  of 
land  used  for  rights  of  way,  the  base  cost  was  arrived  at  in  most  cases  by  the 
application  of  the  multiplier  2i/^  to  the  market  value  of  the  land,  to  cover  the 
assumed  costs  of  acquisition  for  railway  purposes. 

Mr.  J.  K.  Newman  seems  to  agree  substantially  with  Professor  Cooley  in 
his  fundamental  theory  of  valuation.  At  page  573  of  the  Proceedings,  he  testi- 
fies as  follows : 

"Commissioner  Meeker:  It  is  not  quite  clear  to  me  just  how  you  would  obtain  a 
reasonable  return.  Do  you  mean  a  reasonable  return  upon  moneys  invested  or  a  reasonable 
return  upon  a  fair  valuation? 

"Mr.  Newman :  I  mean  upon  a  fair  replacement  value  of  the  property  including  the 
cost  of  the  development  of  that  property. 

"Commissioner  Meeker :  In  the  properties  under  your  control  have  you  followed  that 
scheme  or  have  you  depended  upon  physical  valuation  of  the  properties? 

"Mr.  Newman  :  You  cannot  take  the  naked  physical  value.  There  is  lots  that  does  not 
appear  in  that,  that  goes  to  make  up  part  of  the  value.  It  would  appear  in  the  cost  to  any 
city  which  would  attempt  to  build  a  new  street  railroad  system,  if  it  was  all  thrown  out. 
You  cannot  find  certain  elements  of  value  that  were  there  to  start  with,  and  are  not  there 
today,  but  they  have  been  part  of  the  cost  of  the  development  of  the  system." 

Mr.  A.  Merritt  Taylor,  President  of  the  Philadelphia  and  West  Chester 
Traction  Company,  formerly  Director  of  the  Department  of  City  Transit  in 
Philadelphia  and,  during  the  war,  manager  of  the  Division  of  Passenger  Trans- 
portation and  Housing,  United  States  Shipping  Board,  Emergency  Fleet  Corpor- 
ation, prepared  a  brief  memorandum  in  relation  to  the  valuation  of  electric  rail- 
way properties,  which  Mr.  Warren  filed  with  the  Commission.  This  memoran- 
dum appears  at  pages  288  and  289  of  the  Proceedings.  Mr.  Taylor  does  not 
go  into  the  details  of  valuation  methods  but  lays  emphasis  upon  the  principle 


362  Electric  Railway  Problem 

that  an  electric  railway  engaged  in  a  legitimate  constructive  enterprise  should 
be  permitted  to  charge  rates  that  will  "yield  a  profitable  return  on  the  true  cost 
of  establishing  and  developing  its  property  and  business."  Among  other  things, 
he  says : 

"Receiverships  will  in  tlie  near  future  make  necessary  many  adjustments  as  between 
companies  and  communities.  Readjustments  should  be  approached  in  a  spirit  of  fairness  by 
both  parties;  and  no  advantage  should  tx:  sought  by  communities  because  of  the  present 
condition  of  the  companies  insofar  as  it  has  been  occasioned  by  the  European  war  and  the 
excessive  costs  resulting  therefrom. 

"\aluation  of  properties,  when  resorted  to  as  a  basis  of  fare  adjustment,  should  be  made 
upon  the  then-cost  of  reproduction,  together  with  the  added  cost  of  protlucing  a  condition  of 
readiness  to  serve.  I  have  no  patience  with  the  contention  that  any  community  may  now 
properly  expect  a  valuation  to  be  based  on  pre-war  prices  or  the  cost  of  earlier  years.  The 
only  justification  for  such  a  claim  would  lie  in  the  supposition  that,  instead  of  enjoying 
increased  values  in  common  with  others,  the  companies  were  to  be  in  some  way  assured  of  a 
continued  reasonable  return  upon  tlic  invested  capital.  Communities  did  not  give  street  rail- 
way companies  any  such  assurance.  The  companies  took  the  same  risks  of  profit  and  loss 
as  did  the  investor  in  other  kinds  of  property,  consequently  in  such  a  time  of  readjustment, 
it  seems  only  just  that  the  communities  should  be  willing  to  establish  a  fare  sufficient  to  pay 
a  proper  return  on  that  sum  representing  the  amount  which  it  would  cost  the  city  itself  to 
reproduce  the  property  used  and  usable  in  transporting  the  people." 

General  Tripp's  testimony  indicates  a  rather  sharp  divergence  of  thought 
from  Professor  Cooley  and  the  Committee  on  Valuation.  At  pages  161  and 
162  of  the  Proceedings,  we  find  the  following  significant  testimony: 

"Commissioner  Sweet :  In  tr)ing  to  show  the  general  public  that  the  companies  were 
doing  what  was  right  and  fair,  would  you  consider  that  the  capital  stock  of  the  companies 
as  it  now  stands  throughout  the  country  should  be  the  basis  of  earnings  or  that  the  value 
of  the  physical  properties  should  be  the  basis  for  earnings? 

"Gen.  Tripp  :  I  do  not  think  you  can  take  the  stock  as  it  now  stands  as  a  basis  for 
earnings  allowed  under  a  new  relationship,  if  that  is  what  you  mean. 

"Commissioner  Sweet :     Yes. 

"Gen.  Tripp:  However  obnoxious  it  may  be  to  some  of  us  who  are  in  the  business, 
I  see  no  other  method  than  to  base  it  on  the  investment  of  the  property,  regardless  almost 
of  the  securities  that  are  outstanding. 

"Commissioner  Sweet :  Would  that  mean  the  original  honest  investment  or  the  present 
value  of  the  property? 

"Gen.  Tripp:  1  believe — and  here  1  am  expressing  only  my  own  personal  Ijclief;  I  do  not 
wish  to  commit  the  Committee  of  One  Hundred  on  this  point — I  believe  that  the  fair  method 
is  to  take  the  money  that  has  been  honestly  invested  in  the  proiierty. 

"Commissioner  Sweet :  Going  back  in  many  cases  to  the  horse-car  days,  and  then 
through  the  various  systems  up  to  the  present  time,  do  you  mean? 

"Gen.  Tripp  :  Well,  it  is  not  such  a  tremendous  job  as  that.  I  do  not  believe  that  in 
these  days  you  would  find  the  investirent  in  the  horse-car  lines  ever  put  forward  as  a  part 
of  the  cost  of  the  present  system. 

"Commissioner  Sweet:  Some  of  these  roads,  however,  that  are  operating  today  started 
as  horse-car  systems. 

"Gen.  Tripp :  Yes ;  that  investment  has  prol>ably  lieen  written  ofT  and  disappeared  in 
the  tremendous  increase  in  investment  that  has  come  siitce  those  days.  I  could  determine 
to  my  own  satisfaction  in  any  property,  1  JK'lieve.  the  amount  of  investment  that  was  honestly 
made  in  the  property. 

"Commissioner  Sweet:  Would  you  arrive  at  that  by  an  examination  of  the  property 
itself,  and  take  your  own  knowledge  of  the  transitions  that  have  been  gone  through,  and 
perhaps  add  a  little  sdniething  to  it,  and  fix  the  amount  in  that  manner? 

"Gen.  Tripp:  N'o;  I  would  not  do  it  that  way.  Mr.  Commissioner.  I  would  take  the 
different  classes  of  securities  that  have  been  issued  on  a  given  proj^rty,  however  many  there 
might  be,  and  it  would  be  easily  determined  how  much  money  was  received  for  an  issue  of 
iMinds  and  what  became  of  the  money.  These  men  in  the  early  days  did  not  steal  the  money. 
That  is  a  popular  fallacy.  There  was  no  money  taken.  The  money  went  into  the  property. 
Securities  were  issued,  however,  on  'general  hopes.'  They  issued  'general  hopes  5's,'  if  you 
please,  for  which  no  cash  was  received.  Now,  it  is  easy  to  segreg.ite  that  class  of  security 
from  the  class  of  security  that  was  honestly  sold  for  cash,  and  it  does  not  re<|uire  a  valuation 
of  the  property  in  miTuite  detail  to  arrive  in  any  given  case  at  a  fair  investment  in  a  given 
property  ujion  which  to  rest  a  new  relationship  iKtween  the  public  and  tlic  company." 


Valuation  363 

General  Tripp  is  of  the  opinion  that  the  lower  purchasing  power  of  money 
is  a  somewhat  permanent  condition  not  only  in  this  country,  but  throughout  the 
world,  and  he  thinks  that  the  high  prices  of  material,  as  well  as  the  higher  wages, 
are  rather  permanent.     Upon  this  point,  at  page  164  of  the  Proceedings,  he  says : 

"I  think  that  until  these  tremendous  war  debts  are  very  largely  liquidated  there  can  be 
no  marked  reduction  in  prices,  or  rather  a  resumption  and  a  return  to  the  old  value  of 
currency.  The  war  debts  are  half  paid  today  by  a  depreciated  dollar.  In  the  very  depreciation 
of  the  dollar  it  pays  50  per  cent  of  the  war  debts,  and  it  may  be  a  very  wise  economic  law  and 
prevent  great  national  disaster  that  that  should  happen.  And  until  these  debts  have  been 
reasonably  well  liquidated  and  taken  care  of  I  see  no  hope  for  lower  prices  to  any  particular 
extent." 

In  further  discussion  of  his  method  of  getting  at  the  actual  money  put  into 
the  property  as  the  basis  for  the  recognized  investment  he  testifies  at  pages  164 
and  165  of  the  Proceedings : 

"I  think  the  most  feasible  method  would  be  an  examination  into  the  various  classes  of 
securities  that  have  been  issued  upon  an  electric  railway  property  from  its  beginning  as  an 
electric  railway  property  and  not  go  back  into  the  horse-car  days ;  that  examination  to  develop 
what  disposition  was  made  of  the  securities,  whether  they  were  sold  for  cash,  and  if  so,  at 
what  price ;  or,  to  state  it  another  way,  at  what  discount.  I  think  the  history  of  each  com- 
pany as  regards  to  its  security  issues  would  be  readily  available  and  that  that  method  would 
be  more  feasible  than  an  examination  of  the  books.  The  books  of  a  street  railway  company 
show-  on  its  asset  side  certain  arbitrary  items  which  are  simply  used  to  offset  items  upon  the 
credit  side  and  do  not  in  themselves  represent  in  all  cases  investment  in  the  property.  And 
since  these  systems  are  thirty  to  thirty-five  years  old  and  tnany  of  them  have  been  through 
receivers'  hands  and  changed  hands,  it  would  be  almost  an  impossibility  to  trace  through  the 
books  of  account  the  investment  in  the  property.  While,  on  the  other  hand,  as  I  have  just 
stated,  evidence  regarding  the  diflferent  issues  of   securities   is  always  available." 

With  respect  to  the  present  treatment  of  the  money  investment  in  the  orig- 
inal horse-car  lines,  at  page  165,  he  makes  the  following  suggestions: 

"Those  electric  railways  which  began  as  horse  railways  and  were  equipped  and  developed 
as  a  system  starting  with  liorse  railways,  like  the  West  End  of  Boston,  for  example,  probably 
have  as  clear  a  record  in  regard  to  their  securities  issued  in  the  horse-car  days  as  they  have 
in  the  electric  days.  I  know  that  to  be  so  in  the  case  of  the  West  End  Street  Railway  at  least 
as  far  back  as  1860.  because  in  some  litigation  that  was  had  in  Massachusetts,  the  issue  being 
something  I  have  now  forgotten,  I  was  employed  to  report  upon  tlie  security  issues  and  what 
became  of  them,  how  they  were  disposed  of,  from  186(1  That  went  back  into  the  Middlesex 
Railway  time.  And  I  had  no  difficulty  in  securing  information  and  getting  a  statement  which 
satisfied  the  court  as  to  the  disposition  of  all  of  those  securities  back  to  1860.  ***** 
There  are  some  companies,  however,  that  started  by  buying  up  the  horse  railroad  system. 
That  made  a  clean  start.  They  usually  bought  the  horse  railroad  system  for  less  tlian  it 
cost.  And  I  do  not  believe  that  in  those  cases  the  public  would  be  endangered  if  they  started 
at  that  point.  So  where  an  electric  raihvay  started  by  buying  up  an  existing  horse  railway 
and  made  a  clean  start,  I  would  make  a  clean  start  there  also.'' 

That  he  thinks  this  method  of  arriving  at  a  fair  investment  value  is  prefer- 
able to  a  physical  valuation  is  shown  by  the  following  testimony  at  pages  165 
and  166  of  the  Proceedings : 

"Commissioner  Meeker:  You  think  it  is  easier  and  better  policy  to  get  at  the  invest- 
ment ill  the  way  that  you  have  indicated  rather  than  to  make  a  physical  valuation  of  the 
properties  now  existing? 

"Gen.  Tripp:  A  physical  valuation  of  the  property,  Mr.  Commissioner,  would  not  de- 
termine the  investment.  It  would  determine  the  value,  and  that  value  would  be  figured  on 
some  basis  of  prices.  An  arbitrary  assumption  would  have  to  be  made  as  to  what  period 
they  would  take  for  the  purpose  of  establishing  prices  on  such  a  valuation.  It  would  be 
impossible  to  take  each  item  of  an  electric  railway  and  ascertain  what  the  original  price  paid 
for  that  particular  piece  of  apparatus  was.  because  in  the  first  place  it  does  not  represent 
the  whole  investment ;  it  may  have  been  replacement  of  an  original  piece  of  apparatus  and 
the  difference  between  the  cost  of  the  original  piece  and  the  new  piece  charged  to  plant 
account,  while  the  value  of  the  old  piece  would  be  charged  to  operating  expense.  So  that 
there  is  no  method  of  valuation  which  will  determine  the  investment  in  the  property. 


364  Electric  Railway  Problem 

"Commissioner  Meeker:  Will  it  not  be  necessary  to  make  assumptions  and  hypotheses 
in  getting  at  actual  investment  in  the  way  you  have  indicated? 

"Gen.  Tripp:  No,  1  distinguish  between  investment  and  valuation.  By  investment  I 
mean  the  money  that  was  spent  on  the  property. 

"Commissioner  Meeker:  By  that  you  mean  the  money  that  was  turned  back  into  the 
improvement  and  extension  of  the  road  out  of  earnings? 

"Gen.  Tripp:  That  would  be  part  of  it.  The  other  part  would  be  the  money  received 
from  the  sale  of  bonds  and  expended  on  the  property ;  the  money  received  from  the  sale 
of  stock  and  expended  on  the  property. 

"Commissioner  Meeker :  .\nd  the  accounts  of  the  railways  will  show  alt  of  these 
additions  to  investment,  whether  they  are  additions  in  the  purchase  of  bonds  and  stocks  or 
whether  they  are  additions  made  out  of  earnings? 

"Gen.  Tripp :  \o,  I  do  not  think  that  the  books  of  account  of  the  companies  generally 
speaking  are  in  such  a  condition  as  to  show  that.  .\nd  for  that  reason  I  have  suggested  that 
the  books  of  account  be  ignored ;  that  evidence  be  taken  as  to  the  securities  that  have  been 
issued  from  the  beginning  on  this  property,  what  they  were  sold  for  and  what  became  of  the 
money.  The  mere  fact  only  would  l)e  established —  did  the  money  go  into  the  property? 
Having  established  that  the  money  went  into  the  property,  that  would  be  sufficient  evidence 
to  call  it  investment  upon  which  a  return  is  fair  and  just." 

General  Tripp  is  of  the  opinion  that  the  books  would  probably  show  the  ex- 
tensions and  improvements  made  out  of  earnings,  and  that  such  investments 
should  be  included  in  the  rate  base.     At  page  166  of  the  Proceeding,';,  he  says : 

"The  earnings  that  have  been  turned  back  into  the  property  were  net  profits  that  the 
stockholders  were  entitled  to.  They  chose,  instead  of  taking  those  in  cash  to  put  them  back 
into  the  property.  There  is  no  difference  between  that  method  and  a  method  where  they  had 
collected  the  dividends,  put  them  in  their  pockets,  taken  the  money  out  of  their  pockets  again 
and  purchased  additional  securities  of  the  street  railway  in  order  to  furnish  it  funds  for  the 
necessary  development." 

With  respect  to  appreciation  or  depreciation  he  testified  at  page  167  of  the 
Proceedings,  as  follows: 

"Commissioner  Meeker:  Do  you  think  it  might  be  a  fair  way  of  getting  at  the  property 
upon  which  income  is  to  be  allocated  to  the  bondholders  and  stockholders  by  taking  account 
of  either  appreciation  or  depreciation  in  the  physical  properties  of  the  companies? 

"Gen.  Tripp:     No,  sir.     My  theory  ecludes  the  question  of  depreciation  or  appreciation." 

At  page  172,  General  Tripp  explains  just  how  he  would  treat  bond  discount 
and  promotion  securities.     He  says: 

"In  arriving  at  the  investment  in  a  property  there  should  be  included  as  a  part  of  the 
legitimate  investment  the  discount  on  securities;  that  is  to  say,  securities  are  not  always 
saleable  at  par  and  they  are  sold  at  the  best  price  obtainable  and  the  difference  tx:twecn  the 
price  so  obtained  and  par  represents  a  discount  which  is  a  proper  investment  in  these  prop- 
erties upon  which  a  return  should  Ik  allowed. 

"Commissioner  Meeker:     Would  that  apply  to  stocks  as  well  as  bonds? 

"Gen.  Tripp:  Stocks  are  usually  issued  at  par.  1  think  in  most  cases  and  perhaps  all 
stock  when  it  is  issued  is  fully  paid  at  one  hundred  cents  on  the  dollar.  Now  it  may  be 
paid  cither  in  cash,  UK1  cents  on  the  dollar,  or  it  may  lie  paid  in  promotion  service  at  100 
cents  on  the  dollar,  and  between  those  two  classes  1  would  distinguish.  Where  the  stock  is 
sold  for  cash,  even  if  it  was  not  sold  at  100  cents  on  the  dollar,  if  some  law  permits  it.  but 
if  it  was  the  best  price  that  could  be  received  for  that  stock,  the  discount  there  should  go 
into  the  cost  of  the  property. 

"Commissioner  Meeker :  Then  what  would  be  the  difference  between  taking  the  total 
bonded  debt  and  all  the  stock  outstanding,  except  such  as  was  issued  for  promotion  services, 
sum  them  and  lake  that  sum  as  the  investment  upon  which  returns  must  t)e  paid  to  bond- 
holders and  .stockholders? 

"den.  Tripp:  That  is  precisely  what  happens.  Segregate  the  securities  that  arc  watered 
securities  so  called,  prove  that  the  rest  of  the  securities  were  not  watered,  and  if  the  rest 
of  the  securities  were  not,  they  were  honestly  issued  for  value.  That  is  the  investment  in 
the  property." 

It  will  be  observed  that  General  Tripp  disagrees  with  Professor  Cooley  and 
the  Committee  on  \'aluation  with  respect  to  bond  discount,  which  he  would  in- 
clude in  the  investnieni,  and  promoter's  profits,  wliich  he  would  exclude.     He  is 


Valuation  365 

absolutely  at  disagreement  with  them  on  the  question  of  the  readjustment  of  the 
rate  base  or  of  the  rate  of  return  to  suit  the  changes  in  the  purchasing  power  of 
money.  He  states  that,  in  his  opinion,  it  would  not  be  necessary  or  practicable 
either  to  increase  the  investment  base  or  to  increase  the  rate  of  return  on  capital 
already  in  the  street  railway  business,  on  account  of  the  depreciation  in  the  pur- 
chasing power  of  money.  In  answer  to  questions  by  Commissioner  Gadsden,  he 
testifies  at  some  length,  as  shown  by  the  following  extract  taken  from  pages  173 
to  175  of  the  Proceedings : 

"Commissioner  Gadsden:  General,  in  this  method  of  arriving. at  values  you  have  been 
talking  about,  is  it  not  true,  referring  to  the  depreciation  in  the  purchasing  price  of  money 
that  you  have  referred  to,  that  under  that  system  all  the  loss  would  fall  on  the  investor? 
In  other  words,  suppose  that  a  property  worth  a  million  dollars,  costing  a  million  dollars 
under  your  system  twenty  years  ago,  is  covered  by  bonds  at  5  per  cent;  under  your  plan  that 
property  today  would  be,  we  will  say,  valued  at  a  million  dollars  and  the  return  is  still 
5  per  cent.  Now  admitting  that  the  value  of  money  has  depreciated  50  per  cent,  the  investor 
is  getting  one-half  return  on  his  property,  is  he  not? 

"Gen.  Tripp :     Yes. 

"Commissioner  Gadsden :  Therefore  is  it  not  necessary,  in  view  of  this  extraordinary 
depreciation  in  the  purchasing  price  of  money,  in  order  to  equalize  that  situation,  either  to 
increase  the  rate  of  return  or  to  give  the  current  value  of  the  property  in  the  value  of 
money  today? 

"Gen.  Trigp :  I  do  not  believe  so,  Mr.  Commissioner.  It  would  be  lifting  yourself  by 
your  bootstraps.  Currency  has  depreciated.  It  was  the  operation  in  my  opinion  of  a  natural 
law  brought  about  by  the  tremendous  war  debts  all  over  the  world.  Those  war  debts  have 
got  to  be  paid.  Now  in  order  to  do  that,  the  natural  law  depreciated  currency  by  about  50 
per  cent  and  paid  oflt  half  this  debt.  The  people  who  had  to  have  immediate  assistance 
because  they  had  no  margin  of  safety  to  go  on  were  the  laborers.  Ne.xt  we  find  the  landlord 
who  had  less  margin  of  safety  to  go  on,  and  he  searched  for  greater  income,  and  he  got 
part  of  it,  but  he  had  trouble  in  doing  it.  Labor  particularly,  then,  is  not  in  a  position  to  pay 
any  portion  of  this  war  debt.  It  had  no  margin  to  pay  it  with.  It  has  got  to  be  paid.  The 
people  who  have  got  to  pay  it  are  the  fund  owners,  the  owners  of  fixed  income  securities. 
And  if  you  adjust  their  incomes  by  the  method  you  have  suggested  so  they  are  relieved,  you 
have  not  done  anything,  you  have  just  lifted  yourself  up  by  your  bootstraps  and  you  are 
right  where  you  were  when  you  started. 

"Commissioner  Gadsden  :  Is  it  not  true  that  the  people  by  your  plan  would  be  confined 
solely  to  public  utilities 

"Gen.  Tripp:     No. 

"Commissioner  Gadsden :  Would  it  not  be  true  with  investors  in  every  line  of  business, 
that  their  property  would  be  appreciated? 

"Gen.  Tripp :  No,  I  think  you  are  mistaken,  Mr.  Commissioner.  There  are  billions  of 
fixed  income  bonds  held  by  investors  throughout  the  United  States  on  which  they  cannot 
get  relief,  railroad  bonds.  Now  your  theory  is  that  the  street  railway  company  could  get 
relief — if  it  liad  a  5  per  cent  bond,  it  ought  to  have  an  increase  in  return  because  of  the 
decreased  purchasing  power  of  the  dollar.  Under  my  theory  they  are  exactly  in  the  same 
position,  the  owner  of  a  railroad  bond  is  just  in  the  same  position 

"Commissioner  Gadsden :  Unquestionably,  but  getting  outside  of  regulated  properties, 
getting  to  textile  properties  and  the  value  of  steel  properties,  is  not  the  value  of  a  steel  mill 
today  based  upon  current  prices  and  not  what  it  cost? 

"Gen.  Tripp  :  Yes,  but  when  you  get  into  the  question  of  return  on  stock  in  industrials, 
the  industrials  are  reaping  a  harvest  in  this  case. 

"Commissioner  Gadsden  :  But  if  you  were  asked  a  similar  question,  what  is  the  value  of 
a  shoe  factory  in  Massachusetts  or  Connecticut  today,  you  would  give  it  current  value,  would 
you  not?  You  would  not  say  its  value  was  what  the  investors  put  into  it  in  the  history 
of  the  plant? 

"Gen.  Tripp :  Well,  I  would  not  buy  a  shoe  factory  on  the  basis  of  present  earnings,  on 
the  same  theory  that  I  would  have  purchased  it  before  the  war.  I  would  have  to  have  a  wider 
margin.  There  is  a  distinction  between  regulated  and  unregulated  industries.  My  theory 
asks  the  public  to  guarantee  a  return  upon  our  investment  in  electric  railways.  The  in- 
dustrials ask  no  one  to  guarantee  their  return.  When  hard  times  come  they  must  take  their 
medicine.  Now  you  cannot  regard  the  investment  in  a  public  utility  which  is  practically 
guaranteed  by  the  public  on  the  same  basis 

"Commissioner  Gadsden :  Do  you  think  the  history  of  the  industry  as  you  have  shown  it 
today  has  shown  a  guaranty  of  return? 

"Gen.  Tripp :  No,  but  I  am  directing  all  my  testimony  here  towards  the  theory  which 
I  have  promulgated 


366  Electric  Railway  Problem 

"Commissioner  Gadsden:     Towards  the  future? 

"Gen.  Tripp:    That  there  should  be  a  different  relation  in  the  future. 

Commissioner  Gadsden:  Exactly;  therefore,  is  it  not  necessar>-  to  bring  the  situation  up 
to  date  to  rectify  the  values  of  these  properties  from  now  on  up  to  date  and  then  keep  the 
account  ? 

"Gen.  Tripp :     No,  I  do  not  think  so." 

On  the  subject  of  the  treatment  of  superseded  property  General  Tripp  "got 
oflf  the  reser\-ation"  again.  Commissioner  Sweet  asked  him  a  question  based 
upon  the  illustration  of  a  countr)-  merchant  who  erects  a  small  frame  building 
in  which  to  conduct  his  business ;  he  prospers  and  later  on  finds  this  building  in- 
sufficient for  his  needs  and  tears  it  down  and  puts  up  a  fine  brick  structure  in 
its  place.  The  question  was  whether  the  cost  of  the  frame  building  and  the  cost 
of  the  new  brick  structure  taken  together,  with  other  moneys  actually  invested, 
should  constitute  the  capital  upon  which  the  owner  ought  to  make  a  legitimate 
profit,  and  if  so,  whether  that  would  illustrate  the  way  in  which  General  Tripp's 
theory  of  determining  the  investment  in  a  street  railway  property  would  be  ap- 
plied.    Upon  this  point  he  testified  as  follows,  at  page  175  of  the  Proceedings: 

"If  I  understood  your  question  correctly,  I  should  not  think  it  was  quite  that  way.  I 
understood  you  to  say  that  the  cost  of  the  wooden  building  would  be  added  in  its  entirety 
to  the  cost  of  the  brick  building  and  that  the  sum  of  those  two  constituted  an  investment 
on  which  he  is  entitled  to  a  return.     Was  that  your  question? 

"Commissioner  Sweet :     Yes,  the  entire  investment. 

"Gen.  Tripp :  Now,  however,  in  the  street  railway  field  the  cost  of  the  old  wooden 
building  would  be  charged  off  against  the  properties  and  the  cost  of  the  new  building  would 
be  the  atnount  that  it  wouldj  be  entitled  to  a  return  on  imder  the  system  of  bookkeeping 
which  has  been  adopted  by  the  Interstate  Commerce  Commission,  if  I  am  correct. 

"Commissioner  Sweet:  Then  if  money  had  been  expended  by  a  street  railroad  company 
for  the  purchase  of  a  horse-car  system  or  for  changing  over  from  the  horse-car  system  to 
the  cable  system  or  the  cable  to  electricity,  do  you  mean  to  say  all  that  money  should  be 
crossed  off  entirely  and  only  the  value  of  the  electric  system  taken  as  representing  the  capital 
upon  which  dividends  are  to  be  paid? 

"Gen.  Tripp:  Yes,  speaking  generally,  because  a  depreciation  item  has  or  ought  to 
have  been  set  up  to  care  for  depreciation  and  obsolescence.  Now  I  would  not  say  that  that 
rule  ought  to  be  applied  arbitrarily  and  imjustly.  But  apparatus  that  has  disappeared  will 
generally  be  found  to  have  been  taken  care  of  out  of  the  earnings  of  the  company  and  it  is 
an  item  called  depreciation  or  obsolescence." 

General  Tripp  was  then  asked  whether  a  physical  valuation  of  the  property 
would  be  found  to  equal  or  exceed  the  securities  outstanding  other  than  the  pro- 
motion securities  to  which  he  had  referred.  He  replied  that  in  most  cases  he 
thought  the  physical  valuation  would  be  greater,  and  in  fact  knew  of  no  case  in 
which  it  would  not. 

Then  the  question  came  up  as  to  what  had  been  done  with  the  old  properties 
and  he  stated  that  there  had  been,  or  ought  to  have  been,  set  up  for  depreciation 
an  amount  sufficient  to  amortize  the  property  that  had  disappeared,  such  as  the  old 
horse  railroads.  The  matter  not  yet  being  entirely  clear  to  the  Commissioners, 
General  Tripp  answered  other  questions  put  to  him  by  Commissioners  Meeker, 
Beall,  Gadsden  and  Sweet.  His  testimony  in  this  connection  is  foiuid  at  pages  178  to 
180  of  the  Proceedings,  and  has  already  been  quoted  almost  in  full  in  Chapter 
XXV  in  connection  with  our  discussion  of  the  relative  position  of  "ser\'ice"  and 
"profits"  as  actuating  motives  in  the  development  of  electric  railways.  .Xt  this 
point  in  the  record.  General  Trijip  expressed  the  opinion  that  a  properlv  managed 
company  would  have  charged  off  its  obsolete  projierty  through  the  depreciation 
account,  so  that  when  it  came  to  renew  its  bonded  obligations  it  would  only  have 


\'.\LUATION  367 

to  take  care  of  the  property  then  in  existence.  In  reply  to  Commissioner  Gads- 
den's question  as  to  whether,  as  a  matter  of  fact,  in  the  history  of  the  industry, 
the  street  railway  companies  had  set  up  the  reserves  to  accomplish  this  purpose, 
General  Tripp  says: 

"Some  have  and  some  have  not,  and  those  that  have  not  are  today  on  the  verge  of 
bankruptcy,  and  you  will  have  no  difficulty  in  dealing  with  those." 

Further  on  he  says : 

"All  those  companies  that  have  come  under  my  observation,  that  have  changed  from 
cable  to  electricity,  have  been  through  the  hands  of  a  receiver,  and  the  whole  thing  has 
been  wiped  out." 

Mr.  Henry  G.  Bradlee,  President  of  the  Stone  and  Webster  Corporation, 
thought  the  valuation  matter  was  less  simple  than  General  Tripp's  testimony 
would  indicate.  At  pages  222  and  223  of  the  Proceedings,  in  response  to  ques- 
tions by  Commissioner  Meeker,  Mr.  Bradlee  gives  the  following  testimony : 

"Commissioner  Meeker:  Do  you  think  that  the  value  of  the  property  is  most  easily 
gotten  at  by  the  method  of  appraisal  of  physical  valuation,  or  do  you  think  it  can  be  gotten 
at  easier  in  some  other  way? 

"Mr.  Bradlee :  I  do  not  think  the  problem  is  quite  as  simple  as  Mr.  Tripp  stated.  The 
Supreme  Court,  as  I  understand  it,  has  pointed  out  that  the  money  that  goes  into  the 
property  is  one  element  in  determining  a  fair  value ;  that  the  cost  of  reproduction  is  another 
element  in  determining  a  fair  value;  that  the  price  paid  for  the  property  by  the  then  owners 
is  another  element  in  determining  the  fair  value ;  and  that  it  is  necessary  to  weigh  those  all 
more  or  less  and  give  them  some  consideration  in  arriving  at  a  conclusion  as  to  what  is  the 
fair  value. 

"Now,  I  think  it  is  perfectly  true  that  there  are  cases  in  which  a  fair  value  can  be 
arrived  at  by  taking  the  money  that  has  gone  into  the  property.  I  think  there  are  other  cases 
in  which  that  would  lead  to  an  unfair  value  unless  a  broader  consideration  was  given  to  the 
other  factors.  Wherever  it  is  possible  to  arrive  at  a  fair  solution  of  the  question  by  taking  the 
actual  cash  investment,  I  believe  that  that  is  a  simpler  thing  to  get  at.  I  believe  it  is  a 
thing  which  is  much  better  understood  by  the  public.  I  think  it  makes  it  much  easier  to  work 
out  a  satisfactory  solution  with  the  public  and  I  am  inclined  to  adopt  that  plan  and  favor 
it  except  with  this  reservation,  that  there  are  cases  in  which  I  believe  that  might  lead  to 
injustice  sometimes  towards  the  investor,  sometimes  an  injustice  perhaps  to  the  community. 

"Commissioner  Meeker :  Do  you  believe  that  it  is  essential  that  we  get  at  a  fair  valuation 
of  the  street  railway  properties? 

"Mr.  Bradlee :  I  do.  I  see  no  way  of  working  out  a  service-at-cost  franchise  or  any 
other  equitable  solution  without  arriving  at  some   fair  value." 

Further  on,  at  page  227,  Mr.  Warren  takes  the  matter  up,  and  Mr.  Bradlee 
gives  the  additional  testimony  on  valuation  as  follows : 

"Mr.  Warren:  On  that  matter  of  valuation,  Mr.  Bradlee,  in  cases  where  the  securities 
of  the  company  have  been  issued  under  supervision  by  a  supervisory  board  and  with  its 
approval,  the  easiest  method  would  be,  would  it  not,  to  take  the  capitalization  of  the  com- 
pany as  the  basis  rather  than  either  a  valuation  or  an  attempt  to  detenuine  the  amount  of 
money  that  has  gone  in? 

"Mr.  Bradlee:  I  think  that  would  be  easy  and  that  would  apply  to  the  State  of  Massa- 
chusetts as  a  very  good  example 

"Mr.  Warren  :     Yes,  exactly. 

"Mr.  Bradlee  :  There  for  twenty-five  or  thirty  years  the  securities  have  all  been  issued 
under  the  direction  and  control  of  the  Commission  and  the  securities  represent  the  actual 
cash  which  has  gone  into  the  property. 

"Let  me  say  just  a  word  on  that.  It  seems  to  me  if  you  are  going  to  take  the  cash  that 
has  gone  into  the  property  as  the  measure  of  value,  the  cash  to  be  considered  and  the  value 
to  be  considered  is  the  entire  cash  value  of  everything  that  has  gone  in  to  create  that  prop- 
erty from  the  investor  or  any  services,  and  which  has  not  been  paid  back.  If  the  investor  has 
had  some  of  his  investment  paid  back  to  him.  that  of  course  cancels  that  part  of  the  proposition. 
But  in  so  far  as  the  investor  has  put  in  money  in  good  faith  and  properly,  that  should  be 
recognized,  whether  that  money  has  gone  into  a  building  which  is  there  today  or  a  building 
which  was  there  some  time  ago  and  has  disappeared.  If  the  investor  has  not  got  his  inoney 
back  he  is  still  entitled  to  a  return  on  his  monev  until  such  time  as  he  is  reimbursed  for  the 


368  Electric  Railway  Problem 

capital  which  he  has  furnished.  So  to  my  mind  the  essence  of  the  thing  is  what  money  has 
gone  in  there  and  not  l>ceii  paid  back  and  everything  that  enters  into  that  class  should  be  a 
proper  element  in  the  cost  of  the  property." 

At  page  339  of  the  Proceedings,  the  following  exchange  occurs  between 
Commissioner  Meeker  and  Mr.  Francis  H.  Sisson.  who  was  then  on  the  stand 
testifying  as  a  witness  for  the  American  Electric  Railway  Association: 

"Commissioner  Meeker  ;»  *  *  *  Xhe  all-important  thing,  as  I  see  it,  is  in  the 
arriving  at  a  proper  estimate  of  the  value  of  the  properties  upon  which  the  street  railways 
are  entitled  to  earn  a  reasonable  return. 

"Mr.  Sisson:     Exactly. 

"Commissioner  Meeker:     That  is  the  all-important  thing,  is  it  not? 

"Mr.  Sisson:     Exactly  so;  yes,  sir." 

In  view  of  the  paramount  importance  of  the  valuation,  it  is  perhaps  unfor- 
tunate that  the  Commission  was  unable  to  go  into  the  matter  more  fully.  As  we 
have  seen,  the  theories  advanced  by  Professor  Cooley,  which  agree  in  the  main 
with  the  theories  officially  promulgated  by  the  Committee  on  \'aluation  of  the 
American  Electric  Railway  Association,  differ  quite  radically  from  the  theories 
advanced  by  General  Tripp.  Mr.  Bradlee,  in  his  brief  testimony  on  the  subject, 
seems  to  agree  in  principle  with  General  Tripp.  We  have  here  a  distinct  and 
fundamental  cleavage  between  the  original  investment  theon.'  and  the  reproduc- 
tion-cost theory  of  valuation.  Professor  Cooley  expressed  the  opinion  that  the 
full  historical  cost  of  a  street  railway  property  would,  in  most  cases,  exceed  the 
reproduction  cost  in  normal  times.  The  war  and  the  abnormal  prices  resulting 
from  it  have  emphasized  the  difference  between  the  results  obtained  by  the  two 
methods.  Professor  Cooley  and  the  Committee  on  \'aluation  now  discard  the 
historical  cost  method  because  it  does  not  reflect  the  change  in  the  purchasing 
power  of  money.  General  Tripp,  without  denying  the  depreciation  of  the  dollar, 
nevertheless  takes  the  view  that  it  is  not  necessar)-  to  make  the  valuation  in  terms 
of  the  present  low  priced  dollars.  The  extent  of  the  difference  in  the  results 
obtained  from  the  use  of  the  two  methods  of  valuation  is  well  illustrated  by  the 
"Report  of  the  Engineers  Valuation  Board  in  Re  Pittsburgh  Railways  Company" 
submitted  to  the  Public  Service  Commission  of  Pennsylvania  under  date  of 
August  6,  1919.  This  board  of  engineers  consisted  of  two  representatives  of 
the  Pittsburgh  Railways  Company,  two  representatives  of  the  City  of  Pittsburgh, 
and  the  chief  engineer  of  the  Pennsylvania  Public  Service  Commission  acting 
as  chairman.  The  board  was  appointed  "in  conformity  with  an  agreement  be- 
tween the  City  of  Pittsburgh,  certain  other  municipalities,  individuals  and  asso- 
ciations, complainants  *  *  *  ♦  and  the  Pittsburgh  Railways  Company  and 
certain  of  its  aHiliated,  associated  or  underlying  railway  companies  *  *  *  * 
to  assist  the  Public  Service  Commission  in  arriving  at  conclusions  upon  the  ques- 
tions which  may  properly  arise  in  a  hearing  to  determine  the  value  of  the  property 
for  rate-making  purposes  and  reasonable  return  thereon,  and  the  reasonable  rates 
of  fare  to  be  charged  by  the  Pittsburgh  Railways  Company."  In  its  report  the 
board  sets  forth  the  historical  cost  of  the  Pittsburgh  Railways  property  and  its 
estimated  cost  of  reproduction  new  on  several  different  bases  with  respect  to  the 
unit  prices  used.  The  board  found  that  the  historical  cost  as  determined  by  the 
records  was  $59,069,382.  including  $11,271,458  for  superseded  property,  while 
the  estimated  cost  of  reproduction  new  at  prices  prevailing  as  of  April  1,  1918, 


Valuation  369 

the  date  of  the  valuation,  was  $102,842,274.  The  general  results  of  the  board's 
investigation  are  clearly  set  forth  in  the  following  extract  taken  from  pages  5 
and  6  of  its  printed  report: 

"With  the  purpose  of  providing  those  measures  of  value  specified  in  the  Public  Service 
Company  Law,  the  Board  has  had  prepared  a  statement  of  the  historical  cost  as  determined 
from  the  records,  and  estimates  of  the  reproduction  costs  of  the  physical  property  based  upon 
several  interpretations  of  the  fair  average  price  of  materials,  property  and  labor. 

"We  find  the  cost  of  the  physical  property  as  determined  from  the  records  and  if  repro- 
duced upon  the  various  bases  of  pricing,  to  be  as   follows : 

"Basis  No.  1 — Historical  cost  as  determined  from  the  records,  with  scrutiny  of  engineers 
and  accountants,  representing  actual  investment  in  physical  property  placed  in  the 

service  of   the  public    $59,069,382 

"Basis  No.  2 — Estimated  cost  of  reproduction  new  at  prices  ruling  when  each  part  of 
the  existing  property  was  constructed  and  under  original  conditions  of  construc- 
tion     $49,324,791 

"Basis   No,   3.\ — Estimated  cost  of   reproduction   new  at  average  prices   of   the  period 

1906  to  1915,  inclusive,  and  under  original  conditions  of  construction....  $56,148,398 

"Basis   No.  3B — Estimated  cost  of   reproduction  new  at  prices   indicated   for   1918  by 

the  trend  of  prices  for  20  years  previous  to  1916,  and  under  original  conditions  of 

construction $60,832,200 

"Basis   No.  3C — Estimated  cost  of   reproduction  new  at  average  prices  of  the  period 
1914  to  1918,  inclusive,  and  under  original  conditions  of  construction. ..  .$73,560,300 
"Basis   No.  3D — Estimated  cost   of   reproduction   new  at   the  estimated  average   prices 
of  the  period  from  1918  to  1922,  inc.,  and  under  original  conditions  of  construc- 
tion      $84,191,300 

"Basis  No.  4 — Estimated  cost  of  reproduction  new  at  prices  and  under  the  conditions 

ruling  at  the  date  of  valuation,  viz.,  April  1,  1918 $102,842,274 

"These  figures  include  real  estate  and  rights  of  way,  organization  and  development  cost 
prior  to  construction ;  engineering,  legal  and  administrative  expenses ;  interest  and  taxes  during 
construction ;  cost  of  financing ;  materials  and  supplies  and  working  capital  necessary  for 
operation. 

******** 

"The  historical  cost  as  found  includes  superseded  property  in  the  following  amounts : 

Horse  Car  System  $1,542,178 

Cable  System   3,778,639 

Early  Electric  Equipment  and  Construction  5,950,641 

$11,271,458 

"A  large  portion  of  this  property  was  superseded  when  in  good  operating  condition  and 
in  particular  the  cable  systems  were  in  operation  for  only  seven  years. 

"We  find  the  accrued  depreciation  of  parts  of  the  physical  property  as  of  April  1,  1918, 
to  have  been  as  follows : 

Prices  used  in 

Basis  No.  2   $12,039,600 

Basis   No.  3A    12,733,100 

Basis  No.  3B    13.869,700 

Basis  No.  3C  16.845,200 

Basis   No.  3D   19,364,000 

Basis  No.  4  23,775,500 

"These  estimates  are  based  upon  detailed  inspection  of  condition  with  consideration  of 
elapsed  and  of  estimated  remaining  life.  They  include  such  overhead  charges  as  enter  into 
the  cost  of  replacements." 

This  quotation  from  the  report  of  the  Pittsburgh  valuation  board  illustrates 
in  a  striking  way  a  fallacy  that  prevails  in  the  public  mind  with  respect  to  en- 
gineering valuations.  It  seems  to  be  the  general  opinion  of  laymen,  to  which 
members  of  the  engineering  fraternity  have  undoubtedly  given  much  encourage- 
ment, that  the  value  of  a  public  service  property  is  a  fact  that  can  be  discovered 
by  a  competent  engineer  designated  for  the  purpose.  Even  Professor  Cooley, 
in  his  testimony,  expressed  the  opinion  that  "there  is  not  very  much  trouble  now 
in  valuing  a  property"  and  that  "valuation  has  been  very  much  simplified,  very 


370  Electric  Railway  Problem 

much  organized,  and  it  is  not  a  difficult  matter  to  procure  results,  and  they  are 
reasonably  accurate."  It  will  be  recalled  also  that  Mr.  J.  K.  Newman,  in  his  tes- 
timony with  respect  to  the  basis  for  the  valuation  to  be  used  in  a  reorganization, 
remarked  that  "there  are  parties  in  line  today  who  will  determine  that  amount, 
there  are  men  who  are  following  that  as  a  business  who  will  do  it."  He  evidently 
referred  to  the  appraisal  engineers  and  engineering  firms  who  make  a  business 
of  public  utility  valuations.  The  fact  is,  however,  that  no  valuation  made  by 
an  engineer  or  anybody  else  means  anything  at  all  unless  the  basis  upon  which 
it  is  made  is  fully  set  forth,  and  then  the  value  of  the  result  will  depend  upon 
the  judgment  of  the  men  to  whom  it  is  presented  for  acceptance.  From  the  point 
of  view  of  public  policy  and  a  clear  understanding  of  the  difficulties  of  the  electric 
railway  problem  nothing  is  more  important  than  the  recognition  of  the  complexity 
and  elusiveness  of  the  processes  of  valuation,  and  the  uncertainty  of  the  results 
obtained.  It  is  no  doubt  true  that  two  competent  engineers  representing  different 
interests  could  make  an  appraisal  of  the  same  property  and  reach  almost  identical 
results  in  terms  of  "base  cost"  if  all  of  the  hypotheses,  assumptions  and  limita- 
tions with  respect  to  the  methods  of  valuation  were  laid  down  in  advance  by  a 
third  party. 

It  is  noteworthy  that  in  the  Pittsburgh  valuation  the  engineers  representing 
opposing  interests  were  placed  on  the  board  together,  and  the  chief  engineer  of 
the  Public  Service  Commission,  a  supposedly  impartial  body,  was  designated  to 
preside  over  their  deliberations.  The  purpose  of  such  an  arrangement  was  agree- 
ment, and  as  a  matter  of  fact  the  board  was  unanimous  in  reporting  the  findings 
above  quoted,  thus  showing  that  agreement  can  be  reached  between  opposing 
interests  even  in  valuation  matters  when  the  bases  for  the  determination  of  value 
are  definitely  prescribed,  but  it  will  be  noted  that  with  respect  to  the  physical 
property  seven  different  results  were  arrived  at,  ranging  all  the  way  from 
$49,324,791  to  $102,842,274.  In  fact,  both  the  minimum  figure  and  the  maxi- 
mum figure  were  derived  from  an  application  of  the  reproduction-cost-new 
theory,  but  in  the  one  case  it  was  based  upon  the  actual  prices  normally  prevail- 
ing when  each  part  of  the  property  was  installed,  and  in  the  other  case  it  was 
based  upon  the  war  prices  jirevailing  at  the  date  of  the  valuation.  Moreover, 
each  one  of  the  seven  different  results  was  arrived  at  without  the  deduction  of 
accrued  depreciation.  The  extreme  range  is  between  historical  cost  with  super- 
seded property  and  accrued  depreciation  deducted,  and  reproduction  cost  new  at 
the  "prices  of  today."  On  this  basis  the  comparison  is  between  an  approximate 
low  figure  of  $35,758,324  and  $102,842,274,  the  high  figure. 

It  is  to  be  presumed  that  if  engineers  representing  the  city  of  Pittsburgh 
and  engineers  rcprcseiuing  the  Pittsburgh  Railways  Company  had.  without  col- 
laboration, made  a  reproduction-cost  valuation  of  the  property  on  any  one  of  the 
reproduction  bases  used  by  the  board,  considerable  differences  would  have  re- 
sulted, and  these  differences  would  have  further  confused  the  issue.  For  ex- 
ample, even  where  the  rules  for  a  reproduction-cost  valuation  are  carefully  pre- 
scribed in  advance,  there  will  be  a  wide  difference  of  judgment  among  appraisers, 
particularly  with  respect  to  structural  overheads  such  as  engineering  and  superin- 
tendence, legal,  administration  and  miscellaneous  general  expenses,  interest  dur- 


Valuation  371 

ing  construction  and  taxes  during  construction,  to  which  are  sometimes  added 
cost  of  financing,  promoter's  remuneration  and  preliminary  expenses  in  connec- 
tion with  the  organization  and  development  of  the  project  prior  to  construction. 
The  Pittsburgh  board  reported  that  it  was  "unable  to  agree  as  to  development 
value,  going  concern  value,  and  other  elements  of  value."  The  engineers  rep- 
resenting the  city  reached  the  conclusion  "that  the  fair  value  of  the  property  of  the 
Pittsburgh  Railways  System  for  a  rate  base"  was  $48,000,000,  and  the  engineers 
for  the  company  reached  the  conclusion  that  the  fair  value  of  the  property  for  a 
rate  base  was  between  $65,000,000  and  $70,000,000.  The  Public  Service  Com- 
mission fixed  the  fair  value  of  the  company's  property,  considered  as  a  going 
concern,  at  $62,500,000,  but  in  doing  so  looked  more  to  the  result  to  be  obtained 
than  to  the  evidence  presented,  as  will  be  shown  by  the  following  quotation  from 
the  Pennsylvania  Commission's  report  handed  down  March  22,  1920  :- 

"The  commission  is  convinced  under  all  the  testimony  that  even  if  the  evidence  would 
warrant  it,  a  valuation  of  $48,000,0(X)  would  defeat  the  very  purpose  which  the  city  and  other 
complainants  have  in  view,  to  wit,  the  rehabilitation  of  respondent's  property  upon  a  new  and 
better  financial  basis,  and  the  improvement  and  extension  of  its  service  to  properly  care  for 
the  present  and  future  needs  of  the  city  and  surrounding  territory. 

"Upon  such  a  valuation,  the  receivership  would  no  doubt  continue  until  foreclosures  of 
mortgages  disintegrated  the  unified  system  and  left  the  city  and  vicinity  with  a  number  of 
separately  operated  street  railway  companies,  each  charging  fares,  to  care  for  the  public. 
This  is  unthinkable,  and,  by  this  report,  we  believe  that  we  have  laid  the  foundation  for  all 
that  the  complainants  desire,  or  the  public  may  require. 

"At  the  risk  of  redundancy,  but  with  a  view  of  retaining  the  emphasis  of  our  former 
statements,  the  commission  again  refers  to  the  fact  that  the  most  important  question  now 
alTecting  the  City  of  Pittsburgh,  with  respect  to  its  transit  problems,  is  improvement  in  street 
railway  service ;  that  improvement  cannot  be  secured  except  by  the  expenditure  of  a  large 
amount  of  money,  a  part  of  which,  at  least,  would  represent  new  capital  requirements  and 
a  portion  to  be  devoted  to  replacements  of  tracks,  acquiring  new  equipment  to  take  the  place 
of  some  that  must  be  superseded.  In  reaching  its  conclusion,  the  commission  has  at  all  times 
had  these  matters  in  mind,  and  its  final  determination  is  made  with  that  end  in  view.  It 
recognized  the  difficulties  in  the  way  of  accomplishment,  and  that  conditions  which  arose  in 
former   years   are    not   easily   overcome   or   set   aside. 

"A  program  by  which  the  amount  required  might  be  so  divided  that  a  part  would  be 
chargeable  to  capital  and  the  balance  amortized  over  a  course  of  years  would  furnish  a  solu- 
tion. Under  all  the  evidence  of  the  case,  and  taking  into  consideration  all  the  measures  of 
value  set  forth  in  the  Public  Service  Company  Law,  the  commission  finds  that  the  fair  value 
of  respondent's  property  considered  as  a  going  concern   is  $62,500,000." 

That  the  determination  of  fair  value  for  rate  purposes  is  not  a  siinple 
thing  to  be  referred  to  and  determined  by  an  engineer  without  the  assistance  of 
legal,  accounting  and  economic  knowledge,  is,  of  course,  well  known  to  those 
charged  with  the  regulation  of  public  utilities,  although,  as  I  have  already  indi- 
cated, it  is  not  so  well  known  to  the  general  public.  The  complexity  of  the  prob- 
lem is  indicated  by  the  provisions  of  the  law  under  which  the  Pennsylvania  Pub- 
lic Service  Commission  acts,  and  to  which  it  referred  in  its  finding  with  respect 
to  the  Pittsburgh  valuation.  The  Pennsylvania  Public  Service  Company  Law 
contains  the  following  provision : 

"In  ascertaining  and  determining  such  fair  value,  the  Commission  may  determine  every 
fact,  matter,  or  thing  which,  in  its  judgment,  does  or  may  have  any  bearing  on  such  value; 
and  may  take  into  consideration,  among  other  things,  the  original  cost  of  construction,  par- 
ticularly with  reference  to  the  amount  expended  in  the  existing  and  useful  permanent  im- 
provements ;  with  such  consideration  for  the  amount  in  market  value  of  its  bonds  and  stocks, 
the  probable  earning  capacity  of  the  property  under  particular  rates  prescribed  by  statute  or 
ordinance,  or  other  municipal  contract,  or  fixed  or  proposed  by  the  Commission,  and  for  the 
items  of  expenditures  for  obsolete  equipment  and  construction,  as  the  circumstances  and  the 
historical  development  of  the  enterprise  may  warrant ;  the  reproduction  costs  of  the  property, 
based  upon  the  fair  average  price  of  materials,  property,  and  labor,  and   the  developmental 


372  Electric  Railway  Problem 

and  going  concern  value  of  such  public  service  company ;  and  these,  and  any  other  elements 
of  value  shall  be  given  such  weight  by  the  Commission  as  may  be  just  and  right  in  each  case." 

It  will  be  observed  that  as  a  result  of  the  complex  process  prescribed  by  the 
Pennsylvania  law,  the  Public  Service  Coinmission,  after  having  secured  the 
benefit  of  the  report  of  the  valuation  hoard,  made  up  in  the  way  I  have  described, 
finally  reached  a  conclusion  that  represented,  in  its  judgment,  a  fair  basis  for  the 
reorganization  of  the  property,  but  clearly  indicated  by  its  report  that  neither 
the  considerations  which  it  gave  most  weight  nor  the  results  obtained  in  the 
Pittsburgh  case  could  be  regarded  as  setting  up  any  specific  standards  applicable 
to  other  individual  properties.  The  widely  difTering  results  reached  by  the  board 
of  engineers  from  the  use  of  different  appraisal  bases  and  the  inability  of  the 
board  of  engineers  to  agree  on  the  intangible  values  were  among  the  facts  upon 
which  the  final  judgment  of  the  commission  was  based.  It  remains  to  be  seen 
whether  the  result  reached  by  the  commission  in  the  valuation  of  the  Pittsburgh 
Railways  will  in  that  particular  case  make  possible  the  reorganization  of  the  com- 
pany and  the  establishment  of  Pittsburgh's  street  railway  service  upon  a  basis 
satisfactory  alike  to  the  private  investors  and  to  the  public.  I  have  referred  to 
the  Pittsburgh  valuation  not  for  the  purpose  of  criticizing  the  claims  of  the  city, 
the  claims  of  the  company,  or  the  final  determination  of  the  Pennsylvania  Com- 
mission, but  because  the  Pittsburgh  receivership  figured  largely  in  the  testimony 
before  the  Federal  Electric  Railways  Commission,  and  to  bring  out  the  extraor- 
dinary difficulty  and  complexity  of  the  valuation  process,  and  the  utter  impos- 
sibility of  accepting  as  facts  the  findings  of  value  made  by  engineers  employed 
by  the  street  railway  companies  themselves,  no  matter  how  detailed  and  elaborate 
their  inventories  and  appraisals  may  be.  In  fact,  this  point  was  brought  out  by 
Mr.  Gaylord  C.  Cummin  in  his  testimony  before  the  Commission  at  its  very  first 
public  hearing.    At  page  44  of  the  Proceedings,  we  find  the  following  testimony: 

"Commissioner  Wchle :  How  do  you  think  the  valuation  of  street  railway  properties 
ought  to  t)e  made? 

"Mr.  Cummin:  It  should  be  made  on  the  Iwsis  of  the  investment  if  that  can  be  dis- 
covered. 

"Commissioner  Wchle:     In  many  cases  is  not  that  absolutely   impossible? 

"Mr.  Cummin:  Yes;  a  valuation  is  always  a  case  of  getting  an  approximation  of  the 
truth." 

Further  on,  at  page  5S  of  the  Proceedings,  Mr.  Cummin  s.tys: 

"You  face  tliis  situation  in  a  valuation — securing  a  fair  value  or  physical  value  or  any- 
thing else  of  that  kind — that  you  cannot  get  the  exact  truth.  If  you  try  to  get  the  exact 
truth,  you  will  spend  so  much  time  in  splitting  hairs  over  things  that  are  matters  of  opinion 
and  have  to  be  iKised  on  hyiMtheses,  that  your  results  arc  not  going  to  lie  worth  the  amount 
of  time  you  put  in.  W  hat  you  must  expect  to  get  is  the  closest  possible  approximation  to  the 
truth.  S'ou  prol)ahly  can  have  two  thoroughly  competent  engineers  for  the  .same  property 
and  they  will  not  agrer,  even  with  the  best  intention  in  the  world,  both  of  them  absolutely 
trying  to  get  at  the  truth.  You  cannot  expect  to  get  anything  iKtter  than  an  approximation, 
and  the  thing  yon  must  aim  at  is  to  get  the  licst  approximation  that  you  can  get.  You  have 
to  start  from  some  point  in  making  your  fares.  Well.  now.  there  is  only  one  thing  to  do, 
and  that  is  to  work  out  some  way  of  agreeing  upon  that  Ivasis.  It  may  not  be  tlie  truth,  but 
if  it  is  the  closest  approximation  of  the  truth  you  can  get,  it  is  .satisfactory  as  a  starting  point. 
After  that,  with  accounting  control  you  can  see  that  the  books  are  kept  so  that  you  can  keep 
right  on  upon  that  liasis. 

"(.'ommissioner  Meeker :  You  think  the  deviation  from  the  mean  in  these  engineers' 
estimates  is  within  a  suflnienlly  narrow  limit  so  that  these  various  estimates  may  l)e  taken 
as  the  Kisis  of  adjusting  rate^? 

"Mr.  Cummin:  I  wnuld  say  so  in  the  ca.sc  of  engineers  who  are  recognized  as  being 
disinterested.     Some  of  them  are  not." 


Valuation  i73 

The  record  shows  an  extraordinary  amount  of  consideration  given  to  the 
street  railway  situation  in  Massachusetts.  Reference  has  already  been  made  to 
the  fact  that  electric  railway  capitalization  has  been  under  public  control  for  a 
much  longer  time  in  Massachusetts  than  in  any  other  state  and  that  consequently 
the  evils  of  overcapitalization  have  been  minimized  there.  It  has  also  been 
shown  that  the  higher  fare  policy  was  adopted  earlier  and  applied  more  gener- 
ally in  Massachusetts  than  elsewhere  in  the  country.  It  is  of  peculiar  signifi- 
cance, therefore,  that  the  Massachusetts  Public  Service  Commission  has  seen  its 
way  clear  to  adopt  a  much  simpler  formula  for  the  determination  of  electric  rail- 
way investments  for  rate  purposes  than  the  formula  prescribed  by  the  Pennsyl- 
vania law  or  by  the  laws  and  commission  practices  of  most  other  states.  In  cer- 
tain respects  the  Middlesex  and  Boston  Rate  Case,  decided  by  the  Massachusetts 
Commission  October  24,  1914,^  just  at  the  beginning  of  the  W'orld  War,  was  an 
epoch-making  case  in  valuation  matters.  It  marked  the  definite  rejection  by  a 
leading  state  commission  of  reproduction  cost  as  the  principal  element  in  the 
determination  of  fair  value,  and  the  substitution  of  what  has  since  been  known 
as  the  Massachusetts  rule,  which  was  set  forth  in  this  case  in  the  following  lan- 
guage: 

"Accordingly,  we  rule  that  under  Massachusetts  law  capital  honestly  and  prudently 
invested  must,  under  normal  conditions,  be  taken  as  the  controlling  factor  in  fixing  the  basis 
for  computing  fair  and  reasonable  rates ;  that  if  there  is  mismanagement  causing  loss,  such 
loss  must  be  cliarged  against  the  stockholders  legally  responsible  for  the  mismanagement ; 
that  reproduction  cost  either  with  or  without  depreciation,  while  it  may  be  considered,  is  not, 
under  our  law,  to  be  taken  as  the  determining  basis  for  reckoning  rates." 

The  reasoning  by  which  the  Massachusetts  Commission  reached  its  conclu- 
sion is  illuminating.  With  respect  to  the  relative  merits  of  the  reproduction-cost 
theory  and  the  prudent  investment  theory,  the  Middlesex  and  Boston  report  says : 

"The  reproduction-cost  theory  has  during  recent  years  become  a  fashionable  one  among 
many  attorneys  and  managers  of  public  service  corporations.  Not  very  many  years  ago  such 
counsel  and  managers  would  have  denounced  it  as  utterly  confiscatory.  It  is  obvious  that  in 
recent  years  the  rise  in  prices  has  greatly  increased  the  hypothetical  cost  of  reproducing 
much  of  the  property  used  in  the  public  service.  Beyond  this,  particularly  in  the  west,  the 
fair  value  theory  involves  capitalizing,  as  a  basis  for  rate  purposes,  enormous  quantities  of 
land  given  to  the  railroad  corporations,  besides  fixing  rates  high  enough  to  furnish  a  return 
upon  the  unearned  increment  of  land  which  was  originally  purchased  at  a  small  price.  A 
fair  application  of  this  theory  to  Massachusetts  conditions  would  be  to  rule  that  the  Boston 
and  Providence  Railroad  Company  is  now  entitled  to  charge  fares  adequate  to  make  a  return 
upon  its  right  of  way  into  Boston  reckoned  at  the  present  market  values  of  Back  Bay  land 
for  residential  or  business  purposes.  It  would  ignore  the  fact  that  the  railroad  originally 
came  into  Boston  on  a  right  of  way  consisting  of  piles  driven  into  a  marsh  and  having,  if 
any,  a  very  small  market  value.  Indeed,  in  the  Minnesota  Rate  Case  (230  U.  S.  352)  the 
circuit  judge,  following  the  findings  of  the  master,  held  that  the  carriers  were  entitled  to 
a  return  upon  the  value  of  the  right  of  way,  taking  as  its  value  not  only  the  assumed  cost 
under  present  conditions,  but  adding  thereto  excess  values  which,  as  was  claimed,  the  railroad 
ordinarily  is  compelled  to  pay  whether  obtaining  land  by  purchase  or  under  eminent  domain. 
This  doctrine  was  not  sustained  by  the  United  States  Supreme  Court.     *     *     *     * 

"It  is  a  matter  of  common  knowledge  that  in  Massachusetts  during  recent  years  this 
reproduction-cost  theory  as  a  basis  for  rate-making  has  been  urged  on  behalf  of  certain  public 
utility  companies,  mostly  gas  companies,  that  have  accumulated  out  of  excess  earnings  or 
unearned  increment  upon  land  values,  large  amounts  of  property  not  represented  by  the 
original  capital  invested  or  by  the  stocks  and  bonds  issued  under  our  anti-stockwatering  laws. 

"Undoubtedly  in  rate  cases  and  other  cases  involving  the  conflicting  rights  of  the  rate- 
paying  public  and  the  investing  public,  the  cost  of  reproduction  may  frequently  be  a  fact 
desirable  to  be  ascertained,  and  sometimes  it  illuminates  important  aspects  of  the  problem 
presented ;  it  is  often  the  best  method  of  checking  up  unsatisfactory  accounting,  particularly 
when  dealing  with  depreciation.  But  as  a  fundamentally  controlling  principle,  no  theory  could 
work  out  grosser   injustice  —  to   the   rate-paying   public   in   some   cases   and  to   the   investing 


374  Electric  Railway  Problem 

public  in  other  cases  —  than  the  reproduction-cost  theory.  In  cases  where  rates  have  for  years 
been  too  high,  so  that  the  companies  have  accumulated  out  of  excess  rates  paid  by  the  public 
large  amounts  which  have  gone  for  capital  purposes,  this  theory  requires  the  rate-payer  to 
pay  a  rate  adequate  not  only  for  a  return  upon  the  capital  furnished  by  the  investor  or 
stockholder,  but  adequate  also  to  furnishing  capital  and  a  return  upon  the  capital  furnished ; 
it  would  authorize  the  capitalization  of  excessive  rates  and  a  return  upon  that  capitalization. 
This  is  to  put  a  premium  upon  extortions,  past  and  prospective.  On  the  other  hand,  this 
tlieory  is  grossly  unjust  to  prospective  investors  in  that  even  when  the  investment  is  made 
with  entire  honesty  and  with  reasonable  prudence  —  yet  if.  pending  the  building  up  of  the 
new  business,  the  plant  depreciates  below  the  fair  cost  to  the  investors,  rates  must,  under 
this  theory,  be  made  adequate  to  make  return  only  upon  the  reproduction  cost  of  the  property 
in  its  depreciated  condition.  This  amounts  to  saying  that  money  lost  during  the  earlier  stages 
of  a  public  service  enterprise  is  irretrievably  lost  by  the  stockholders;  that  if,  perchance,  rates 
have  been  fixed  so  low  that  the  rate-payer  has  for  a  period  of  years  obtained  a  service  at 
less  than  cost,  this  is  the  permanent  misfortune  of  the  stockholders — and  that  the  public  should 
never,  at  any  time  and  under  any  circumstances,  be  called  upon  to  make  up  a  deficit  thus 
incurred.  On  this  theory  copper  put  into  the  telephone  service  at  25  cents  a  pound  is  now 
to  be  reckoned  as  worth  about  half  that  sum.  Every  fluctuation  in  prices  involves  the  ascer- 
tainment of  a  new  rate  basis. 

"This  theory  is  as  inexpedient  as  it  is  unjust.  It  should  never  be  forgotten  that  our 
public  utility  companies  are  not  finished.  They  are  in  process;  they  are  constantly  calling 
for  new  capital  and  of  recent  years  in  increasing  amounts.  They  must  Ix;  kept  on  good 
trading  terms  with  the  investing  public  or  the  whole  experiment  of  private  ownership  and 
putjlic  regulation  of  these  public  utility  companies  will  fail.  It  is  as  necessary  to  attract 
capital  into  the  public  service  as  it  is  to  prevent  the  mismanagement  of  these  companies  or 
extortion  by  them.  If  regulation  is  to  limit  (as  it  should)  the  profits  of  stockholders  to  a 
moderate  return,  not  greatly  in  excess  of  an  investment  rate,  regulation  must  also  protect, 
so  far  as  it  reasonably  may,  all  investments  honestly  and  prudently  made  and  properly 
managed  in  the  public  service;  otherwise  there  will  be  no  such  investments.  It  is  entirely 
clear  that  in  the  long  run  the  rate-paying  |)ublic  as  well  as  the  investing  public  will  be  best 
served  if  regulation  makes  as  its  jundmncntally  tiniilinii  friiuifle  an  attempt  to  protect  invest- 
ments honestly  and  prudently  made  and  wisely  managed.  .\ny  other  theory  involves  essential 
injustice,  tends  to  make  the  development  of  our  public  utility  companies  a  speculation  and 
not  an  investment,  operates  as  a  premium  upon  various  kinds  of  fraud;  invites  into  the  public 
service  undesirable  manipulators  instead  of  sound,  level-headed  business  managers;  makes 
every  rate  case  an  almost  interminable  and  labyrinthine  inquiry  into  values  with  endless  con- 
flicts between   so-called  experts. 

"What  the  public  interests  of  this  commonwealth  obviously  need  is  such  regulation  and 
such  management  of  our  public  utilities  that  the  rate-payers  may  always  feel  assured  that 
their  rates  are  based  upon  making  only  a  fair  and  adecpiate  return  upon  capital  which  has 
been  invested  for  their  convenience  and  Iwnefit ;  that  purchasers  of  the  securities  may  know 
that  within  the  limits  of  sound  management  and  reasonable  and  just  regulation,  their  invest- 
ments are  secure ;  a  sy.stem  in  which  a  premium  is  put  upon  good  management  and  discour- 
aging condemnation  is  visited  upon  had  management;  a  .system  which  is  simple  and  capable 
of  economical  and  efficient  administration." 

Ill  the  Bay  State  l^ate  Case,*  decided  .\iignsl  31,  1916.  the  Massachusetts 
Commission  reaffirmed  its  rule  liiat  the  controlling  element  in  determiniiij;  fair 
value  for  rate  purposes  should  be  the  amount  of  capital  honestly  and  prudently 
invested  in  the  enterprise.  The  Bay  State  decision  is  of  unusual  importance, 
not  only  because  of  the  size  of  the  property  (about  'KX)  miles  of  track),  but  also 
because  of  the  detailed  treatment  given  to  various  factors  of  valuation  such  as 
"overheads"  and  "intangibles"  in  an  ajjpraisal  based  upon  estimated  original  cost. 
The  company's  valuation  engineers  claimed  overhead  charges  incurred  in  the 
course  of  construction  to  an  aggregate  amount  of  12.74  per  cent  of  the  direct 
property  cost.     Tiiis  total  was  made  up  as  follows : 

Per  cent. 

"F.nginecring  and  superintendence   .?.68 

"Interest   during   construction    2.23 

"Taxes   during   construction    0. 12 

"Insurance  during  construction    0.48 

"Organization  and  legal  expenses  3.(X) 

"Contingencies    3 .  23 

Total 12.74" 


Valuation  375 

The  Massachusetts  Commission  allowed  8  per  cent  for  the  overheads.  The 
reasons  for  its  conclusion  were  stated  as  follows : 

"The  Commission  realizes  that  much  overhead  expense  in  the  past,  and  even  in  more 
recent  years,  has  not  been  segregated  in  the  records ;  but  it  believes  that  the  company  has 
failed  to  sustain  the  burden  of  proof  in  this  matter  and  that  its  estimate  (which  is  little  more 
than  theoretical)  considerably  exceeds  the  reality.  The  fact  that  other  commissions  in  other 
cases  have  allowed  a  larger  percentage  has  little  significance  in  this  case.  Most  of  these  other 
cases  have  involved  dissimilar  properties  and  the  overhead  charges  were  figured  upon  the 
cost  of  reproduction.  The  present  Bay  State  system  has  grown  slowly  and  a  larger  portion 
of  its  cost  represents  additions  and  improvements  to  already  existing  property,  a  fact  which 
has  tended  to  lessen  interest  during  construction.  Much  of  the  engineering  and  superin- 
tendence, especially  in  the  past,  has  probably  been  supplied  by  officers  whose  salaries  were 
charged  to  operation;  and  this  is  no  doubt  true  of  other  overhead  expense.  Nor  has  the 
construction  of  railway  lines  along  public  ways  required  a  large  amount  or  a  high  grade 
of  engineering.  In  the  early  days,  too,  engineering  on  rolling  stock  and  electric  equipment 
was  largely  supplied  by  the  manufacturers.  The  item  of  contingencies,  we  think,  has  been 
considerably  overestimated.  It  is  based  on  the  theory  that  various  items  of  property  have 
probably  been  overlooked ;  but  the  inventory  was  made  in  great  detail  and,  as  already  indicated, 
covers  much  property  which  cannot  be  seen.  Assumptions  in  regard  to  the  depth  of  excava- 
tions, the  character  of  ballast  and  ties,  the  amount  of  work  on  the  streets,  etc.,  are  likely  in 
some  cases  to  favor  rather  than  to  prejudice  the  company.  This  is  true  in  even  greater 
degree  of  the  assumptions   in  regard   to   unit   prices. 

"After  full  consideration  of  all  the  evidence,  the  Commission  is  of  the  opinion  that  in 
this  case  8  per  cent  is  a  liberal  allowance  for  overhead  charges." 

The  Bay  State  Street  Railway  Company  in  this  proceeding  claimed  an  al- 
lowance for  intangibles  under  three  headings  :  ( 1 )  reward  for  promoters'  serv- 
ices, (2)  cost  of  securing  money,  and  (3)  cost  of  the  development  of  the  plant. 
The  Massachusetts  Commission  found  no  evidence  to  substantiate  this  claim,  and 
therefore  made  no  allowance  for  these  three  items.  The  company  also  made  a 
claim  for  "appreciation  of  land,"  but  the  commission  rejected  it.  On  this  point 
it  said: 

"Considering  this  appreciation  upon  its  own  merits,  car  riders  cannot  fairly  be  expected 
to  pay  higher  fares  because  land  has  increased  in  value,  nor  ought  they  to  pay  lower  fares 
if  it  should  decrease.  If  the  company  wishes  to  sell  such  property  it  is,  of  course,  entitled 
to  whatever  profit  it  is  able  to  make ;  but  so  long  as  land  is  employed  in  the  street  railway 
business  it  is  dedicated  to  a  public  use  and  held  subject  to  the  conditions  fairly  attaching 
to  such  use.  As  the  Commission  has  said  in  another  connection  (see  House  Document  No. 
1900  of  the  current  year,  pp.  88,  89)  :— 

While  no  fair-minded  man  will  deny  that  those  who  put  their  money  into  public 
service  by  building  railroads  are  entitled  to  the  opportunity  to  earn  a  fair  reward,  and 
even  a  generous  reward  if  they  serve  the  public  well,  the  notion  that  this  reward  is  to 
be  determined,  so  long  as  their  property  is  devoted  to  public  use,  not  by  investment  or 
by  service  rendered,  but  in  large  measure  by  the  rapid  e.xpansion  of  real  estate  prices 
in  the  larger  centers  of  population,  is  contrary  to  sound  public  policy.  It  would  mean 
that  communities  would  be  penalized  by  their  own  growth,  and  would  lose  all  advantage 
from  the  fact  that  their  transportation  facilities  were  created  in  due  season  under 
favorable  economic  conditions. 

"It  should  be  added  that,  even  if  the  doctrine  of  present  worth  were  accepted,  the  figure 
to  be  used  in  rate-making  would  clearly  be  present  worth  for  street  railway  purposes.  In 
this  case  no  evidence  whatever  has  been  submitted  that  the  land  has  increased  in  value  for 
such  purposes." 

Valuation  reports  could  be  cited  endlessly  to  show  how  the  commissions  and 
the  courts  in  different  parts  of  the  country  have  handled  the  problem,  but  the 
Pittsburgh  case  and  the  two  Massachusetts  cases  are  sufficient  to  establish  the 
contrast  between  the  complex  valuation  rules  in  Pennsylvania  and  the  compara- 
tively simple  ones  in  Massachusetts. 

The  fact  that  the  Interstate  Commerce  Commission  has  been  engaged  for 
several  years  upon  the  stupendous  task  of  valuing  the  railroads  of  the  country, 


376  Electric  Railway  Problem 

and  in  that  connection  has  been  formulating  rules  of  appraisal  which,  if  estab- 
lished in  the  railroad  field,  would  be  applicable  for  the  most  part  in  the  valuation 
of  the  electric  railways,  is  a  matter  of  great  significance  in  connection  with  our 
inquiry  into  the  street  railway  problem.  The  Interstate  Commerce  Commis- 
sion's rulings  in  the  railroad  valuation  cases  are  to  be  considered,  next  to  the 
rulings  of  the  United  States  Supreme  Court,  as  the  most  authoritative  expres- 
ions  of  public  policy  in  valuation  matters  thus  far  made. 

The  Railroad  Valuation  Act  of  March  1,  1913,'*  required  the  Interstate  Com- 
merce Commission  to  prepare  a  complete  inventory  and  valuation  of  the  proper- 
ties of  the  railroads  subject  to  its  jurisdiction,  and  to  ascertain  the  original  cost 
to  date,  the  cost  of  reproduction  new,  and  the  cost  of  reproduction  less  deprecia- 
tion of  these  properties.  It  also  required  the  commission  to  "state  in  detail  and 
separately  from  improvements  the  original  cost  of  all  lands,  rights  of  way,  and 
terminals  owned  or  used  for  the  purposes  of  a  common  carrier,  and  ascertained 
as  of  the  time  of  dedication  to  public  use,  and  the  present  value  of  the  same, 
and  separately  the  original  and  present  cost  of  condemnation  and  damages  or 
of  purchase  in  excess  of  such  original  cost  or  present  value."  The  \'ahiation 
Act  also  required  the  commission  to  "ascertain  and  report  separately  other  values, 
and  elements  of  value,  if  any,"  of  the  property  of  the  railroads.  The  principles 
of  valuation  worked  out  by  the  Interstate  Commerce  Commission  in  performing 
the  work  prescribed  by  the  Valuation  Act  are  of  especial  interest  insofar  as  they 
relate  to  the  correct  rules  for  the  ascertainment  of  reproduction  cost  new  of  a 
railroad  property.  The  commission's  treatment  of  overhead  expenses  is  one  of 
the  outstanding  features  of  its  valuation  reports. 

In  the  valuation  of  the  Texas  Midland  Railroad  (^X'aluation  Docket  Xo.  2), 
dated  July  31,  1918,"  the  commission  reported  that  the  "original  cost  to  date  of 
each  piece  of  properly  could  not  be  found  with  precision."  but  that  from  an  ex- 
amination of  the  company's  books  the  sum  of  $2,S92.3(>0.94  appeared  to  exceed 
somewhat  "the  amoimt  of  money  which  could  have  been  expended  in  the  prop- 
erty." It  reported  that  the  cost  of  reproduction  new  of  property  other  than  land 
was  $3,461,356  and  that  the  cost  of  reproduction  less  depreciation  of  the  same 
property  was  $2,597,442.  It  also  reported  that  the  cost  of  the  company's  lands 
as  nearly  as  could  be  deterniined  from  the  records  was  found  to  be  $67,493.44, 
and  their  present  value  $254,034.99.  Tlie  commission  expressly  declined  to  make 
any  finding  as  to  "the  present  cost  of  acquiring,  either  by  purchase  or  by  con- 
demnation, the  lands  of  the  carrier  devoted  to  the  public  use."  On  this  point  it 
cited  the  decision  of  the  United  Stales  Supreme  Court  in  the  Miimesota  Rate 
Cases  and  drew  the  conclusion  that  the  determination  of  the  reproduction  cost  of 
railway  lands  for  railway  purposes  is  "incapable  of  rational  ascertainment." 
Upon  this  point  the  United  States  Supreme  Court  in  a  decision  handed  down 
March  8,  1920,  has  overruled  the  commission  and  directed  it  to  comply  with  the 
requirements  of  the  Valuation  Act. 

In  the  Texas  Midland  case  the  commission  did  not  find  any  values  or  ele- 
ments of  value  in  the  property  other  than  those  specifically  referred  to  in  the 
Valuation  Act. 

In  its  findings  with   respect  to  the  reproduction  cost  new  of   the  property 


Valuation  Zll 

it  made  no  allowance  under  the  head  of  "contingencies,"  with  respect  to  which 
Professor  Cooley  gave  such  emphatic  testimony.  It  will  be  remembered  that 
he  expressed  the  opinion  that  contingencies  on  the  average  will  come  within  10 
per  cent  on  base  cost,  5  per  cent  "on  the  inside,  in  connection  with  the  details," 
and  5  per  cent  "on  the  outside,  spread  over."  The  5  per  cent  "on  the  inside" 
represents  contingencies  taken  into  account  in  the  establishment  of  the  unit  prices 
and  does  not  represent  a  separate  general  overhead  charge.  Therefore,  it  is  the 
5  per  cent  "on  the  outside"  to  which  the  Interstate  Commerce  Commission  devotes 
itself  in  its  discussion  of  the  general  overheads.  Its  treatment  of  this  item  in  the 
application  of  the  reproduction-cost  method  to  the  valuation  of  property  used  in 
the  public  service,  as  compared  with  Professor  Cooley's  treatment,  illustrates  very 
well  the  great  differences  that  arise  in  reproduction-cost  estimates  based  upon  the 
different  points  of  view  of  the  appraisers.  Professor  Cooley,  as  was  evident 
from  his  testimony,  belongs  to  the  class  of  public  utility  appraisal  engineers  who 
find  it  difficult  to  get  a  valuation  high  enough  to  satisfy  their  investment  con- 
science, because  they  are  impressed  with  the  idea  that  there  are  a  great  many 
elements  of  cost  in  the  production  of  a  public  service  property  which  are  likely 
to  be  overlooked  by  the  public.  In  the  Texas  Midland  case  the  company  took 
exception  to  the  Interstate  Commerce  Commission's  ruling  with  respect  to  the 
item  of  contingencies  and  contended  that  in  "a  theoretical  reproduction  of  the 
property"  the  same  omissions  will  be  made  and  the  same  unforeseen  difficulties 
will  be  encountered  as  in  the  case  of  the  original  construction  of  a  railroad  based 
upon  the  engineering  estimates.     In  its  report  the  commission  says : 

"Experience  has  shown  that  it  is  practically  impossible,  no  matter  how  carefully  such  an 
estimate  may  have  been  made,  to  include  all  the  items  of  expense  which  will  be  incurred  in 
the  work  of  construction.  Additional  expense  is  caused  by  omissions  and  unforeseen  diffi- 
culties in  the  work  of  construction.  Necessary  materials  are  sometimes  omitted.  From 
soundings  a  cut  may  appear  to  be  made  up  entirely  of  earth  and  the  estimate  for  excavating 
and  digging  is  based  upon  this  expectation.  However,  when  the  work  is  performed  it  is 
found  that  it  contains  a  large  boulder  which  it  is  necessary  to  cut  through  or  entirely  remove. 
This  unforeseen  condition  lengthens  the  time  allowed  for  construction  and  correspondingly 
increases  the  expense.  Frequently  quicksand  is  found  where  solid  earth  was  expected. 
Numerous  other  instances  of  unforeseen  difficulties  could  be  cited  which  occur  and  which  add 
to  the  total  cost  of  the  work.  In  order  to  provide  for  expenses  of  this  kind  the  practice 
of  including  a  certain  sum  for  contingencies  in  estimates  of  the  prospective  cost  of  construc- 
tion  has   been  quite   generally   adopted." 

In  the  opinion  of  the  commission,  however,  the  situation  is  entirely  changed 
when  it  comes  to  a  theoretical  reproduction  of  a  property  already  in  existence, 
as  shown  by  the  following  discussion  found  at  pages  25  and  26  of  the  Texas 
Midland  report : 

"In  our  view  the  theoretical  reproduction  of  a  railroad,  such  as  is  assumed  in  valuation 
work,  is  materially  different  from  the  original  construction  and  does  not  justify  an  allowance 
for  contingencies  as  such.  In  theoretical  reproduction  the  property  to  be  constructed  by  the 
engineer  is  before  his  eyes.  The  topography  of  the  country  through  which  the  right  of  way 
runs  can  be  observed.  He  knows  the  natural  difficulties  which  will  have  to  be  overcome. 
If  rock  is  found,  his  estimate  is  based  upon  cutting  through  or  removing  that  rock.  The 
exact  amount  of  materials  above  the  roadbed  is  capable  of  ascertainment,  and  no  addition 
should  be  made  for  materials  omitted.  However,  with  respect  to  certain  materials  the  carrier 
is  not  limited  to  the  amount  necessan.-  to  duplicate  what  is  actually  in  the  property.  This 
is  illustrated  by  the  item  of  spikes.  It  is  recognized  that  in  laying  rail  a  certain  percentage 
above  the  number  of  spikes  required  is  purchased  to  take  care  of  losses  and  imperfections, 
and  an  allowance  to  cover  these  possibilities  is  made.  It  is  recognized,  of  course,  that  in 
compiling  the  inventory  of  the  roadway  there  are  certain  quantities  which  are  hidden  and 
cannot  be  observed. 


378  Electric  Railway  Problem 

"In  estimating  hidden  quantities  the  representatives  of  the  commission  rely  upon  the 
statements  of  the  carriers  supplemented  by  such  records  as  they  may  possess,  tested  by  the 
observations  of  our  engineers.  These  statements  and  records  are  accepted  unless  they  appear 
to  be  erroneous  on  their  face.  Field  notes  of  the  commission  containing  the  estimate  of  the 
quantities  to  be  allowed  are  furnished  the  carrier  if  desired,  and  if  objected  to  the  matter 
is  thoroughly  investigated.  In  the  application  of  prices  to  the  items  embraced  in  the  inven- 
tory, we  endeavor  to  compensate  for  all  expenses  which  will  be  met  in  connection  with  a 
particular  item.  The  item  of  grading  furnishes  a  good  illustration.  We  ascertain  the  price 
per  cubic  yard  which  is  proper  to  apply  for  grading,  and  its  determination  in  this  regard  is 
guided  by  prices  paid  under  contracts  for  work  of  this  character.  However,  it  is  recognized 
that  certain  work  is  performed  by  the  grading  contractor  which  is  not  included  in  his  contract 
price,  such  as  erecting  temporary  bridges,  constructing  ditches  off  the  right  of  way,  etc. 
To  the  price  per  cubic  yard  which  is  obtained  in  the  manner  indicated  above  is  added  an 
estimated  amount  to  cover  the  additional  expense.  A  similar  addition  is  made  in  other  cases 
when  necessary. 

"The  statement  that  no  provision  for  contingencies  has  been  made  by  us  in  this  pro- 
ceeding is  therefore  incorrect.  The  figure  reported  as  cost  of  reproduction  new  is  an  estimate 
of  the  amount  of  money  necessary  to  reproduce  the  identical  property  under  valuation.  The 
inventory  is  made  with  great  care  and  the  prices  applied  are  arrived  at  after  exhaustive  study. 
Every   necessary  expense   is  taken  into  consideration. 

"Since  reproduction  new  is  at  best  an  estimate,  it  is  apparent  that  an  estimate  arrived 
at  upon  a  basis  as  outlined  above  is  as  liable  to  be  too  high  as  too  low  and  that  therefore 
there  is  no  warrant  for  the  addition  of  a  definite  amount  to  cover  contingencies,  but  that  any 
allowance  of  that  kind  which  ought  to  lie  made  should  be  and  is  taken  care  of  in  connection 
with  particular  items  of   property." 

With  respect  to  the  item  of  engineering  the  Interstate  Commerce  Commis- 
sion made  an  exhaustive  study  of  the  accounts  of  121  actual  railroad  construction 
projects  in  different  sections  of  the  country  ranging  from  2yi  miles  to  900  miles 
in  length,  which  cost  in  the  aggregate  $302,000,000,  and  found  that  thp  weighted 
average  was  approximately  3.6  per  cent  for  engineering  expenses.  In  view  of 
the  results  of  this  study  the  conmiission  directed  its  engineers  to  keep  their  al- 
lowances for  engineering  expenses  within  a  range  of  from  2  per  cent  to  5  per 
cent  of  the  direct  cost  of  the  road  exclusive  of  land.  It  should  be  observed  also 
that  the  term  "road"  does  not  include  equipment. 

With  respect  to  several  items  in  the  classification  of  accounts  grouped  under 
the  term  "general  expenditures"  and  including  organization  expenses,  general 
office  expenses,  law  expenses,  taxes,  etc.,  the  Interstate  Conmierce  Commission 
caused  its  accountants  to  make  a  study  similar  to  that  undertaken  in  connection 
with  engineering,  with  the  result  that  general  expenditures  other  than  interest 
during  construction  were  found  to  be  on  the  average  1.93  per  cent  of  all  road 
accounts  exclusive  of  land.  The  commission,  therefore,  adopted  1]!^  per  cent 
as  the  allowance  for  general  cx])enditures.  With  respect  to  the  "cost  of  obtain- 
ing money"  the  commission  said : 

"Money  with  which  to  construct  a  railroad  is  usually  obtained  by  the  sale  of  stocks 
and  bonds.  Sometimes  the  money  is  at  first  borrowed  on  short  term  paper  and  the  bonds 
arc  issued  and  sold  at  the  end  of  the  construction  pcrio<l.  The  bonds  may  be  issued  before 
the  beginning  of  construction  and  held  as  collateral  for  the  short-term  paper,  or  the  bonds 
may  be  sold  in  advance  of  construction.  The  latter  method  has  seldom  l)cen  followed.  Both 
methods  involve  expense.  Short-term  paper  carries  with  it  a  certain  charge  for  brokerage, 
generally  not  exceeding  one-half  per  cent,  while  the  sale  of  bonds  involves  a  discount  which 
includes  brokerage,  dependent  upon  the  rate  of  interest,  the  length  of  the  term,  and  the 
credit  of  the  company. 

"During  the  early  stages  of  our  valuation  work  an  endeavor  was  made  to  determine  the 
cost  to  a  carrier  under  valuation  of  obtaining  money  :  that  is  to  say,  to  ascertain  the  credit 
of  the  particular  company  and  the  circumstances  which  would  surround  its  financing.  It 
seemed  necessary,  however,  to  abandon  this  methotl  liecause  it  was  found  to  be  an  almost 
impossible  task,  and  the  result  was  misleading.  The  bureau  has  therefore  assumed  for  this 
purpose  that  the  rcconstniclion  would  l>c  done  by  a  company  the  credit  of  which  was  good 
and  which  could  purchase  supplies  at  advantageous  prices.     This  policy  having  been  adopted, 


I 


Valuation  379 

it  was  necessary  to  determine  the  rate  of  interest.  Since  a  railroad  with  good  credit  has 
no  difficulty  during  normal  times  in  borrowing  money  at  Ayi  per  cent,  it  was  felt  that  the 
rate  of  6  per  cent  would  be  ample  to  cover  all  incidental  items  of.  e.xpense  in  connection 
therewith. 

"The  carrier  objects  to  this  method  and  states  that  the  assumption  that  its  credit  is  good 
enough  to  enable  it  to  borrow  money  to  build  its  railroad  upon  a  6  per  cent  basis  is  without 
foundation  in  fact,  but  that  should  an  assumption  such  as  above  indicated  be  correct,  6  per 
cent  is  too  low  to  cover  the  entire  cost,  which  would  include  commissions,  syndicating,  and 
other  e.xpenses.     Eight  per  cent  is  suggested  as  proper  in  the  present  case. 

"There  are  undoubtedly  instances  where  it  will  be  found  that  should  the  carriers  be  left 
entirely  to  their  own  resources  they  probably  could  not  borrow  money  at  any  rate  of  interest 
in  a  sufficient  amount  to  cover  the  entire  cost  of  construction.  Assuming  that  reconstruction 
would  be  done  by  a  company  the  credit  of  which  was  good,  the  cost  of  reproducing  properties 
on  the  basis  here  assumed  will  be  fairly  comparable  in  all  cases." 

The  commission's  rule  for  estimating  interest  during  construction  is  found 
at  pages  32  and  33  of  the  Texas  Midland  report,  as  follows: 

"The  rate  of  6  per  cent  interest  having  been  approved,  it  remains  to  consider  the  length 
of  time  for  which  this  rate  should  be  applied.  Interest  for  one-half  of  the  construction 
period  has  been  generally  allowed  in  the  valuation  of  public  utilities.  Since,  however,  in 
determining  the  construction  period  in  the  instant  case  no  time  has  been  considered  for 
preliminary  work  as  such,  the  question  arises  whether  or  not  one-half  of  the  construction 
period  is  sufficient.  It  is  assumed  by  us  that  a  railroad  company  would  have  a  sufficient 
amount  of  money  on  hand  at  the  beginning  of  each  six  months  to  cover  construction  e.xpen- 
ditures  for  that  period.  A  study  of  the  active  construction  of  certain  roads  shows  that  when 
expenditures  begin  they  continue  at  about  an  even  rate  to  the  end  of  the  construction  period; 
that  is,  for  the  total  number  of  months  during  which  construction  continues,  the  outgo  per 
month  is  about  uniform.  Therefore,  if  the  assumption  that  the  money  required  for  each  six 
months  is  on  hand  at  the  beginning  of  that  six  months  is  reasonable,  and  we  find  that  it  is, 
the  time  for  which  interest  should  be  allowed  is  one-half  the  construction  period  plus  three 
months,  which  will  be  ample  to  cover  the  relatively  small  amount  of  money  which  is  e.xpended 
prior  to  construction.  This  is  the  method  which  has  been  adopted  by  the  bureau,  and  interest 
is  computed  upon  the  total  amount  of  the  road  and  general  expenditures  accounts  with  the 
exception  of  land  and   interest  during  construction. 

"A  considerable  part  of  the  cost  of  a  railroad  is  in  its  equipment.  While  it  is  true  that 
as  a  general  rule  equipment  is  not  purchased  until  the  road  is  practically  completed,  and  but 
little  interest  is  paid  on  money  expended  for  equipment  before  operation  begins,  nevertheless 
it  is  necessary  to  have  the  equipment  some  little  time  prior  thereto.  For  this  reason  some 
provision  for  interest  should  be  made.  It  is  believed  that  an  allowance  of  three  months  on 
the  money  expended  for  exquipment  is  equitable.     This  rule  has  been  adopted." 

The  commission,  following  its  interpretation  of  the  Minnesota  Rate  Cases, 
refused  to  allow  any  overhead  percentages  upon  the  present  value  of  the  land. 

The  upshot  of  the  matter  was  that  the  Interstate  Commerce  Commission 
in  its  reproduction-cost  appraisal  of  the  Texas  Midland  Railroad  made  an  allow- 
ance of  only  7.6  per  cent  upon  the  total  base  reproduction  cost  of  the  property, 
exclusive  of  land,  for  the  general  overheads. 

It  is  not  advisable  in  this  report  to  enter  further  into  the  discussion  of  the 
details  of  valuation,  either  for  the  purpose  of  showing  the  extraordinary  dis- 
crepancies that  develop  in  the  effort  to  apply  the  reproduction-cost  theory  to  the 
valuation  of  a  public  utility  property,  particularly  with  respect  to  the  determina- 
tion of  the  overhead  expenses,  land  values,  and  intangibles  such  as  going  con- 
cern value  and  development  cost,  or  for  the  purpose  of  showing  the  vast  differ- 
ences in  the  results  obtained,  especially  in  these  abnormal  times,  where  different 
methods  of  valuation  are  used. 

The  appraisals  submitted  by  the  companies  and  those  prepared  on  behalf 
of  the  public  are  often  as  far  apart  as  the  East  is  from  the  West,  and  even  where 
the  companies  employ  half  a  dozen  appraisal  experts  to  swear  to  their  theories 
of  valuation  where  one  is  employed  by  the  public,  that  fact  does  not  make  the 


380  Electric  Railway  Problem 

appraisals  submitted  by  the  companies  half  a  dozen  times  as  reliable  as  those 
for  which  the  public  contends.  The  problem  of  the  valuation  is  not  made  simple 
by  long  discussion  and  analysis.  The  courts  and  the  commissions  are  still  quot- 
ing the  language  of  Justice  Harlan  in  the  epoch-making  decision  of  the  United 
States  Supreme  Court  in  the  case  of  Smyth  vs.  Ames,''  where  he  says: 

"We  hold,  however,  that  the  basis  of  all  calculations  as  to  the^  reasonableness  of  rates 
to  be  charged  by  a  corporation  maintaining  a  highway  under  legislative  sanction  must  be  the 
fair  value  of  the  property  being  used  by  it  for  the  convenience  of  the  public.  .\nd  in  order 
to  ascertain  that  value,  the  original  cost  of  construction,  the  amount  e.\pendcd  in  permanent 
improvements,  the  amount  and  market  value  of  its  bonds  and  stock,  the  present  as  cofnpared 
with  the  original  cost  of  construction,  the  probable  earning  capacity  of  the  property  under 
particular  rates  prescribed  by  statute,  and  the  sum  required  to  meet  operating  expenses,  are 
all  matters  for  consideration,  and  are  to  be  given  such  weight  as  may  be  just  and  right  in 
each  case.  We  do  not  say  that  there  may  not  be  other  matters  to  be  regarded  in  estimating 
the  value  of  the  property.  What  the  company  is  entitled  to  ask  is  a  fair  return  upon  the 
value  of  that  which  it  employs  for  the  public  convenience.  On  the  other  hand,  what  the 
public  is  entitled  to  demand  is  that  no  more  be  e.xacted  from  it  for  the  use  of  a  public 
highway  than  the  services  rendered  by  it  are  reasonably  worth." 

Subsequent  to  the  decision  in  Smyth  z's.  Ames,  and  quite  contrary  to  the 
comprehensive  language  used  by  the  court  in  that  case,  the  reproduction-cost 
method  acquired  such  vogue  in  valuation  matters  that  it  was  regarded  as  almost 
the  exclusive  method  of  determining  fair  present  value.  In  fact,  many  public 
utility  men  still  speak  of  "present  value"  as  being  synonymous  with  reproduction 
cost,  either  new  or  less  depreciation.  But  even  prior  to  the  present  period  of 
extraordinary  prices,  the  reproduction-cost  method  was  coming  into  disrepute 
with  the  public  service  commissions.  This  method  is  so  highly  theoretical  and 
lends  itself  so  readily  to  the  vagaries  of  the  engineering  imagination  in  that  un- 
happy borderland  where  scientific  attainments  submit  themselves  to  the  uses  of 
financial  exploitation  for  a  price,  that  it  has  been  unable  to  escape  the  well-nigh 
unanimous  condemnation  of  thoughtful  men  who  have  been  given  the  responsi- 
bility for  determining  the  fair  value  of  public  utility  properties.  As  an  illustra- 
tion of  the  present  trend  of  thought  in  public  service  commission  circles,  I  quote 
a  resolution  submitted  by  Mr.  Paul  P.  Ilaynes,  at  that  time  a  member  of  the 
Indiana  Public  Service  Commission,  to  the  National  Association  of  Railway  and 
Utilities  Commissioners,  at  their  national  convention  held  in  Indianapolis,  Octo- 
ber 16,  1919,  and  now  under  consideration  by  the  valuation  conuuittee  of  the  asso- 
ciation. This  resolution  represents  a  right-about-face  in  the  application  of  the 
"fair  value"  rule,  declaring  as  it  does  that  "the  honest  and  prudent  investment" 
should  be  given  the  greater  weight  in  the  valuation  of  public  utility  properties. 
The  following  is  the  resolution  : 

"Whereas,  in  recent  years  the  cost-of-roproduction  method  of  evaluation  has  in  many 
instances  become  the  controlling  factor  in  determining  the  fair  value  of  the  property  of  public 
utilities;  and 

"WiiERE.\s.  during  the  past  few  years,  there  has  tiecn  an  unprecedented  increase  in  the 
cost  of  materials  and  supplies  entering  into  the  construction  of  utility  properties;  and 

"Whereas,  the  cost-of-reproduction  methcxi  of  evaluation,  although  applied  with  moder- 
ating averages,  arbitrarily  attaches  to  properties  con.structcd  before  the  high  price  period, 
values  greatly  in  excess  of  the  actual  prudent  investment  therein,  in  many  instances  from 
25  to   1(10  per  cent  greater  than   such    investment ;   and 

"WiiFJtEAS.  under  present  abnormal  conditions,  the  cost-of-reproduction  theory  has  ceased 
to  perform  the  service  which  it  was  designed  to  perform,  and  now  leads  to  unwarranted  and 
unreasonable  values  which  offer  little  guidance  in  determining  the  fair  value  of  the  property 
of  public  utilities;  and 

"Whkreas,  the  continuance  of  the  cost-of-reproduction  theory  as  the  controlling   factor 


Valuation  381 

in  public  utility  valuations  will  in  the  future  undoubtedly  cast  a  burden  upon  those  utilities 
which  were  required  by  public  necessity  to  make  substantial  plant  investments  during  the 
high  price  period, 

"Therefore  be  it  Resolved,  by  the  National  Association  of  Railway  anu  Utilities 
Commissioners,  that  a  continued  disposition  on  the  part  of  commissions  and  courts  to  consider 
cost  of  reproduction  or  cost  of  reproduction  less  depreciation  as  the  controlling  factor  in 
determining  the  value  of  the  property  of  utilities  will  tend  to  impair  scientific  and  equitable 
regulation,  to  permit  the  establishment  of  unwarranted  and  unreasonable  values,  and  ulti- 
mately to  diminish  public  confidence  in  commissions  and  courts,  and  thereby  impair  their 
usefulness. 

"Be  it  further  Resolved,  that  one  of  the  obligations  of  commissions  and  regulatory 
bodies  is  to  protect  and  preserve,  insofar  as  it  lies  within  their  power,  honest  and  prudent 
investment  in  utility  properties,  and  that  in  view  of  abnormal  price  conditions  now  prevailing, 
equity,  justice  and  a  proper  regard  for  the  interests  of  utilities  as  well  as  the  public,  seem 
to  demand  that  in  the  valuation  of  public  utility  property  greater  weight  should  be  given  to 
the  honest  and   prudent   investment   therein. 

"Be  it  further  Resolved,  that  it  is  not  intended  by  this  resolution  to  hold  that  the  fair 
value  rule  should  be  abandoned  or  impaired,  but  rather  that  under  the  fair  value  rule  and  in 
view  of  abnormal  conditions  prevailing,  a  greater  measure  of  justice  and  equity  will  be 
secured  by  giving  greater  weight  to  the  honest  and  prudent  investment,  and  less  weight  to 
the  cost  of  reproduction  or  cost  of  reproduction  less  depreciation." 

The  issue  between  the  historical  cost  method  and  the  reproduction-cost 
method  was  discussed  at  the  last  of  the  public  hearings  by  Dr.  Edward  \V. 
Bemis,  economist  and  valuation  expert,  who  appeared  as  a  witness  representing 
the  general  public.  Dr.  Bemis  considers  the  valuation  as  even  more  fundamental 
than  the  rate  of  return.  He  refers  to  the  efforts  of  the  street  railway  companies 
"before  this  Commission  and  elsewhere  to  generalize  and  to  excite  universal  pub- 
lic sympathy  for  all  railway  companies,"  and  expresses  the  opinion  that  each 
street  railway  must  be  considered  separately,  as  "conditions  vastly  differ."  At 
pages  2105  to  2107  of  the  Proceedings,  he  says : 

"The  great  question  before  the  country  w'ith  regard  to  these  matters  in  general  has  been 
whether  they  have  been  getting  and  are  getting  a   fair  return. 

"The  problem  has  not  been  so  much  what  constituted  a  fair  return  in  the  shape  of  a 
percentage — that  figure  running  anywhere,  usually,  from  six  to  seven  per  cent,  as  to  the 
whole  property,  recognizing  that  part  of  it  is  usually  in  five  per  cent  bonds — but  the  test  has 
been  the  valuation  on  which  the  return  is  to  be  estimated. 

"There  are  two  tests,  it  seems  to  me,  and  practically  only  two  tests,  of  a  fair  return. 
There  are  variations  of  those  two  tests,  but  there  are  fundamentally  only  two;  and  the  great 
problem  before  the  country   is  the   war  between  those   two   tests. 

"One  is  the  reproduction  valuation  and  the  other  the  historical  valuation. 

"The  reproduction  theory  is  the  estimated  cost  of  the  reproduction  new  today,  on  the 
basis  either  of  existing  prices  or  the  prices  of  two  or  three  years  just  past,  either  with  or 
without  depreciation  from  all  causes,  physical  obsolescence  and  inadequacy.  That  is  a  minor 
conflict  as  to  the  application  of  the  reproduction  theory,  whether  depreciation  shall  be  taken 
off  or  not.  But  the  fundamental  proposition  is  the  estimated  cost  of  reproduction  on  prices 
that  exist  today  and  have  existed  for  two  or  three  years,  and  may,  to  a  large  degree,  exist 
for  the  next  two  or   three   years. 

"The  great  opposing  test  is  whether  a  company  is  earning  a  fair  return  on  the  actual 
cost  of  the  property  now  in  use,  less  depreciation,  and  with  due  regard  to  the  history  of  the 
investment.  If  a  company  has  not  earned  enough  in  the  past  to  take  care  of  depreciation, 
an  allowance  under  this  theory  must  be  made  for  it  in  some  form.  If  a  company  has  not 
earned  enough  to  take  care  of  depreciation,  that  does  not  prevent  depreciation  having  oc- 
curred. Depreciation  is  not  a  factor  of  profit.  It  is  a  result  of  physical  and  functional 
causes :  but  the  ability  of  the  company  to  take  care  of  depreciation  through  its  earnings  may 
greatly  affect  our  treatment  of  it  in  a  rate  case,  and  may  cause  us  to  set  up  a  counterbalancing 
figure  in  the  shape  of  a  going  value  or  something  of  that  kind,  if  the  company  has  not  been 
able  to  take  care  of  depreciation. 

"On  the  other  hand,  if  the  company  has  earned  much  more  than  a  fair  rate  of  return 
on  the  actual  investment,  weight  must  be  given,  under  this  tlieory,  to  that  fact.  I  do  not  say 
how  much  weight,  but  some  weight  will  have  to  be  given  to  it,  I  believe. 

"Under  the  first  theory,  which  I  call  the  reproduction  theory,  the  companies  do  make 
large  claims,  and  they  can  properly  make  large  claims,  because  the  results,  honestly,  carefully 


382  Electric  Railway  Problem 

applied,  will  result  in  much  larger  figures  than  the  historical  cost.  To  be  sure,  I  believe 
they  are  exaggerated  in  the  minds  of  many  engineers  by  fanciful  estimates,  extremely  large 
overhead  charges  allowed,  and  development  charges,  but  still,  under  any  application  of  the 
theory  there  will  be  a  very  large  valuation  secured  by  that  method. 

"Under  the  second,  which  for  short  I  will  call  the  historical  theon-.  which  is  adopted 
to  a  large  degree  by  some  State  Public  Service  Commissions,  notably  in  Massachusetts,  New 
Hampshire,  Indiana  and  Illinois,  a  valuation  is  reached  which  is  usually  much  below  the 
outstanding  securities — not  necessarily  in  Massachusetts,  because  there  they  have  kept  down 
the  issuance  of  securities,  but  in  other  states  that  usually  is  the  case.  ' 

"This  theory,  however,  in  my  judgment  is  not  only  a  popular  theory  among  the  great 
mass  of  citizens,  but  I  believe  it  is  an  e(|uitable  theory.  It  is  the  theory  that  had  been  largely 
controlling  in  the  United  States  Supremo  Court  until  the  Nebraska  Kate  Case."  when  the 
mistaken  effort  was  made  by  the  attorneys  lor  Nebraska  to  introduce  the  reproduction  theory, 
because  it  was  thought  the  public  would  gain  somewhat  by  that  theory  in  the  valuation  of 
the  Pacific  railroads  which  had  been  built  under  war  prices ;  and  the  courts  very  largely  swung 
around  afterwards  to  that  theory;  but  they  have  now  split  with  it  in  three  vital  respects,  and 
the  Supreme  Court  now  has  no  definite  theory. 

"The  three  respects  in  which  they  have  broken  from  the  reproduction  theory  are,  first. 
with  respect  to  paving  over  mains  and  conduits.  That  is  no  longer  allowed  by  most  courts 
if  the  paving  was  put  there  after  the  mains  or  conduits  were  laid ;  but  it  is  an  absolute  logical 
split   from  the  reproduction  theory,  not  to  allow  it. 

".•\gain,  there  has  been  a  split  from  that  theory  with  respect  to  the  matter  of  land.  In 
the  Minnesota  Rate  Cases;"  Justice  Hughes  emphasized  a  position  which  is  neither  the  histor- 
ical theory  nor  the  reproduction  theory,  but  takes  the  value  of  the  adjacent  land  at  the  time 
of  valuation,  and  refuses  to  put  on  any  costs  of  acquisition,  any  overhead,  such  as  interest 
on  the  land  while  the  railroad  is  being  built,  or  engineering  or  any  other  charges,  although 
they  are  always  incurred  both  in  the  historical  theory  and  in  the  reproduction  tlicory  ;  but  the 
Supreme  Court,  perhaps  thinking  that,  even  applying  that  value  of  adjoining  land,  you  got 
something  nearer  to  justice  than  if  you  took  the  reproduction  theory  and  then  added  the 
overheads  on  that,  adopted  a  theory  which  has  no  logic  in  it.  as  I  can  see  it,  but  nevertheless 
is  interesting  because  it  is  a  break  from  the  reproduction  theory. 

"The  third  break  has  been  in  the  case  of  going  value.  The  reproduction  theon-  of  going 
value  is  based  on  the  cost  of  reproducing  the  business.  The  courts  have  split  from  that,  and 
have  taken  the  historical,  early  losses  not  made  up  by  later  gains,  as  in  the  Kings  County 
Gas  Case,  and  in  the  Des  Moines  Gas  Case."'" 

It  is  often  assumed  that  a  "big  valuation"  is  to  the  advantage  of  the  present 
investors,  but  the  electric  railway  business  has  evidently  now  reached  a  stage 
where  its  salvation  as  an  industry  depends  u])on  a  conservative  capitalization, 
with  security  both  as  to  the  investment  itself  and  as  to  its  earning  power,  rather 
than  upon  a  large  theoretical  value  which  in  itself  stands  in  the  way  of  a  solution 
of  the  problem  of  street  railway  credit  and  street  railway  prospcritv.  It  is  un- 
questionably important  from  every  point  of  view  that  the  rate  base  should  not 
be  fixed  at  so  high  a  figure  as  to  prove  the  essential  and  necessar}'  bankruptcy 
of  the  industry.  From  the  point  of  view  of  public  policy,  so  far  as  it  involves 
the  possibility  of  a  change  from  private  to  public  ownership  and  operation,  it 
cannot  be  denied  that  with  respect  to  the  valuation  there  is  a  sharp  conflict  of 
interest  between  the  present  Owners  and  the  future  purchasers  of  street  railway 
property.  It  is  clearly  to  the  interest  of  the  owners  to  get  the  valuation  of  their 
property  fixed  at  as  high  a  ligure  as  practicable  without  destroying  the  possibility 
of  sale.  On  the  other  hand,  the  public  has  a  directly  contrary  interest  in  that 
a  low  valuation  as  the  basis  for  public  purchase  is  always  desirable  from  the 
public  point  of  view  and  in  many  cases  may  be  essential  to  the  financial  success 
of  public  ownership  and  operation. 

This  discussion  of  the  valuation  has  not  led  us  to  a  definite,  final  result, 
cither  with  respect  to  tlie  fundametUal  method  to  be  employed  in  arriving  at 
fair  value  as  a  basis  for  the  readjustment  of  the  public  relations  of  the  electric 


Valuation  383 

railways,  or  as  to  the  specific  and  detailed  rules  for  the  application  of  the  method 
chosen.  It  has  shown,  however,  beyond  a  doubt  that  the  electric  railways  can- 
not come  into  the  court  of  public  opinion  claiming  in  equity  a  valuation  of  their 
property,  either  for  rate  purposes  or  for  public  purchase,  arrived  at  in  strict  ac- 
cordance with  the  recommendations  of  the  Committee  on  Valuation  of  the  Ameri- 
can Electric  Railway  Association  or  in  strict  accordance  with  the  rules  laid  down 
by  Professor  Cooley.  The  "ignorance"  of  the  public  is  too  profound  to  enable 
it  to  appreciate  the  equity  of  a  method  that  would,  at  this  stage  of  the  business, 
make  good  to  the  present  owners  of  street  railway  securities  all  the  losses  that 
they  or  their  predecessors  may  have  heretofore  incurred  in  the  street  railway 
business,  from  the  inception  of  horse-car  transportation  down  to  the  present 
time,  and  that  would  make  up  to  the  common  stockholders  of  the  operating 
companies  the  losses  that  the  bondholders  and  the  guaranteed  stockholders 
have  incurred  through  the  depreciation  in  the  purchasing  power  of  the  dol- 
lar. In  the  opinion  of  many  of  the  witnesses  who  appeared  before  the 
Commission,  the  American  public  is  "fair-minded"  and  will  give  the  electric 
railways  a  "square  deal"  when  the  facts  are  thoroughly  understood.  It  seems 
perfectly  obvious  that  the  extreme  claims  presented  by  the  electric  railway  com- 
panies, and  by  the  engineering  experts  employed  by  them  in  most  valuation 
cases,  do  not  have  the  effect  of  making  the  public  "understand" ;  but  on  the  con- 
trary tend  to  accentuate  the  distrust  and  hatred  that  have  already  long  been 
characteristic  of  the  relations  between  urban  communities  and  the  street  railway 
corporations.  In  other  words,  the  electric  railways,  if  they  follow  the  lead  of  the 
Committee  on  Valuation  and  of  the  school  of  appraisal  engineers  represented  in 
the  testimony  by  Professor  Cooley  will,  in  my  judgment,  be  "riding  for  a  fall." 
Any  valuations  that  may  be  established  in  accordance  with  this  leadership  in 
these  abnormal  times  are  likely  to  cause  a  "backfire,"  if  we  may  be  permitted  to 
use  Mr.  Babson's  expression  where  he  was  giving  voice  to  his  fear  of  the  results 
of  either  public  ownership  or  the  service-at-cost  plan. 

There  is  something  about  the  prevalent  theories  of  utility  service  under 
public  regulation  that  makes  it  hard  for  public  utility  men  to  conceive  of  the  pos- 
sibility of  ultimate  loss  to  investors  in  street  railway  securities.  The  broad 
mantle  of  public  interest  and  public  guaranty  is  expected  even  to  reach  back  over 
the  generations  that  are  past  and  to  make  good  luiiic  pro  tunc  the  investments 
then  made  on  a  frankly  speculative  basis.  The  public  is  even  expected  to  ignore 
the  losses  attendant  upon  receiverships  and  reorganizations  in  the  past  and  to 
make  good  to  the  present  investors  the  long- forgotten  losses  which  their  less 
fortunate  forebears  underwent  in  the  earlier  days  of  street  railway  development. 
The  utility  men  are  not  entirely  unanimous  in  making  these  claims.  General 
Tripp  proved  to  be  a  notable  exception,  but  the  orthodox  school  of  street  railway 
appraisers  insists  on  getting  the  ancient  losses  in.  whether  the  historical  cost 
method  or  the  reproduction-cost  method  is  used.  The  public  generally  is  inclined 
to  approve  the  actual  investment  theory  without  the  frills  of  promoter's  profits 
and  hypothetical  deficiencies  cumulated  at  compound  interest.  On  this  basis,  the 
public  will  even  be  lenient  with  respect  to  accrued  depreciation  where  it  can  be 
clearly  shown  that  the  electric  railways,  under  prescribed   rates,   were  in   fact 


384  Electric  Railway  Problem 

well  managed  and  well  maintained  and  still  were  unable  to  earn  the  depreciation 
as  it  accrued.  If  the  experience  of  the  electric  railway  industry  has  proven  any- 
thing, it  is  the  fundamental  importance  of  conservatism  in  capitalization  and  the 
capital  account,  and  the  fatal  danger  inherent  in  the  perpetuation  of  a  load  of 
dead  investment.  Surely,  in  these  critical  times,  the  electric  railways  cannot 
except  to  repair  their  broken  fortunes  on  the  theory  that  all  things — profits  and 
losses  alike — have  worked  together  to  enhance  the  value  of  their  property. 


Chapter  XXXIX 
THE  RATE  OF  RETURN 

The  valuation  is  fundamental  because  it  is  the  basis  for  rate-fixing  and  also 
the  basis  for  the  purchase  price  in  case  the  property  is  to  be  transferred  from 
private  to  public  ownership.  The  rate  of  return  does  not  affect  the  purchase 
price,  except  as  the  latter  is  left  indeterminate.  In  that  case  a  high  rate  of 
return  will  undoubtedly  tend  to  enhance  the  purchase  price  when  that  comes  to 
be  fixed  at  some  future  time.  In  connection  with  the  discussion  of  a  readjust- 
ment of  the  public  relations  of  the  electric  railways  it  would  not  be  safe  to 
leave  out  of  consideration  the  possibility  of  future  public  purchase,  and  this  is 
particularly  true  where  any  sort  of  a  service-at-cost  plan  or  any  kind  of  a  public 
subsidy  or  public  guaranty  is  to  be  provided.  We  cannot  assume  that  private  owner- 
ship is  to  be  continued  indefinitely.  Therefore,  we  must  discuss  the  rate  of  return 
not  merely  as  a  complementary  factor  to  the  valuation  for  the  purpose  of  provid- 
ing a  fair  return  to  the  investors  from  the  rates,  but  also  as  a  factor  affecting 
future  public  policy  with  respect  to  purchase.  From  the  public  point  of  view,  a 
low  valuation  and  a  low  rate  of  return  are  doubly  advantageous,  as  they  keep 
the  cost  of  the  service  down  while  the  railways  remain  in  private  ownership, 
and  put  the  city  in  a  position  to  undertake  municipal  ownership  with  relative  ease 
and  with  a  relatively  good  prospect  of  financial  success.  For  the  facilitation  of  a 
public  ownership  program  a  low  valuation  is  advantageous  even  though  the 
present  owners  of  the  property  be  given  a  compensating  high  rate  of  return. 
On  the  other  hand,  a  high  vaulation  with  a  high  rate  of  return  is  doubly  dis- 
advantageous to  the  public,  as  this  combination  enhances  the  cost  of  service 
under  private  ownership  and  at  the  same  time  makes  it  difficult  to  inaugurate  or 
succeed  in  public  ownership.  Furthermore,  while  a  low  valuation  even  though 
coupled  with  a  high  rate  of  return  is  advantageous  to  the  public  from  the  point 
of  view  of  ultimate  purchase,  this  combination  may  prove  quite  disadvantageous 
to  the  public  in  case  the  policy  of  private  ownership  is  continued  for  a  long  time ; 
for  it  means  a  high  cost  of  all  new  capital  brought  into  the  business  for  exten- 
sions and  betterments. 

This  discussion  seems  to  be  based  on  the  assumption  that  the  valuation  and 
the  fair  rate  of  return  are  not  facts  to  be  ascertained  separately,  but  correlated 
factors  to  be  juggled  with.  In  fact,  the  resettlement  of  the  public  relations  of 
any  given  street  railway  is  likely  to  be  a  matter  of  negotiation  between  opposing 
interests,  a  give-and-take  process.  In  these  negotiations  we  cannot  expect  the 
present  owners  of  the  railways  to  do  other  than  look  out  for  their  own  interests, 
and  likewise  the  public  must  not  be  expected  to  assume  an  entirely  judicial  atti- 
tude, but  it  must  always  be  borne  in  mind  that  local  transportation  is  a  public 


386  Electric  Railway  Problem 

function,  that  it  exists   for  service  primarily,  and  that   in  the  broad  sense  the 
pubhc  interest  is  predominant. 

With  these  considerations  before  us,  what  is  the  test  o£  the  rate  of  return 
to  be  allowed  on  property  invested  in  electric  railways  under  private  ownership? 
Is  it  to  be  a  non-confiscatory  rate,  a  "fair"  rate  or  an  effective  rate?  Where  it 
is  a  case  of  reducing  charges  or  of  keeping  them  down  by  the  exercise  of  the 
police  power,  the  regulatory  authorities  are  limited  by  the  inhibitions  of  the 
Federal  Constitution  as  interpreted  by  the  United  States  Supreme  Court.  The 
rate  of  return  allowed  upon  the  fair  value  of  the  property  must  not  be  so  low  as 
to  be  confiscatory.  Indeed,  there  is  a  tendency  in  the  decisions  of  the  Supreme 
Court  to  treat  the  term  "fair"  w-hen  applied  to  the  rate  of  return  as  identical 
with  "non-confiscatory."  In  a  broad  sense,  and  subject  to  many  qualifications, 
six  per  cent  came  to  be  regarded,  in  normal  times,  as  marking  the  "dead  line" 
between  a  fair  return  and  confiscation.  It  is  noteworthy,  however,  that  the 
Supreme  Court,  in  the  case  of  Lincoln  Gas  &  Electric  Lit/lit  Company  z:  Lincoln, 
decided  June  2,  1919,'  modified  a  decree  of  the  district  court  entered  on  Sep- 
tember 23,  1915,  wherein  the  company's  complaint  against  the  validity  of  a  1906 
regulatory  ordinance  was  dismissed,  by  stipulating  that  such  dismissal  "shall  be 
without  prejudice  to  the  commencement  of  a  new  action  to  restrain  the  enforce- 
ment of  said  ordinance  hereafter."  In  rendering  the  opinion  for  the  court,  Mr. 
Justice  Pitney  used  the  following  significant,  but  somewhat  inconclusive  lan- 
guage (Supreme  Court  Reports,  I^w  Edition  63,  page  582) : 

"We  cannot  approve  the  finding  that  no  rate  yielding  as  much  as  6  per  cent  upon  the 
invested  capital  could  be  regarded  as  confiscatory,  in  view  of  the  undisputed  evidence,  accepted 
by  the  master,  that  8  per  cent  was  the  lowest  rate  sought  and  generally  obtained  as  a  return 
upon  capital  invested  in  banking,  merchandising,  and  other  businesses  in  the  vicinity ;  7  per 
cent  Iteing  the  'legal  rate'  of  interest  in  Nebraska.  Complainant  had  not  such  a  monopoly 
nor  were  its  profits  'virtually  guaranteed'  in  such  a  sense  as  to  permit  the  public  authorities 
to  restrict  it  to  a  return  of  6  per  cent  upon  its  invested  capital.  It  is  not  entirely  clear, 
however,  that  the  rate  ordinance  did  so  restrict  it. 

******** 

"Perhaps  it  would  go  without  saying,  but  in  our  opinion  the  decree  ought  to  be  modified 
so  as  to  permit  complainant  to  make  another  application  to  the  courts  for  relief  against  the 
operation  of  the  ordinance  hereafter,  if  it  can  show,  as  a  result  of  its  practical  test  of  the 
dollar  rate  since  May  1.  1915,  or  upon  evidence  respecting  values,  costs  of  operation,  and  the 
current  rates  of  return  upon  capital  as  they  stand  at  the  time  of  bringing  suit  and  are  likely 
to  continue  thereafter,  that  the  rale  ordinance  is  confiscatory  in  its  effect  under  the  new 
conditions.  It  is  a  matter  of  common  knowledge  that,  owing  principally  to  the  World  War, 
the  costs  of  labor  and  supplies  of  every  kind  have  greatly  advanced  since  the  ordinance  was 
adopted,  and  largely  since  this  cause  was  last  heard  in  the  court  below.  .\nd  it  is  equally 
well  known  that  annual  returns  upon  capital  and  enterprise  the  world  over  have  materially 
increased,  so  that  what  would  have  been  a  proper  rate  of  return  for  capital  invested  in  gas 
plants  and  similar  public  utilities  a  few  years  ago  furnishes  no  .safe  criterion  for  the  present 
or  for  the   future." 

This  language  of  Justice  Pitney 's  opinion  is  clearly  dictum,  but  its  intima- 
tions as  to  the  probable  attitude  of  the  Supreme  Court  with  respect  to  the  rate  of 
return  in  cases  that  may  come  before  it  under  the  abnormal  conditions  now  pre- 
vailing are  very  significant.  Clearly,  verj'  little  reliance  can  now  be  placed  upon 
the  assumption  that  the  United  States  Supreme  Court  will  sustain  as  non-confis- 
catory any  regulatory-  act  that  does  not  reduce  the  rate  of  return  upon  invested 
capital  below  six  per  cent. 

Moreover,  the  public  utility  commissions  of  the  several  states  generally  act 


Rate  of  Return  387 

under  a  somewhat  different  rule  from  that  laid  down  by  the  United  States  courts 
in  confiscation  cases.  The  commissions  aim  to  reach  a  result  that  will  be  "fair" 
to  the  investors  and  that  will  be  adequate  to  induce  new  capital  to  flow  into  the 
enterprise  in  sufficient  quantities  to  take  care  of  expanding  service.  They  aim 
to  keep  well  above  the  "dead  line."  In  the  rather  celebrated  Passaic  Gas  Case, 
the  New  Jersey  Board  of  Public  Utility  Commissioners  allowed  8  per  cent  upon 
the  value  of  the  property.  The  valuation  was  hotly  contested  in  the  courts,  by 
the  company  because  the  commission  had  not  included  a  separate  item  for  the 
alleged  value  of  the  franchises,  and  by  the  municipalities  because  the  commission 
had  included  an  allowance  of  30  per  cent  of  the  physical  valuation  for  going 
concern.  The  New  Jersey  courts  upheld  the  commission  on  both  points.  In 
rendering  the  opinion  in  the  State  Supreme  Court,  which  was  later  adopted  by  the 
Court  of  Errors  and  Appeals,  Mr.  Justice  Swayze  discussed  the  just  and  reason- 
able rate  for  service,  in  its  relation  to  the  rights  of  the  consumer  on  the  one  side 
and  to  those  of  the  investor  on  the  other,  in  the  following  manner :  ^ 

"On  the  one  hand  a  just  and  reasonable  rate  can  never  exceed,  perhaps  can  rarely  equal, 
the  value  of  the  service  to  the  consumer.  On  the  other  hand,  it  can  never  be  made  by  com- 
pulsion of  public  authority  so  low  as  to  amount  to  confiscation.  A  just  and  reasonable  rate 
must  ordinarily  fall  somewhere  between  these  two  extremes,  so  as  to  allow  both  sides  to 
profit  by  the  conduct  of  the  business  and  the  improvements  of  methods  and  increase  of 
efficiency.  Justice  to  the  consumer  ordinarily  would  require  a  rate  somewhat  less  than  the 
full  value  of  the  service  to  him;  and  justice  to  the  company  would  ordinarily  require  a  rate 
above  the  point  at  which  it  would  become  confiscatory.  To  induce  the  investment  and  con- 
tinuance of  capital  there  must  be  some  hope  of  gain  commensurate  with  that  realizable  in 
other  business;  the  mere  assurance  that  the  investment  will  not  be  confiscated  would  not 
suffice.'' 

Justice  Swayze  clearly  assumed  that  the  value  of  the  service  to  the  consumer 
will  always  be  more  than  enough  to  yield  a  profit  to  the  company.  The  value 
of  the  service  is  regarded  as  the  ceiling  in  the  room  of  regulation  and  the  non- 
confiscaton,'  base  line  is  the  floor,  and  naturally  it  is  assumed  that  the  ceiling 
cannot  sink  below  the  floor  or  the  floor  rise  above  the  ceiling.  But  the  analogy 
breaks  down  and  the  figure  of  speech  fails  in  cases  where  as  a  matter  of  fact 
the  cost  of  the  service  including  a  fair  return  to  the  investor  exceeds  the  value 
of  the  service.  Obviously,  the  constitutional  limitations  enforced  by  the  Federal 
courts  are  designed  to  prevent  certain  types  of  injustice  being  done  by  the  affirma- 
tive act  of  public  regulatory  bodies,  while  the  public  service  laws  of  the  states  are 
designed  to  promote  justice  affirmatively,  as  well  as  to  restrain  private  corpora- 
tions engaged  in  rendering  public  service  from  doing  injustice  to  the  people  who 
are  dependent  upon  them  for  the  service.  It  cannot  be  doubted,  in  the  light  of 
the  evidence  produced  before  the  Commission,  that  some  electric  railway  enter- 
prises fall  within  the  category  where  the  value  of  the  service  to  the  individual 
patrons  of  the  line  is  less  than  the  cost  necessarily  incurred  by  the  company 
under  present  conditions  in  rendering  the  service.  In  such  cases  it  is  a  futile 
act  for  the  regulating  authority  to  fix  the  fair  rate  of  return  to  the  investors 
unless  it  be  for  the  purpose  of  definitely  putting  the  enterprise  beyond  the  pale 
of  regulation. 

But  our  entire  discussion  up  to  this  point  hinges  upon  the  acknowledged 
necessity  for  a  restoration  of  electric  railway  credit  in  order  that  new  capital  may 
become  available  for  necessary  extensions,  additions  and  improvements  of  trans- 


388  Electric  Railway  Problem 

portation  facilities.  From  this  point  of  view,  whether  under  private  or  under 
pubhc  ownership,  the  test  of  the  rate  of  return  is  its  persuasiveness  to  new  in- 
vestors, not  primarily  its  justice  to  the  investors  whose  money  is  already  in  the 
enterprise.  It  is  doubtless  true  that  under  certain  conditions  a  policy  of  justice 
to  the  old  investors  will  tend  to  attract  new  ones;  but,  on  the  other  hand,  it  is 
unquestionably  true  that  a  policy  of  leniency  toward  existing  security-holders, 
without  much  regard  to  the  past  financial  policies  upon  which  their  claims  de- 
pend, will  in  many  cases  tend  to  discourage  new  investors  from  coming  in. 
Obviously,  if  all  the  losses  of  the  past,  whether  the  result  of  original  bad  judg- 
ment, poor  management,  manipulation  or  outside  economic  causes,  are  now  to  be 
capitalized  and  given  a  perpetual  preference  in  the  distribution  of  the  earnings, 
the  new  investor  cannot  see  much  in  the  enterprise  for  him.  and  he  will  not  come 
in  at  all  or  else  will  demand  a  very  high  rate  of  return  for  his  speculative  risk. 
Under  such  conditions  receiver's  certificates  would  be  infinitely  more  attractive 
than  junior  securities. 

It  is  agreed  that  the  rate  of  return  must  be  sufficient  to  attract  new  capital 
to  the  extent  that  new  capital  is  essential,  but  what  rate  will  be  sufficient  depends 
both  upon  the  conditions  of  the  market  and  upon  the  conditions  of  the  invest- 
ment. We  must  consider,  therefore,  both  sets  of  conditions.  The  unprece- 
dented destructiveness  of  the  World  War  and  the  heavy  demand  for  new  capi- 
tal in  industrial  enterprises  in  the  present  reconstruction  period  have  united  to 
produce  a  relative  scarcity  of  free  capital  which  tends  to  increase  the  cost  of 
money.  Apparently,  it  was  tiiese  things  that  Justice  Pitney  had  in  mind  in  the 
Lincoln  Gas  Case  decision.  It  is  not  clear  from  the  language  he  used  whether 
he  also  had  in  mind  the  thought  that  the  decrease  in  the  purchasing  power  of 
money  affects  the  rate  of  return  demanded  by  capital.  That  this  thought  is  in 
the  minds  of  a  great  many  who  have  given  attention  to  the  problems  of  public 
utility  regulation  is  clear  not  only  from  the  testimony  before  the  Conmiission,  but 
from  other  sources.  For  instance,  very  recently  in  a  letter  discussing  the  ad- 
vantages of  the  actual-investment  theory  over  the  reproduction-cost  theory  in 
valuation,  a  state  public  service  commissioner  expressed  himself  as  follows: 

".Miiiost  all  commissioner.s,  I  believe,  have  made  the  mistake  of  holding  the  rate  of 
return  down  almost  to  pre-war  levels.  If  in  1915  or  191(),  a  Kencral  policy  had  been  adopted 
in  which  rates  of  return  were  increased  in  measurable  degrees  relating  to  the  increased  cost 
of  money  and  to  the  decreased  purchasing  power  of  money,  I  am  convinced  that  there  would 
not  now  Ik  a  gemral  demand   for  values  based  on  hi^h  war  prices. 

"It  .seems  fundamental  to  me  that  there  should  be  stability  to  utility  values.  The  most 
equitable  and  the  most  practical  method  of  securing  such  stability  is  to  follow  closely  the 
actual  investment.  This  done,  thereafter  the  rate  of  return  would  fluctuate  to  compensate 
for  constantly  changing  conditions.  Such  a  policy  would  go  far  in  attracting  capital  and 
maintaining  credit." 

As  we  have  already  seen,  Professor  Cooley  also  suggested  an  increase  in  the 

rate  of  return  corresponding  to  the  decrease  in  the  purchasing  power  of  money 

as  an  acceptable  alternative  to  the  use  of  war  prices  in  the  valuation.     Professor 

Irving  Fisher  also  stressed  this  point.    At  pages  1332  and  13.^  of  the  Proceedings, 

referring  to  the  testimony  given  by  Corjjoration  Counsel   William   P.   Burr,  of 

New  York  City,  Professor  Fisher  says: 

"He  spoke  about  the  income  which  the  investor  in  street  railways  was  getting  today 
iiiid  tried  to  make  out  that  he  was  getting  a  fair  return  on  his  investment.    Now  if  6  per  cent 


Rate  of  Retlkn  389 

was  a  fair  return  on  a  company  which  was  capitalized  before  the  war  at  a  certain  amount, 
12  per  cent  is  a  fair  return  today  on  that  same  capitalization,  because  the  price  level  has 
doubled.  Twelve  per  cent  today  is  only  6  per  cent  on  the  basis  of  a  recapitalization  in  terms 
of  our  present  cheaper  dollar,  our  fifty-cent  dollar.  That  is,  he  made  the  mistake  of  counting 
— suppose  a  concern  was  capitalized  at  $100,000,000  before  the  war  and  is  earning  $6,000,000 
today,  he  says  that  is  6  per  cent ;  but  it  is  not  6  per  cent,  it  is  only  3  per  cent.  Si.x  million 
dollars  today  are  si.x  millitjn  little  dollars,  and  he  is  taking  the  ratio  of  six  million  little  dollars 
to  one  hundred  million  big  dollars.  He  either  ought  to  recapitalize  in  terms  of  present  prices, 
which  one  of  the  members  of  the  Commission  suggested,  calling  the  capitalization  two  hundred 
millions  in  terms  of  modern  purchasing  power,  in  which  case  he  is  getting  six  millions  at 
three  per  cent,  or  he  ought  to  transplant  his  six  million  little  dollars  today  into  the  big  dollars 
of  the  pre-war  period,  and  they  would  be  only  three  millions  of  those  big  dollars. 

"To  show  clearly  this  shift,  suppose  you  go  back  to  an  ordinary  case  of  a  stockholder 
and  bondholder  in  a  corporation  that  does  adjust  the  price  of  its  product  quickly  and  easily, 
an  ordinary  industrial  corporation,  suppose  it  was  incorporated  for  $2,000,000,  one  million 
in  stock  and  one  million  in  bonds,  before  the  war.  And  suppose,  to  take  simple  figures,  that  the 
income  is  5  per  cent  on  both  of  those,  that  would  be  an  income  of  $50,000  to  the  bondholder  and 
$50,000  to  the  stockholder.  Today  if  the  prices  of  this  concern  have  been  doubled,  as  other 
prices  have  been,  and  the  cost  of  producing  labor  and  materials  has  also  doubled,  the  profits  of 
the  concern  will  also  be  doubled,  and  the  total  income  will  be,  instead  of  $100,000.  $200,000;  but 
the  bondholder  of  this  $200,000  will  no  longer  get  half.  He  will  still  get  the  $50,000  which 
he  is  entitled  to  under  the  terms  of  his  contract,  and  that  leaves  $150,000  to  the  stockholder, 
who  gets  therefore  three  times  as  much,  the  bondholder  getting  one-half  of  his  value,  getting 
nominally  the  same  value,  and  the  stockholder  getting  three  times  the  nominal  value  that  he  had 
before.  $150,000  instead  of  $50,000.  And  if  the  stocks  were  sold  on  that  new  basis  the  stocks 
ought  to  go  up  three  times,  they  ought  to  be  selling  at  three  times  what  they  were. 

"Now,  that  is  called  profiteering.  It  is  a  necessary  consequence  of  the  change  in  the 
price  level,  but  it  is  not  the  cause  of  the  change  in  the  price  level." 

In  reply  to  a  question  by  Commissioner  Gadsden,  Professor  Fisher  then  went 
on  to  apply  this  reasoning  to  the  nickel  fare.  He  had  shown  that  the  general 
prices  at  the  time  he  was  testifying  (August,  1919)  were  about  double  the  prices 
of  the  period  just  before  the  war  and  three  times  the  prices  of  1896.  He  said 
that  if  the  fare  of  5  cents  was  right  in  1896,  and  if  the  prices  of  street  railway 
labor  and  materials  on  the  average  have  kept  pace  with  the  general  rise  of  prices, 
"then  the  corresponding  fare  today  would  be  15  cents."  However,  he  did  not 
profess  any  knowledge  with  respect  to  the  street  railway  business  in  particular. 
At  page  1334  of  the  Proceedings,  he  says: 

"Now,  I  do  not  know  anything  about  the  labor  and  materials.  You  men.  of  course,  are 
going  into  that  and  will  inform  yourselves  whether  there  have  been  improvements  justifying 
a  lowering  in  fares  or  not,  and  whether  the  fare  was  excessive  in  1896.  But  there  would 
be  naturally  a  triple  adjustment  to  put  one's  self  in  the  same  position,  if  this  industry  is 
typical  of  industries  in  general." 

In  all  this  discussion.  Professor  Fisher  had  been  treating  the  return  on 
capital  as  if  it  were  affected  by  the  change  in  the  purchasing  power  of  money  in 
just  the  same  way  that  other  elements  of  cost  had  been  so  affected.  At  this 
point.  Commissioner  Meeker  took  up  the  question  as  tft  the  relation  of  interest 
rates  to  general  prices,  and  Professor  Fisher  admitted  that  interest  rates  are 
determined  by  factors  that  are  more  or  less  independent  of  price  levels.  This 
testimony  is  also  found  at  page  1334  of  the  Proceedings: 

"Commissioner  Meeker :  Just  there,  Professor  Fisher,  in  regard  to  a  6  per  cent  return 
and  a  12  per  cent  return,  the  interest  upon  capital,  of  course,  is  determined  by  factors  that 
are  more  or  less  independent  of  price  levels,  is  not  that  true? 

"Mr.    Fisher:     Yes. 

"Commissioner  Meeker :  That  is,  we  might  have  a  decrease  in  interest  rates  with  an 
increase  in  the  level  of  prices. 

"Mr.   Fisher:     Yes. 

"Commissioner   Meeker :     That  has  occurred  ? 


390  Electric  Railway  Problem 

"Mr.  Fisher:    Yes. 

"Commissioner  Meeker:     At  certain  times,  historically? 

"Mr.  Fisher:     Yes." 

The  discussion  then  went  to  the  point  of  the  effect  of  contracts  and  fare 
limitations  upon  the  adjustment  of  the  rate  of  return  to  meet  changes  in  the 
purchasing  power  of  money.  The  testimony,  at  pages  1334  and  1335  of  the 
Proceedings,  follows: 

"Commissioner  Meeker:  If  we  were  going  to  give  a  12  per  cent  return  upon  a  bonded 
debt — will  you  explain  how  you  would  bring  about  a  readjustment,  granting  that  the  pur- 
chasing power  of  the  income  of  a  bondholder  has  been  cut  in  half,  how  would  you  bring 
about  a  readjustment  so  that  its  purchasing  power  might  be  preserved  and  also  the  capital 
investment  preserved?  Because,  if  you  double  the  income  that  he  is  to  receive — well,  will 
you  e.xpand  on  that? 

"Mr.  Fisher:     Are  you  referring  to  the  bondholder  or  stockholder? 

"Commissioner   Meeker:     I    mean   the   bondholder   now. 

"Mr.  Fisher:  I  do  not  think  anything  could  be  done  for  the  bondholder  now.  You 
have  to  keep  your  contracts  and  get  your  pound  of  flesh  and 

"Commissioner   Meeker:     I   misunderstood  the   reference  which  you  made. 

"Mr.  Fisher:  But  with  the  nickel  fan-  unchanged,  which  is  now  worth  one-third  in 
purchasing  power  of  what  it  was  in  1896  or  one-half  of  what  it  was  before  the  war,  I 
sui)pose  you  have  the  chief  explanation  for  the  bankruptcy  that  has  been  going  on  and  the 
fact  that  the  stock  of  these  public  service  corporations,  according  to  Mr.  Babson,  has  gone 
down  to  a  quarter  on  the  average,  of  various  stocks  of  this  country,  of  what  they  were 
before  the  war,  and  the  natural  remedy  I  should  suppose  would  be  a  raise  of  fare. 

"Mr.  Warren:  In  other  words,  the  stock  of  a  public  utility  with  a  limited  income  is 
very  much  like  the  bond? 

"Mr.  l-'isher:  Yes,  the  stockholders  in  a  public  service  corporation  are  really  in  the 
same  position  as  the  bondholders  in  an  ordinary  corporation.  I  am  so  accustomed  to  express 
it  in  terms  of  the  bondholder,  because  1  am  thinking  of  the  typical  corporation,  that  this 
exceptional  case  that   you  have  to  deal   with   is   not  perhaps  adequately  emphasized. 

"Commissioner  Gadsden:  On  a  larger  scale  is  not  your  position  proved  and  substantiated 
by  the  fact  that  of  all  the  phases  of  human  effort,  all  lines  of  activity,  commercial,  industrial, 
and  otherwise,  the  only  ones  which  apparently  have  suffered  during  the  war,  we  will  say, 
are  those  the  prices  of  who.se  product  have  been  fixed  by  law? 

"Mr.  Fisher:     Yes,  fixed  by  law  or  contract. 

"Commissioner  Gadsden :  Steam  railroads,  telephones,  telegraphs,  gas,  electricity,  and 
street  railways;  everybody  else  has  profiteered,  if  you  want  to  put  it  that  way. 

"Mr.  Fisher:     Bondholders,  teachers,  clerks,  and  to  some  extent  wage  earners. 

"Commissioner  Gadsden :     Yes. 

"Mr.  Fisher:  Now,  this  produces  a  kind  of  social  injustice.  While,  of  course,  we  have 
to  keep  our  contracts  literally,  you  cannot  make  an  adjustment  after  you  have  made  a  contract, 
it  remains  true  that  there  is  a  grave  social  injustice  done  where  money  has  depreciated,  to 
the  salaried  man.  the  bondholder  and  the  investor  in  street  railway  industries,  where  the  fare 
is    fixed    by    law,    franchise,    custom    or    contract." 

It  will  he  noted  that  street  railway  hondholdcrs  arc  hound  to  a  fixed  rate 
of  return  hy  contract,  and  that  street  railway  stockhoKlers  have  not  realized  an 
increase  in  their  rate  of  return,  for  the  reason  that  street  railway  earnings  are 
limited  "by  law,  franchise,  custom  or  contract."  This  goes  to  show  that  street 
railway  bondholders  are  "in  the  same  box"  with  all  otlier  bondholders,  and  that 
street  railway  stockholders  are  in  a  different  position  from  the  stockholders  in 
unregulated  private  industries.  Therefore,  if  the  existing  security-holders  of  the 
street  r.iilways  are  to  have  their  rates  of  return  adjusted  to  the  changing  value 
of  the  dollar  by  aftirmative  action  of  regulatory  bodies,  it  means  that  they  are 
to  be  picked  out  as  a  special  class  of  security-holders  and  have  the  values  they 
have  lost  returned  to  tluiu  through  governmental  favor.  This  would  mean  that 
every  public  service  commission  or  other  body  vested  with  power  to  regulate 
electric  railway  rates  would  be  setting  itself  up  in  place  of  the  general  govern- 
ment  to  guarantee  in   its  own   little   field   the   purchasing  power  of   the  dollar. 


Rate  of  Return  391 

Such  a  policy  would  necessarily  lead  to  intolerable  confusion  and  unthinkable 
favoritism.  For  the  regulatory  authorities  either  to  double  the  valuation  or  to 
double  the  rate  of  return,  as  suggested  by  Professor  Cooley,  without  at  the  same 
time  insisting  upon  a  corresponding  readjustment  of  the  obligations  of  the  com- 
panies to  the  bondholders  and  guaranteed  stockholders  of  the  leased  lines,  would 
result  in  shifting  the  stockholders  of  the  operating  companies  into  the  industrial 
profiteering  class,  while  leaving  the  bondholders  and  the  stockholders  of  the 
leased  lines  to  take  their  losses.  Nothing  could  be  further  than  this  from  the 
legitimate  exercise  of  regulatory  power  for  the  stabilization  of  public  utility 
investments. 

All  this  relates  to  the  investors  whose  money  is  already  in  the  electric  rail- 
way business  under  contractual  and  regulatory  conditions  that  were  well  under- 
stood at  the  time  when  the  investments  were  made.  When  it  comes  to  the  new 
investors,  an  increase  in  the  rate  of  return  to  correspond  with  the  decrease  in  the 
purchasing  power  of  the  dollar  would  be  sheer  and  absolutely  inexcusable  gratu- 
ity; for  the  capital  supplied  by  the  new  investors  will  be  measured  in  terms  of 
the  same  depreciated  dollars  in  which  the  interest  upon  it  is  paid.  The  fallacy 
that  because  labor  is  getting  higher  wages  and  the  prices  of  materials  have  gone 
up,  capital  too  should  receive  a  higher  wage,  was  well  brought  out  in  the  Cleveland 
Railway  arbitration  undertaken  in  September  and  October,  1919,  and  referred  to 
in  the  testimony.  Mr.  John  J.  Stanley,  president  of  the  Cleveland  Railway  Com- 
pany, testified  before  the  Commission  on  July  22,  1919,  that  during  the  entire 
time  since  the  Tayler  service-at-cost  plan  went  into  effect  in  1910  the  fixed 
charges  on  the  investment,  including  the  interest  on  the  company's  capital  stock, 
had  been  paid.  When  asked  whether  any  extensions  and  improvements  had 
been  made  during  this  period  he  replied  that  "we  are  making  five  extensions 
this  year."  He  explained  that  these  extensions  would  aggregate  from  five  to 
seven  miles  of  new  track  at  a  cost  of  from  $50,000  to  $60,000  per  mile.  It  will 
be  remembered  that,  up  to  the  time  Mr.  Stanley  was  testifying,  the  rate  of  return 
on  the  Cleveland  Railway  stock  was  6  per  cent.  The  following  testimony,  at 
page  595  of  the  Proceedings,  relates  to  the  cost  of  the  extensions  above  referred  to : 

"The  Chairman :     Where  did  you  get  the   money  ? 
"Mr.  Stanley:     From  our  stockholders. 
"The   Chairman:     You   sold   new   stock? 
"Mr.  Stanley :     We  sold  new  stock. 
"The  Chairman :     What  was  that   stock  sold  at  ? 
"Mr.  Stanley:     At  par.     We  cannot  sell   it  at  any  less. 
"The  Chairman:     Was  there  any  trouble  in  disposing  of  it? 

"Mr.   Stanley :     We  have  not  had  any   trouble.     We   had  trouble   when  we   first   started 
the   grant." 

The  Tayler  grant  went  into  effect  in  1910,  and  the  trouble  the  company  had 
at  that  time  in  selling  its  stock  at  par  was  due  to  the  fact  that  the  original  fran- 
chise contract  was  thought  by  the  investing  public  not  to  give  adequate  security 
to  the  stockholders.  The  contract  was  thereupon  amended  to  increase  the  se- 
curity, and  after  that  the  six  per  cent  stock  was  salable  at  par  even  down  to 
1918.  In  his  testimony,  Mr.  Stanley  explained  that  after  the  trainmen's  wages 
had  been  increased  to  60  cents  in  Detroit,  the  Cleveland  Railway  employes  came 
forward  with  a  demand   for  the  same  rate.     The  matter  was   referred  to  the 


392  Electric  Railway  Problem 

City  Council,  with  the  result  that  the  increase  in  wages  was  granted  and  the 
company  got  an  increase  in  its  operating  and  maintenance  allowances,  and  also 
got  the  permanent  maximum  rate  of  fare  changed  from  4  cents  and  a  penny 
for  a  transfer  to  6  cents  and  a  penny  for  a  transfer.  Also  the  city  was  induced 
to  submit  to  arbitration  the  question  as  to  whether  the  company  should  have  7 
per  cent  on  its  stock  instead  of  6  per  cent.  Mr.  Stanley's  testimony,  at  page  597 
of  the  Proceedings,  is  as  follows : 

"The  Chairman :     And  what  return  on  the  capital  does  the  contract  fi.x  ? 
"Mr.  Stanley :     Six  per  cent. 

******** 

"The  Chairman:     In  this  negotiation,  you  say  the  union  wanted  60  cents  an  hour? 

"Mr.   Stanley :     Yes. 

"The  Chairman:     And  then  the  stockholders  came  along  and  wanted  7  per  cent? 

"Mr.   Stanley:    Yes. 

"The  Chairman  :  What  difference  did  it  make  to  the  stockholders  if  the  union  got  40 
or  50  or  60  cents  an  hour,  so  long  as  the  stockholders  got  their  return? 

"Mr.  Stanley :  Well,  the  stockholders  used  the  same  argument  that  the  men  were  using, 
that  the  high  cost  of  living  was  so  that  they  had  to  have  more  wages,  and  if  that  applied 
to  the  union,  it  certainly  applied  to  the  stockholders." 

Further  on,  at  page  608  of  the  Proceedings,  Mr.  Stanley  expressed  the 
opinion  that  the  Cleveland  Railway  stock  could  not  any  longer  be  sold  at  par  on 
a  six  per  cent  basis.     He  says : 

"I  doubt  very  must ;  in  fact,  I  am  satisfied  that  we  could  not  today  sell  any  of  our  stock 
at  6  per  cent.  We  would  have  to  put  our  stock  on  the  market  below  par.  Now,  if  that 
is  so,  the  city  should  give  us  a  higher  rate  of  interest  and  allow  us  to  sell  our  stock  at  par, 
or  above  par." 

A  few  weeks  after  Mr.  Stanley's  appearance  before  the  Commission,  the 
arbitration  proceeding  came  on,  and  considerable  testimony  was  offered  both  by 
the  company  and  by  the  city.  The  majority  of  the  board  of  arbitration,  in  a 
report  signed  December  4,  1919,  recommended  that  the  franchise  rate  of  return 
on  the  capital  stock  be  increased  from  six  per  cent  to  seven  per  cent.'  It  is  sig- 
nificant that  before  the  decision  was  rendered  the  Cleveland  Railway  Company 
withdrew  its  claim  that  the  rate  of  return  should  be  increased  because  of  the 
decrease  in  the  purchasing  power  of  money,  as  will  appear  from  the  following 
extract  from  the  arbitration  report : 

"The  Railway  Company,  in  the  first  instance,  presented  two  general  reasons  why  the  rate 
of   interest   should   be   raised. 

"(1)  That  si.x  per  cent  was  not  a  fair  return,  meaning  that  the  existent  stockholders 
and  others  who  might  ac<|uire  stock  ought  to  have  a  larger  return  upon  their  investment,  due 
to   the   decrease   in   the  purchasing   power   of   money. 

"(2)  That  the  Kailway  Company  had  a  certain  necessary  program  of  extension  and 
enlargement  to  meet  the  requirements  of  public  necessity,  and  that  conditions  were  now 
such  that  they  could  not  finance  this  program  on  a  six  per  cent  basis. 

"The  first  of  these  reasons  has  been  eliminated  from  our  consideration,  as  the  Railway 
Company  now  disclaims  reliance  upon  it.  and  furthermore,  the  evidence  discloses  that  a  six 
per  cent  return  is  not  yet  discarded  in  this  market  as  a   fair  return. 

"The  finding  in  this  hearing  must,  therefore,  rest  wholly  upon  the  second  reason  urged." 

The  majority  of  the  arbitrators  found  that  a  large  amount  of  new  capital 
would  be  required  in  the  near  future  to  finance  necessary  extensions  and  im- 
provements, and  upon  this  basis  they  proceeded  to  discuss  the  is.sue  before  them 
as  follows : 

"The  exact  question  is,  therefore,  will  the  Railway  Company  be  able  to  finance  this 
program  at  six  per  cent? 


Rate  of  Return  393 

"The  evidence  shows  that  this  railway  property  has  been  maintained  at  a  high  standard ; 
that  it  justly  enjoys  the  reputation  of  being  the  best  managed,  best  equipped  and  most  suc- 
cessful street  car  enterprise  in  the  country.  We  have  been  shown  that  a  higher  percentage 
of  expenditure  for  maintenance  and  upkeep  has  been  in  force  here  than  in  other  cities. 
Experts  have  analyzed  the  situation  and  presented  the  conclusion  to  us  that  by  reason  of 
efficient  and  intelligent  executive  management,  and  by  reason  of  the  high  rate  of  upkeep  and 
maintenance,  a  large  appreciation  in  the  value  of  the  property  has  resulted. 

"The  most  important  result  of  this  hearing  is  the  full  and  complete  illumination  of  the 
question  of  the  safety  of  the  Cleveland  Railway  stock  as  an  investment.  A  right  under- 
standing of  the  franchise  discloses  that  the  stock  of  the  Cleveland  Railway  Company  is 
safeguarded  and  protected  so  as  to  become  a  quasi-municipal   investment. 

"The  city  does  not  guarantee  the  stock,  and  that  term  should  never  have  been  employed 
in  respect  to  it,  but  the  franchise  does  protect  the  stock  in  a  way  equivalent  in  effect  to  a 
guaranty. 

"The  protective  features  of  the  stock  which  were  developed  in  this  hearing  are  the 
conservative  valuation  originally  fixed  upon  the  physical  property,  and  the  subsequent  appre- 
ciation of  value  due  to  liberal  expenditures  for  upkeep.  The  automatic  increase  of  fare, 
the  provisions  for  arbitration,  the  semi-public  control  preventing  exploitation  by  stockholders, 
the  provisions  for  purchase  at  110  in  the  event  of  municipal  ownership,  the  power  in  the  city 
to  renew  the  franchise  and  the  strong  probability  that  the  grant  will  be  renewed  and  so 
become  practically  perpetual,  and  the  opportunity  for  liquidation  of  the  stock  by  operation 
at  the  maximum  rate  of  fare  in  the  event  the  city  does  not  renew  the  franchise. 

"We  have  no  difficulty  in  reaching  the  conclusion  that  this  stock  is  protected  and  safe 
to  the   investor. 

"It  does  not  necessarily  follow,  however,  that  because  Cleveland  Railway  stock  is  safe, 
sound  and  dependable  as  an  investment,  and  a  quasi-municipal  security,  it  can  be  sold  in  this 
market  on  a  six  per  cent  basis.  The  fact  that  certain  industrial  securities  sell  readily  on 
a  six  per  cent  basis  in  this  market  is  not  conclusive,  and,  in  fact,  has  very  little,  if  any, 
relation  to  this  problem.  ' 

"We  had  before  us  bankers  and  financiers  whose  judgment  must  be  respected,  who  testify 
that  in  their  opinion  Cleveland  Railway  will  not  sell  in  this  market  on  a  six  per  cent  basis. 

"None  of  these  witnesses  disclosed  that  they  had  any  very  definite  and  certain  knowledge 
of  the  protective  features  of  this  stock,  or  that  they  had  interpreted  this  franchise  with  the 
same  care  and  study  as  the  witnesses  called  by  the  city.  Presumably  they  have  not  gone 
thus  deeply  into  the  question.  What  they  had  in  mind  and  what  they  undertook  to  say  was 
that  this  is  a  street  railway  stock,  and  suflfers  from  the  generally  bad  reputation  of  street 
railway  securities.  That  this  railway  is  in  part  controlled  by  the  city,  and  visions  of  politics 
are  stalking  before  the  public  mind.  That  there  is  a  limit  in  the  franchise  on  the  amount 
of  dividends  which  can  be  distributed.  That  the  purchase  feature  of  the  stock  by  the  city 
and  the  renewals  which  the  city  may  grant  are  merely  options  and  not  obligations.  These 
impressions  which  they  find  in  the  public  mind  and  which  they  partly  endorse,  together  with 
the  fact  that  numerous  seven  per  cent  safe  offerings  are  coming  into  the  market,  turns  the 
scale  in  their  opinion,  against  the  Cleveland  Railway  security. 

".'\ny  of  the  financial  experts  could  easily  be  convinced  on  close  study  of  the  franchise 
provisions,  that  the  views  of  the  public  about  the  stock  are  wrong,  but  their  testimony  relates 
merely  to  the  view  of  the  public  and  not  to  whether  it  is  right  or  wrong,  and  they  very  well 
understand,  as  does  everyone,  that  no  campaign  of  education  with  interpretations  from 
experts  could  be  carried  out  as  to  convince  the  public  of  its  error.  The  public  mind  engaged 
in  buying  securities  does  not  operate  in  that  way.  Hence  they  testify  that  the  stock  will 
not  be  sold  on  a  six  per  cent  basis,  and  no  one  testifies  that  it  will. 

"If  it  be  accepted  as  the  only  opinion  before  us  that  Cleveland  Railway  stock  will  not 
sell  in  competition  with  other  seven  per  cent  securities  unless  it  also  earns  seven  per  cent, 
then  the  interest  rate  must  be  raised  if  the  Cleveland  Railway  is  to  continue  to  serve  the 
public." 

It  is  sipiificant  that  the  arbitrators,  while  finding  that  the  Cleveland  Railway 
stock  was  "protected  and  safe"  to  the  investor,  were  of  the  opinion  that  it  suf- 
fered from  the  bad  name  of  street  railway  securities  generally,  and  based  their 
final  recommendation  upon  what  they  thought,  in  the  light  of  the  evidence  pre- 
sented, the  investing  public  would  do.  Mr.  Henry  J.  Davies,  Secretary  and 
Treasurer  of  the  company,  testified  in  the  proceedings  that  in  his  opinion  the 
company  could  continue  to  finance  itself  upon  a  six  per  cent  basis  if  the  fran- 
chise were  amended  so  as  to  provide  for  the  amortization  of  accrued  depreciation 
and  capital  not  represented  by  physical  property.  In  this  connection  it  should  be 
said  that  the  physical  property  in  existence  in  1909  was  put  into  the  capital  ac- 


394  Electric  Railway  Problem 

count  on  a  depreciated  basis,  but  that  no  provision  was  made  in  the  franchise  for 
the  accruing  depreciation  on  additions  and  extensions,  except  that  the  entire 
physical  property,  old  and  new,  was  to  be  maintained  at  a  condition  equivalent  to 
70  per  cent  of  reproduction  cost  new.  Furthermore,  property  withdrawn  from 
service  was  to  be  charged  against  maintenance  at  the  full  cost  of  replacement  for 
identical  property  at  the  date  of  the  withdrawal.  It  was  shown  that  this  last 
provision,  as  a  result  of  the  era  of  rising  prices,  had  added  from  $3,000,000  to 
$5,000,000  taken  out  of  earnings  to  the  value  of  the  property.  At  the  same  time 
no  provision  was  made  in  the  franchise  for  the  amortization  of  $3,615,000  of 
commuted  franchise  value,  $1,158,000  of  unpaid  rentals  and  about  $2,000,000  of 
pavement  which  were  capitalized  under  the  Tayler  grant.  The  net  additions  to 
capital  value  during  the  nine  years  from  March  1,  1910,  to  March  1,  1919, 
amounted  to  $10,124,055.  It  appears,  therefore,  that  the  maximum  unprovided 
for  depreciation,  namely  30  per  cent  on  the  new  investment,  must  have  been 
fully  offset  by  the  operation  of  the  peculiar  replacement  rule  of  the  Cleveland 
franchise.  This  would  leave  the  old  capital  account  intact  as  it  was  in  1910. 
In  considering  the  rate  of  return  upon  the  Cleveland  stock  it  must  be  remembered 
that  of  the  total  capital  value  on  March  1,  1919,  $28,720,055  was  represented 
by  capital  stock,  a  junior  security,  and  only  $5,495,000  by  first-mortgage  5  per 
cent  bonds,  a  senior  security.  Attention  should  also  be  called  to  the  fact  that 
the  stock  of  Ohio  corporations — and  the  Cleveland  Railway  Company  is  one — 
is  exempt  from  state,  county,  city  and  school  taxes  when  held  by  residents  of 
Ohio,  though  subject  to  Federal  taxes.  This  point  was  brought  out  by  Com- 
missioner Beall  in  connection  with  my  own  testimony  with  relation  to  the  Cleve- 
land rate  of  return. 

I  have  discussed  the  Cleveland  rate  of  return  at  some  length  primarily  for 
the  purpose  of  disposing  of  the  contention  that  the  rate  of  rctuni  on  electric 
railway  investments  should  be  readjusted  on  account  of  fluctuations  in  the  pur- 
chasing power  of  money  and  also  for  the  purpose  of  showing  how  large  a  part 
security  and  good  reputation  have  to  play  in  holding  the  rate  of  return  down 
even  in  times  like  these.  We  may  now  turn  to  the  testimony  to  see  what  claims 
are  made  as  to  the  rate  of  return  necessary  to  attract  new  capital  under  past  and 
present  conditions.  Mr.  Halford  Erickson.  of  the  firm  of  Hagenah  &  Erickson, 
consulting  public  utility  statisticians,  and  for  many  years  an  influential  member 
of  the  Wisconsin  Railroad  Commission,  appeared  as  a  witness  for  the  American 
Electric  Railway  .Vssociation,  and  testified  as  to  the  cost  of  capital  for  public 
utility  ijuqjoses.     At  pages  971  and  972  of  the  Proceedings,  Mr.  Erickson  says: 

"Utilities  before  the  war  had  to  earn  alxiut  8%  on  the  full  value  of  the  physical  property, 
incUuliiiK  the  RoiuR  value,  in  order  to  attract  the  necessary  capital.  Bonds,  for  instance, 
if  they  Ixire  O^'r.  would  not  sell  at  par,  unless  there  was  nmre  property  hy  a  (?oo<l  deal  behind 
them  than  their  par  value,  and  unless  tliey  were  protected  by  net  earninRS  that  amounted 
to  at  least  twice  as  much  as  the  interest  charges.  Stocks  were  in  the  same  p<isition.  They 
had  to  have  projierty  behind  them.  Six  per  cent  stock,  to  sell  at  par,  had  to  have  net  earnings 
behind  them  that  amounted  to  10  or  12  or  14%.  If  they  did  not  have  those  earnings  behind 
them,  neither  bonds  nor  stock  would  sell  at  par;  that  is,  on.  say,  a  6%  basis. 

"That  means  this,  that  the  cost  of  capital  in  the  utility  field  is  measured  not  by  the 
income  basis  upon  which  the  securities  arc  selling,  but  the  cost  is  measured  by  what  you 
must  have  in  the  way  of  net  earnings  behind  the  securities,  in  order  that  they  may  sell 
on  a  normal  iKisis. 

"I  investigated  also  from  time  to  time,  and  particularly  in  1914,  1915  and  1916,  the  income 


Rate  of  Return  395 

basis  on  which  mortgages  were  selUng  in  some  of  our  leading  citjes.  A  farm  mortgage 
on  a  good  farm,  well  located,  could  not  cover  more  than  one-half  of  a  good  farm,  in  order 
to  sell  on  6%  income  basis.  That  may  be  likened  to  the  bonds  covering  half  of  the  property. 
.\  second  farm  mortgage,  covering  at  least  the  investment,  would  not  sell  on  a  6%  basis, 
unless  it  received  10  or  12%  as  interest.  In  other  words,  the  security  was  not  good,  and 
demanded  compensation  for  the  risk.  That  may  be  likened  to  the  stocks  that  come  on  top 
of  the  bonds. 

"The  result  was  that  the  cost  of  money  on  a  farm,  up  to  the  full  value  of  the  farm,  was 
over  8%  on  the  full  value,  the  same  as  the  cost  of  money  or  capital  in  the  public  utility  field 
amounted  to  over  8%." 

In  connection  with  Mr.  Erickson's  testimony  reference  should  be  made  to 
what  Mr.  James  D.  Mortimer  said  with  respect  to  the  rate  of  return  allowed 
by  the  Wisconsin  Railroad  Commission,  of  which  Mr.  Erickson  was  then  a 
member,  in  the  Milwaukee  fare  case  decided  in  1912.*  This  Milwaukee  case 
was  the  first  one  in  the  country  where  a  public  service  commission  made  a  com- 
plete valuation  ahd  fixed  the  fares  on  a  big  electric  railway  system  without  regard 
■  to  the  franchise  rates  prescribed  by  municipal  contracts.  It  was  an  outstanding 
pioneer  case  in  the  development  of  commission  regulation  in  the  electric  railway 
field.     At  pages  774  and  775  of  the  Proceedings,  Mr.  Mortimer  says : 

"The  commission  in  its  decision  of  August,  1912,  held  that  the  railway  utility  was  entitled 
to  a  reasonable  return  upon  the  fair  measure  of  the  utility  capital,  that  that  reasonable  return 
was  seven  and  a  half  per  cent  per  annum,  and  based  upon  that  assurance  I  authorized  the 
expenditure  in  our  Wisconsin  properties,  during  the  succeeding  years,  of,  roughly,  fifteen 
million  dollars.  I  feel  quite  sure  that  we  have  never  earned  any  seven  and  a  half  per  cent 
return  in  the  railway  business  during  the  intfervening  period  of  time,  and  the  Railroad  Com- 
mission, in  its  decision  of  .\pril  4.  1919.  in  response  to  our  petition  of  August,  1918.  held 
that  the  Commission  had  never  said  that  the  companies  were  to  get  a  reasonable  return 
during  good  times  and  bad  times. 

"Now,  if  a  reasonable  return  limited  to  seven  and  a  half  per  cent  means  anything  it 
means  that  you  are  going  to  get  it  both  in  good  times  and  bad  times.  Otherwise,  there  is 
no  justification  for  limiting  the  return  to  a  figure  as  low  as  seven  and  a  half  per  cent.  The 
theory  of  the  computation  of  seven  and  a  half  per  cent  is  that  there  shall  be  an  allowance 
for  interest  approximately  six  per  cent,  plus  a  profit  on  that  for  the  compensation  of  the 
enterpriser  of  one  and  a  half  per  cent.'' 

Further  on,  at  page  780,  Mr.  Mortimer  takes  up  the  discussion  again : 

"Now,  regulation  by  the  Wisconsin  Commission  is  presumed  to  embrace  the  theory  of 
cost  of  service.  The  rates  of  fare  are  intended  to  produce  sufficient  revenues  which  will 
provide  all  current  ordinary  operating  expenses,  taxes  and  an  allowance  to  insure  the  future 
replacement  of  physical  property,  and  a  reasonable  return,  and  in  our  railway  utility  the 
commission  has  held  that  a  7.5  per  cent  return  is  a  reasonable  return,  and  that  has  been 
adjudicated  by  the  Supreme  Court  of  the  state  as  fair  and  proper.  .\t  no  time  during  the 
last  two  years  have  we  earned  any  such  return. 

"The  year  1916  was  our  best  year,  because  our  expenditures  for  maintenance  were  rather 
low,  but  even  then  the  commission  held  that,  during  1916,  after  making  adjustments  and 
operating  expenses,  charging  to  depreciation  reserve  the  things  that  this  commission  thouglit 
should  be  charged,  and  things  that  the  previous  commission  thought  should  be  charged  to 
operating  expenses,  they   found  that  our  return  never  exceeded  7.6  per  cent. 

"Now.  our  experience  with  the  investment  of  capital  in  a  railway  business  is  such  that 
I  would  feel  no  justification  in  recommending  to  investors  that  they  put  any  additional 
money  into  the  railway  business  in  Wisconsin.  I  have  frequently  told  the  commission  that, 
and  it  is  pretty  well   understood  that  some  important  change  has  to  take  place." 

Mr.  Harold  L.  Stuart,  president  of  Halsey,  Stuart  &  Company,  of  Chicago, 
investment  bankers,  testified  as  to  the  need  for  a  rate  of  return  that  will  attract 
capital.     At  pages  192  and  193  of  the  Proceedings,  he  says: 

"As  an  investment  banker  my  idea  as  to  credit  on  which  a  street  railway  company  can 
borrow  money  in  the  future  is  that  it  will  have  to  be  on  some  plan  where  the  street  railway 
company  will  be  permitted  to  earn  all  its  operating  expenses,  proper  maintenance,  proper 
depreciation,  and  a  rate  of  interest  on  the  capital   invested   which   will  attract  capital. 


396  Electric  Railway  Problem 

"Commissioner  Sweet:     What  would  that  rate  be,  in  your  judgment,  now? 

"Mr.  Stuart:  That  is  a  rather  difficult  question  to  answer,  because  the  street  railways 
are  in  such  bad  repute,  but  assuming  that  they  were  brought  to  the  same  standard  in  public 
estimation   that   we   will   say    first-class   electric  companies  are   in 

"Commissioner   Sweet:     Do  you   mean   lighting   companies  now? 

"Mr.   Stuart :     I   mean   lighting  and   iKjwer  companies. 

"Commissioner   Sweet:     Yes. 

"Mr.  Stuart:  The  rate,  I  should  say,  would  be  from  six  to  six  and  a  half  per  cent 
on  senior  securities.     By  "senior  securities'  1   mean  first  mortgage  bonds. 

"Commissioner  Sweet :     Yes. 

"Mr.  Stuart:  Further,  my  idea  of  the  financial  arrangement  of  the  future,  assummg 
street  railway  companies  arc  going  to  be  privately  owned,  and  give  first-class  service  and 
make  extensions  when  needed,  is  that  the  relationship  between  the  municipality  and  the 
railwav  company  will  have  to  be  such  that  it  will  be  attractive  for  a  stockholder,  or  for  a 
man  who  buys  stock,  to  invest  in  stocks,  because  it  is  bad  finance,  and  will  never  work  out 
for  any  corporation  to  keep  on  borrowing  money,  always  putting  out  senior  securities.  It 
must  have  a  senior  security,  which  will  ncces.sarily  bear  a  comparatively  low  rate  of  interest, 
and  a  junior  security  furnishing  the  margin,  which  would  bear  a  higher  rate  of  interest. 
In  other  words,  the  first  mortgage  bonds  and  stock.  Unless  some  plan  for  safe  credit  is 
worked  out,  it  is  hopeless  for  street  railway  companies  to  expect  to  get  money,  in  my 
judgment." 

I^-iter  on.  Mr.  Warren  took  the  matter  up  for  the  purpose  of  getting  Mr. 
Stuart  to  elucidate  the  relations  between  junior  and  senior  securities.  At  pages 
197  and  198  of  the  Proceedings,  we  find  the  following  testimony : 

"Mr.  Warren:  You  spoke  of  a  rate  from  6  to  6^^%  on  senior  securities  of  street  rail- 
ways, if  the  street  railways  were  now  enjoying  the  .same  position  in  public  confidence  that 
the  electric  lighting  companies  enjoy,  and  of  »  higher  rate  for  the  junior  securities,  which, 
I   suppose,   is   ordinarily   stock. 

"Mr.  Stuart :     Ordinarily  I  assume  to  be  stock. 

"Mr.  Warren:     How  much  higher? 

"Mr.   Stuart :     Well.   I   should  say   from   1   to  2%. 

"Mr.  Warren:     Higher  than 

"Mr.   Stuart:     Higher  than  the  senior  securities. 

"Mr.  Warren:  Is  there  any  general  rule  or  practice  in  investment  banking  houses 
respecting  the  earnings  which  a  utility  should  show  in  excess  of  the  interest  required  on 
the  bond  issues? 

"Mr.  Stuart:  There  is  not  any  general  rule,  but,  as  I  said  in  the  beginning,  the  invest- 
ment banker  has  no  control  over  money  of  his  clients,  and  unless  you  present  a  street  railway 
security,  or  any  other  .security  with  a  proper  value  and  proper  earning  restriction,  proper 
earnings  statement,  proper  depreciation  fund,  or  proper  sinking  fund,  proper  escrow  provisions 
in  the  mortgage,  the  investor  won't  buy  it.  Unless  he  thinks  he  is  well  protected,  the  buyer 
of  bonds  would  not  buy  bonds.  He  is  conservative,  and  unless  he  thinks  he  is  well  protected, 
he  won't  buy  bonds. 

"Mr.  Warren  :  .\s  far  as  the  earnings  are  concerned,  he  would  expect  the  company  to 
show  considerable  earnings  in  excess  of  the  money  necessary  to  pay  the  interest  on  the  bonds? 

"Mr,  Stuart:  The  general  rule,  without  however  being  a  rule,  is  that  the  senior  security, 
the  first  mortgage  bond,  to  be  considered  a  safe  security  and  to  be  in  good  standing,  should 
earn  twice  its  interest  charges  or  more." 

With  respect  to  the  relation  between  the  two  classes  of  securities  under  a 
service-at-cost  franchise,  Mr.  Stuart  testifies  at  page  198,  as  follows: 

"Commissioner  Sweet :  Under  the  service-at-cost  plan,  would  not  the  senior  securities, 
the  stock  and  everything,  l>e  substantially  on  the  same  basis,  and  all  practically  guaranteed  by 
the  public? 

"Mr.  Stuart :  No.  They  would,  to  some  extent,  but  there  might  be  conditions  that  would 
come  up  in  any  one  year  that  wiuild  make  the  showing  for  the  junior  securities  a  little  less 
favorable,  perhaps,  than  it  should  be.  Then,  another  thing:  The  buyer  of  the  senior 
securities,  if  he  has  a  big  c(iuity  behind  him,  is  going  to  buy  those  .securities  at  a  good  deal 
less  rate  of  interest  than  be  would  were  he  furnishing  all  the  money,  and  at  times  of  panic 
or  times  of  stringent  money,  when  the  .street  railway  company  finds  it  necessary  to  borrow, 
if  they  have  a  senior  security  which  has  a  big  ecjuity  behind  it  in  the  shape  of  junior  securities, 
they  can  always  raise  the  money  on  those  senior  securities,  either  by  selling  the  securities, 
or  by  hypothecation,  until  snrh  time  as  money  conditions  ease  up.  For  instance,  the  average 
rate  of  interest — suppose  that  it  should  be,  we  will  say,  7  per  cent.     Now,  if  you  paid  eight 


Rate  of  Return  397 

on  your  junior  securities  and  six  on  your  senior  securities,  the  average,  you  will  see,  would 
be  7  per  cent,  a  very  much  better  financial  set-up,  and  if  a  corporation  is  always  in  a  position 
to  borrow  money,  it  is  always  sure  of  serving  the  public  properly." 

In  Chapter  XXIII  of  this  report,  I  have  already  quoted  Mr.  Francis  H. 
Sisson  to  the  effect  that  5  per  cent  electric  railway  securities  guaranteed  by  the 
City  of  New  York  or  by  the  State  of  New  York  would  be  attractive  to  investors. 
Further  along,  at  pages  344  and  345  of  the  Proceedings,  Mr.  Warren  takes  up 
with  Mr.  Sisson  the  rate  of  return  that  would  be  necessary  under  a  service-at- 
cost  arrangement  without  a  public  guaranty.  The  testimony  on  this  point  is  as 
follows : 

"Mr.  Warren :  When  you  speak  of  5  per  cent  under  a  service-at-cost,  that  was  predi- 
cated on  an  absolute  guaranty  of  5  per  cent? 

"Mr.  Sisson :     Exactly. 

"Mr.  Warren :  Now  suppose  that  the  allowable  return  under  the  service-at-cost  arrange- 
ment, which  included  all  the  proper  elements,  included  finally  a  return  on  the  investment 
value,  whatever  that  was  determined  to  be,  dependent  upon  the  ability  of  the  road  at  the 
various  rates  under  the  sliding  scale  to  earn  the  return,  what  then  should  you  say  the  return 
under  present  money  conditions  ought  probably  to  be  in  order  to  induce  new  capital  to 
come  in?     That  is  rather  a  long  question,  but  perhaps  you  see  the  point. 

"Mr.  Sisson:  Yes.  When  you  speak  of  return,  it  depends  whether  you  treat  the 
capitalization  as  a  whole  or  distinguish  between  bonds  and  stock. 

"Mr.  Warren:  I  treat  it  both  as  a  whole  and  in  part,  and  I  would  like  to  know  your 
opinion  as  to  the   wisdom  of  those  two  methods,  too. 

"Mr.  Sisson :     I  think  that  on  that  basis 

"Mr.  Warren:     This  is  without  any  guaranty  other  than  what  the  business  would  insure. 

"Mr.  Sisson :  Viewed  from  the  standpoint  of  the  paying  public  I  should  say  that  a  bond 
would  have  to  bear  an  interest  rate  of  at  least  5J^  per  cent  to  be  salable  and  that  a  stock 
would  have  to  have  a  reasonably  assured  return  of  not  less  than  8  per  cent  to  be  salable. 

"Mr.  Warren:  .\nd  I  suppose  it  follows  from  that,  that  if  the  return  were  going  to 
be  a  flat  return  on  the  entire  investment  value,  it  would  be  a  combination  of  those  two? 

"Mr.  Sisson :     Yes. 

"Mr.  Warren:     An  average  of  those  two? 

"Mr.  Sisson:    Yes." 

At  pages  348  to  350  of  the  Proceedings,  in  response  to  questions  by  Com- 
missioner Sweet,  Mr.  Sisson  goes  into  further  detail  with  respect  to  the  neces- 
sary rate  of  return  upon  stocks  and  bonds  under  a  service-at-cost  plan,  as  appears 
from  the  following: 

"Commissioner  Sweet :  There  is  one  point  that  is  not  quite  clear  to  me,  Mr.  Sisson. 
You  have  stated  that  you  think  there  should  be  a  qualified  guaranty,  as  we  speak  of  it, 
of  at  least  S^  per  cent  on  bonds  in  order  to  enable  the  companies  to  get  their  needed  capital, 
and  8  per  cent  or  thereabouts  on  stock.  Have  you  not  reference,  when  you  say  that,  to  the 
conditions  that  have  prevailed  heretofore  in  the  relation   between  common  stock  and  bonds? 

"Mr.  Sisson  :     Well,  no.    I  was  speaking  broadly  about  what  I  conceived  to  be  a  sound 

"Commissioner  Sweet :  There  never  has  heretofore  been  any  guaranty  upon  common 
stock  whatever. 

"Mr.  Sisson :     No. 

"Commissioner  Sweet :  And  the  purchasers  of  common  stock  have  realized  there  was 
more  of  a  speculative  feature  in  their  purchase  and  ownership  of  stock  than  the  holder  of 
the  bonds. 

"Mr.  Sisson :    Yes. 

"Commissioner  Sweet :  They  might  get  one  or  two  per  cent  or  they  might  get  ten  or 
fifteen  per  cent  on  the  common  stock. 

"Mr.  Sisson  :     Yes. 

"Commissioner  Sweet:  Now  if  the  public  was  to  stand  behind  this  matter  and  so  adjust 
the  rates,  the  fares  that  could  be  charged,  that  it  would  produce  an  income  that  would  make 
the  return  upon  common  stock  just  as  certain  as  the  return  upon  the  bonds,  why  should 
there  be  any  difference  between  the  rate  that  should  be  obtainable  by  the  holder  of  the 
common  stock  and  the  holder  of  the  bonds? 

"Mr.  Sisson:  I  had  not  assumed  that  the  public  would  make  any  such  definite  assurance. 
I  dealt  particularly  with  the  cost  of  capital  and  answered  the  question  broadly,  that  in  order 
to   sell   bonds  to  the  public  and  stock  to  the   public   in  a   proper  financial   structure   of  60 


398  Electric  Railway  Problem 

per  cent  bonds  and  40  per  cent  stock,  the  return  ought  to  be  about  S'/i  per  cent  on  the  bonds 
and  8  per  cent  on  the  stock;  or  a  reasonable  assurance  of  it.  A  return  upon  stock  ought 
to  provide  for  years  in  which  no  dividend  would  be  paid,  perhaps,  and  earnings  would  be 
accumulated  for  extensions  and  betterments  and  perhaps  sinking  funds  and  depreciation.  It 
might  not  always  be  possible  to  declare  an  8  per  cent  dividend  annually.  It  might  be  greater 
some  years  and  less  others,  but  a  reasonable  assurance  of  an  earning  of  8  per  cent  would 
sell  common  stock  at  par,  which  was  the  problem  I  faced  in  Mr.  Warren's  question. 

"Commissioner  Sweet :  In  your  mind  would  the  assurance  given  by  the  public  to  the 
holders  of  stock  be  different  and  less  than  the  assurance  given  to  the  holders  of  bonds? 

"Mr.  Sisson:  Well,  I  assume  so;  of  course,  if  you  are  to  have  an  unqualified  and  positive 
guaranty,  there  would  be  no  difference  between  the  two  classes  of  obligation. 

"Commissioner  Sweet :  Suppose  it  were  not  a  guaranty,  but  if  the  matter  were  left 
entirely  to  a  state  commission  to  adjust  these  rates  so  as  to  produce  enough  to  pay  interest 
upon  the  bonds  oi  S'/i  per  cent  and  5 J/,  per  cent  upon  the  common  stock,  if  the  adjustment 
of  rates  were  to  be  such  as  to  enable  that  to  be  done,  while  taking  care  of  the  other  necessities 
of  the  company;  would  not  that  be  as  fair  an  arrangement  as  could  be  made? 

"Mr.  Sisson:     That  does  not  quite  cover  the  question,  because  bear  in  mind 

"Mr.  Warren:     Without  any  definite  guaranty? 

"Mr.  Sisson :     Yes. 

"Commissioner  Sweet :  Without  any  guaranty  except  that  the  rate  would  be  changed 
from  time  to  time  so  as  to  as  near  as  possible  bring  about  that  result. 

"Mr.  Sisson :  That  does  not  quite  cover  the  question,  because,  bear  in  mind,  the  bonds 
are  a  first  obligation  on  the  property  and  the  stock  does  not  come  in  until  after  that  is  met. 

"Commissioner  Sweet :     The  stock  only  has  an  equity. 

"Mr.  Sisson:  That  is  all,  and  a  man  ought  to  be  entitled  to  a  larger  return  on  an  equity 
above  the  mortgage  than  the  fellow  below  it,  and  you  could  not  get  the  people  to  take  an 
equity. 

"Commissioner  Sweet:  Would  that  be  the  case  if  the  arrangement  with  the  public  were 
such  that  the  amount  which  would  be  received  by  the  stockholders  in  proportion  to  their 
holdings  would  be  as  great  as  the  amount  received  by  holders  of  bonds? 

"Mr.  Sisson:  I  think  it  would.  tx;cau.<^e  I  think  there  is  no  definite  assurance  of  per- 
manency of  such  an  arrangement  indefinitely.  Political  conditions  and  public  sentiment 
change,  and  a  man  who  has  an  underlying  mortgage  upon  physical  property  is  in  much 
stronger  position  and  has  greater  protection  in  the  courts  than  a  man  who  has  an  equity 
which  might  be  greater  or  less  in  accordance  wfth  the  fluctuation  of  public  sentiment  and 
conditions. 

"Mr.  Warren:  In  other  words,  the  fluctuating  conditions  might  affect  the  possibility  of 
the  scale  yielding  a  return  on  stock,  although  yielding  sufficient  to  cover  the  bonds? 

"Mr.  Sisson :    Yes. 

"Commissioner  Sweet :     In  other  words,  the  bonds  would  come  in  first  for  their  share  ? 

"Mr.  Sisson  :     Yes. 

"Commissioner  Sweet :  The  holders  of  stock  would  have  to  take  what  was  left  after 
providing  for  the  other  needs  of  the  company? 

"Mr.  Sisson :     Yes.  both  in  earnings  and  ownership. 

"Commissioner  Sweet :  .\nd  under  your  plan  there  would  be  some  variation  in  what 
the  holders  of  stock  would  receive? 

"Mr.  Sisson:     There  must  necessarily  be  so;  yes,  sir. 

"Commissioner  Sweet:  .And  consequently  you  think  it  would  be  just  that  the  maximum 
would  be  somewhat  larger  than  the  ma.ximum  provided  for  the  holders  of  bonds? 

"Mr.  Sisson  :    Yes. 

"Commissioner  Sweet:     .And  that  is  your  reason  for  it? 

"Mr.  Sisson :  I  think  it  not  only  fair  but  the  practical  question  is  that  it  would  be 
necessary  in  order  to  sell  stock  to  the  public." 

At  the  close  of  Mr.  Sisson's  examination.  Commissioner  Meeker  asked  Mr. 
Warren  about  the  prospects  of  the  Boston  Elevated  stock  under  the  present 
10-year  guaranty  of  dividends.  The  colloquy,  at  pages  352  and  353  of  the  Pro- 
ceedings, follows : 

"Commissioner  Meeker:  You  spoke  of  the  absolute  guaranty  accorded  to  the  Boston 
Elevated  for  ten  years.  Is  there  any  likelihood  that  the  stocks  will  sell  above  70  with  such 
a  limited  guaranty  as  that? 

"Mr.  VN'arren:  Well,  considering,  Mr.  Meeker,  that  a  few  years  ago  the  stock  sold 
at  150  without  any  guaranty  whatever,  it  would  seem  as  if  they  ought  to  sell  higher  than 
that. 

"Commissioner  Meeker:  Well,  there  is  not  any  possibility,  is  there,  of  the  stock  being 
rehabilitated  so  as  to  sell  at  par  or  above  under  a  guaranty  limited  to  ten  years,  because 
Heaven  only  knows  what  will  happen  when  the  ten  years  is  up. 


Rate  of  Return  399 

"Mr.  Warren :  Apart  from  the  guaranty,  of  course,  the  company  has  the  right  to  charge 
on  this  sliding  scale  whatever  is  necessary  to  pay  the  cost  of  the  service  including  that  return. 
The  guaranty  is  additional  to  the  service-at-cost  principle.  At  the  end  of  the  ten  years, 
in  other  words,  the  service-at-cost  principle  involved  in  that  settlement  continues. 

"Commissioner  Meeker:     After  ten  years  the  service-at-cost  principle  goes   into   effect? 

"Mr.  Warren  :     It  is  in  effect  now. 

"Commissioner  Sweet:     It  is  continued? 

"Mr.   \\  arren  :     Yes. 

"Commissioner  Meeker :  But,  Mr.  Warren,  under  that  system  there  never  could  be  any 
justification  for  the  common  stock  of  the  cojripany  to  go  up  to  such  figures  as  you  mention. 

"Mr.  Warren:     No.  not  with  the  absolute  guaranty. 

"Commissioner  Meeker :  No,  whether  it  was  an  absolute  guaranty  or  an  assurance  of 
rates  being  changed  in  accordance  with  needs,  there  never  could  be  the  possibility  of  what  we 
might  call  the  gambling  advantages  which  have  been  looked  upon  as  being  connected  with 
common  stock  under  the  old  system.     There  would  not  be  the  possibilities  of  great   profits. 

"Mr.   Warren:     No,  there  would  not  be.     You   mean   under  the  service-at-cost   system? 

"Commissioner  Meeker:     Certainly. 

"Mr.  Warren:  No,  there  would  not.  I  assume  that  there  would  be  some  limit  fixed. 
I  was  asking  Mr.  Sisson  only  to  get  his  idea  as  a  banker  of  where  that  limit  ought  approxi- 
mately to  be  placed  to  insure  a  market  for  the  stock,  and  I  referred  to  the  Boston  Elevated 
stock  only  as  in  my  judgment  confirming  his  opinion  of  where  the  stock  ought  to  be  placed. 
A  few  years  ago  street  railway  stocks  in  Massachusetts  sold  on  a  4  per  cent  basis.  If  their 
dividends  were  6  per  cent  they  sold  at  around  140  to  130.  and  some  of  them  earning  8  per  cent, 
of  which  there  were  a  few,  sold  for  200  to  220.  But  that  was  under  our  very  strict  regula- 
tion system,  so  that  everybody  knew  that  not  only  $100  had  been  paid  in  but  in  the  case 
of  the  Boston  Elevated  I  think  the  stock  averages  the  stockholders,  not  in  the  market,  but 
in  buying  it  from  the  company  on  the  original  issue,  I  think  it  is  around  $119  or  $120  a  share. 

"Commissioner  Meeker:     Actually  paid  in? 

"Mr.  Warren :  Actually  paid  in.  The  street  railways  of  Massachusetts — and  those 
figures  I  have  referred  to  I  must  put  in  and  will  try  not  to  forget  it — the  Massachusetts 
street  railways,  as  a  whole,  with  $102,000,000  par  capital  show  in  their  balance  sheet  some- 
thing like  six  and  a  half  million  dollars  paid  into  their  treasuries  in  addition  to  par  value  as 
premiums,  and  they  really  have  paid  in  considerably  more,  because  when  that  law  first  went 
into  effect  the  premium  was  not  set  up  in  the  balance  sheet  as  it  is  now  and  as  the  Interstate 
Commerce  Commission's  method  of  accounting  requires,  but  the  premium  would  be  paid  in 
and  carried  to  profit  and  loss  and  all  charged  off  again.  In  other  words,  the  property  would 
be  marked  down  by  the  amount  of  premium  paid  in,  and  my  impression  is  there  were  two 
or  three  million  dollars  paid  in  in  that  way  which  are  not  reflected  on  the  balance  sheet. 

"Commissioner  Beall :  Mr.  Warren,  was  not  one  reason  for  the  high  price  of  street 
railway  stock  in  Massachusetts  and  also  in  Ohio,  where  the  Cleveland  property  is  located,  the 
fact  that  they  were  legal  investment  for  trustees  and  had  certain  exemptions  from  taxation? 

"Mr.   Warren  :     Yes,  and 

"Commissioner  Beall :  What  I  want  to  bring  out  is  under  exactly  the  same  conditions 
and  same  earning  power  and  same  rate  of  return  in  certain  other  states  they  would  not  sell 
for  anything  like  as  much,  due  to  peculiar  local  conditions. 

"Mr.  Warren :  I  think  you  are  quite  right.  In  Massachusetts  until  recently  the  bonds 
of  all  corporations,  and  which  made  it  impossible  for  trustees  to  buy  bonds  to  any  great 
extent,  and  the  stock  of  all  corporations  not  organized  under  the  Massachusetts  law  were 
taxed  on  their  principal  value  at  the  local  rate,  so  that  a  5  per  cent  bond  selling  for  par 
would  have  to  pay  a  tax  in  most  towns  and  cities  of  approximately  $20,  reducing  the  yield 
to  3  per  cent.  And  the  same  would  be  true  of  the  stock  of  a  New  York  corporation  selling 
in  Massachusetts.  That  made  a  very  marked  differential  in  favor  of  the  Massachusetts 
stocks." 

The  efifect  of  an  absolute  state  guaranty  on  the  bonds  of  a  financially  weak 
company  is  seen  in  the  fact  that  the  Board  of  Public  Trustees  operating  the 
Eastern  Massachusetts  Street  Railway  Company  under  the  special  service-at- 
cost  act  of  the  Massachusetts  legislature  applicable  to  that  company  was  able  in 
1919  to  dispose  of  $2,500,000  of  the  company's  6  per  cent  serial  bonds  at  par 
because  these  bonds  were  guaranteed  by  the  state  of  Massachusetts.  It  will  be 
remembered  that  the  common  stock  of  this  company  is  entitled  to  earn  six  per 
cent  dividends  if  it  can,  but  that  these  dividends  are  not  guaranteed.  On  the 
other  hand,  as  explained  by  Mr.  Warren,  the  Boston  Elevated  Railway  Com- 
pany, also  operated  by  a  board  of  public  trustees  under  a  special  service-at-cost 


400  Electric  Railway  Problem 

act,  has  a  state  guaranty  of  the  dividends  on  its  common  and  preferred  stock 
extending  over  a  period  of  ten  years  from  1918.  The  common  stock  is  to  draw 
5  per  cent  for  each  of  the  first  two  years,  5^  per  cent  for  each  of  the  next  two 
years,  and  six  per  cent  for  each  of  the  six  years  thereafter.  If  the  state  chooses 
to  continue  to  operate  the  road  after  the  ten-year  period  expires,  the  six  per  cent 
dividend  will  continue  under  the  state's  guaranty ;  otherwise,  the  road  will  be 
turned  back  to  the  company  with  the  promise  of  the  right  to  charge  any  rate  of 
fare  that  may  be  required  to  enable  the  company  to  earn  the  six  per  cent  divi- 
dends, but  with  no  guaranty  of  its  ability  to  earn  the  dividends,  and  no  contrac- 
tual guaranty  that  the  state  will  not  repeal  its  promise  with  respect  to  the  com- 
pany's freedom  to  control  its  own  fares.  The  company's  bonds  are,  of  course, 
a  first  lien  on  its  property  and  earnings.  The  company's  capitalization  is  about 
evenly  divided  between  stock  and  bonds.  Under  these  conditions,  the  trustees 
were  able  to  sell  in  1919  one  and  one-half  million  dollars  of  one-year  six  per  cent 
bonds  at  98.73  and  another  one  and  one-half  million  dollars  of  five-year  six  per 
cent  bonds  at  93.79.  In  either  case,  the  bonds  were  sold  on  about  a  7^  per  cent 
interest  basis.  In  September,  1919,  the  Boston  Elevated  7  per  cent  preferred 
stock  was  quoted  at  about  88  and  the  common  stock  at  about  64.  It  is  apparent 
from  these  figures  that  the  high  rates  now  demanded  by  new  investors  in  most 
street  railway  stocks  and  bonds  are  the  result  primarily  of  risk,  not  of  the  scar- 
city of  capital  or  the  low  purchasing  power  of  money.  If  the  rate  of  return  upon 
new  capital  is  to  be  kept  within  reasonable  limits,  the  credit  of  the  electric  rail- 
ways must  be  restored  and  this  can  only  be  done  by  giving  both  the  investment 
and  the  annual  return  thereon  a  degree  of  security  which  neither  enjoys  at 
present. 

The  program  advanced  by  witnesses  for  the  Electric  Railway  Association 
is  to  increase  the  rate  of  return  until  the  investors  are  willing  to  bite.  At  page 
859  of  the  Proceedings,  Mr.  Richard  Schaddelee  says: 

"I  am  sure  the  American  people  desire  that  utilities  serving  them  shall  be  empowered 
to  collect  a  charge  or  fare  that  will  enable  them  to  earn  their  lair  and  reasonable  operating 
expenses,  taxes,  depreciation,  etc.,  and  in  addition  a  sufficient  rate  of  net  return  on  their 
investment  to  make  the  investment  in  street  railways  attractive  to  the  investor.  The  people 
know  that  only  on  that  basis  will  the  street  railways  be  able  to  t-xtend  and  improve  their 
properties,  and  have  them  keep  pace  with,  or  abreast  of.  the  growth  of  the  communities,  and 
the  increasing  demands  of  the  public  for  more  adequate  and  superior  service." 

Says  Dr.  Thomas  Conway,  Jr.,  at  page  956  of  the  Proceedings: 

"Now,  I  want  to  make  it  clear  before  I  begin  this  discussion  that  I  am  absolutely  con- 
vinced, as  I  feel  anyone  must  be.  that,  with  private  ownership  and  operation,  the  electric 
railway  business  must,  in  some  fashion,  get  suflicicnt  revenue  to  equal  its  operating  expenses, 
to  set  up  a  proper  amount  for  maintenance  and  depreciation,  and  to  give  a  fair  return  upon 
the  value  of  the  property,  because  as  one  of  you  said  this  morning,  these  properties  are  never 
finished,  new  capital  is  required  from  day  to  day  and  from  year  to  year.  To  get  that  new 
capital  and  to  provide  the  facilities  which  the  public  demand  and  have  a  right  to  expect,  it  is 
necessary  to  give  these  companies  a  fair  return.  It  is  not  a  matter  necessarily  of  equity, 
as  I  see  it,  from  the  public  standpoint.  It  is  a  matter  of  self-interest.  The  average  man 
will  have  to  realize  that  the  giving  to  the  owner  of  the  street  railways  a  fair  return  is  not  a 
gratuity  or  charity,  but  is  just  as  much  to  his  interest  as  it  is  to  the  owner's  interest,  if  he 
wants  to  get  gixxl  car  service,  or  indeed,  for  any  length  of  time,  any  car  service  worthy 
of  the  name.  He  lias  to  do  that.  The  ordinary  man  thinks  to  give  the  owner  a  raise  of  fare 
is  the  same  thing  as  giving  a  beggar  a  quarter.  .\t  least,  many  people  feel  that  way.  They 
do  not  realize  that  their  interest  is   fully  as  great  as  that  of  the  security  holder." 


Rate  of  Return  401 

In  his  enthusiasm  for  the  processes  of  reorganization,  Mr.  J.  K.  Newman 
even  suggested  ten  per  cent  as  a  compensatory  rate,  in  view  of  the  miseries  the 
electric  railway  men  have  had  to  go  through.  But  Mr.  Newman's  plan  to  give 
the  bondholders  and  preferred  stockholders,  representing  the  actual  investment, 
from  5  per  cent  to  7  per  cent  on  their  money,  and  keep  the  balance  of  the  10  per 
cent  return  on  the  valuation  for  the  common  stockholders,  is  still  on  paper.  As 
Mr.  Warren  wisely  remarked:  "You  first  have  to  catch  your  ten  per  cent." 
Nevertheless,  this  10  per  cent  rate  is  being  taken  seriously  by  some  of  the  electric 
railway  men  at  least.  The  so-called  Jenks  service-at-cost  bill,  prepared  by  the 
New  York  Electric  Railways  Association  and  introduced  in  the  legislature  on 
April  1,  1920,  about  three  weeks  before  final  adjournment  of  the  session,  con- 
tained the  following  provision  applicable  to  service-at-cost  agreements  entered 
into  between  municipalities  and  electric  railway  companies: 

"d.  Return  upon  investment.  The  company  shall  receive  in  quarterly  payments  out  of 
gross  revenues  a  sum  equal  to  ten  per  centum  of  its  investment  value  as  agreed  upon  or 
fixed  by  arbitration.  Until  such  investment  vakie  shall  have  been  determined,  such  return 
shall  be  at  a  rate  sufficient  to  pay  at  least  all  existing  fixed  charges,  rentals  and  all  other 
compulsory  obligations  necessary  to  prevent  mortgage  foreclosure  or  the  disintegration  of 
the  system  of  the  company  as  operated  at  the  time  of  the  passage  of  this  act." 

This  bill  was  pressed  very  seriously  by  the  electric  railway  companies  dur- 
ing the  closing  days  of  the  1920  legislative  session  and  failed  of  passage  in  the 
assembly  only  by  a  narow  vote.  It  seems  reasonably  clear  that  salvation  does  not 
lie  in  ten  per  cent.  Now,  of  all  times,  it  is  essential  to  keep  the  cost  of  local 
transportation  service  down  at  every  point  where  it  is  reasonably  possible.  This 
is  absolutely  essential  from  the  public  point  of  view,  and  almost  equally  essential 
from  the  point  of  view  of  the  electric  railway  companies.  Ten  per  cent  as  a 
standard  rate  of  return  in  the  electric  railway  field  is  a  prohibitive  rate,  and  if 
such  a  rate  is  necessary  to  attract  capital  under  private  ownership,  there  will  be 
no  choice  left  but  to  go  to  public  ownership. 

Certain  additional  points  must  be  considered  before  we  leave  the  discussion 
of  the  rate  of  return.  To  what  extent  shall  the  rate  of  return  provide  for  the 
amortization  of  capital  on  account  of  accruing  depreciation?  To  what  extent 
shall  the  rate  of  return  provide  for  a  surplus  to  be  accumulated  against  a  rainy 
day  ?  Shall  the  rate  of  return  be  based  on  some  sliding-scale  theory  designed 
to  encourage  and  reward  efficient  management  ?  Shall  the  rate  of  return  be 
applied  unifomily  to  the  entire  investment,  old  and  new,  whether  represented  by 
capital  stock  or  by  bonds?  Shall  the  rate  of  return  be  flexible  so  as  to  adjust 
itself  to  changing  market  conditions? 

To  my  mind,  the  best  treatment  of  accruing  depreciation  requires  that  it  be 
returned  to  the  investors  up  to  the  full  amount  of  the  difference  between  the 
original  cost  of  the  property  and  its  cost  less  normal,  or  permanent  depreciation: 
or  else  that  it  be  put  back  into  the  property  out  of  earnings  for  the  benefit  of 
the  investor.  Upon  this  theory  the  rate  of  return  should  include  an  element  for 
the  amortization  of  accrued  depreciation,  or  else  this  accrued  depreciation  should 
be  set  up  separately.  Every  effort  should  be  made  to  hold  the  recognized  capital 
value  down  to  the  actual  cost  of  the  property  less  the  subsequently  accrued  de- 


402  Electric  Railway  Problem 

preciation.  If  this  is  to  be  done,  the  permanent  depreciation  will  have  to  be  pro- 
vided for  in  some  way,  either  through  a  depreciation  reserve  that  belongs  to  the 
property,  whether  invested  in  additions  and  extensions  or  not,  or  through  the 
repayment  of  a  part  of  the  investment  and  a  corresponding  reduction  in  capital 
value.  It  is  better  to  keep  the  rate  of  return  entirely  distinct  from  the  allow- 
ance lor  a  return  of  the  investment  or  a  portion  of  it  to  the  investors. 

It  is  also  essential  that  an  electric  railway  should  accumulate  an  indivisible 
surplus  to  serve  as  a  sort  of  equalizer.  This  may  take  the  form  of  a  contingent 
reser\'e  fund  which  is  permitted  to  pile  up  until  it  reaches  a  fixed  sum,  after 
which  the  accumulation  ceases.  If  the  rate  of  return  is  fixed  to  cover  the  sur- 
plus, then  the  regulatory  authority  should  take  the  necessary-  steps  to  protect  the 
surplus  against  misappropriation.  If  this  provision  for  a  surplus  is  included  in 
the  allowed  rate  of  return,  then  the  average  return  actually  paid  out  to  the  stock- 
holders and  bondholders  will  not  be  equal  to  the  allowed  rate  of  return  upon  the 
investment  as  a  whole.  The  discussion  in  this  section  has  been  directed  mainly 
to  the  rate  of  return  that  actually  becomes  available  for  the  security  holders. 

It  is  almost  universally  recognized  that  a  service-at-cost  plan,  whether  based 
upon  continuous  public  regulation  or  upon  semi-automatic  contracts,  strikes  a 
blow  at  the  initiative  which  is  supposed  to  characterize  private  management  where 
profits  are  neither  definitely  limited  nor  definitely  assured.  This  point  was 
brought  out  by  Mr.  Gaylord  C.  Cummin  in  his  testimony  advocating  a  sliding 
scale  arrangement.     At  pages  32  and  35  of  the  Proceedings,  he  says: 

"In  the  cities  where  a  change  of  fare  promises  relief,  it  seems  to  me,  from  what  I  have 
seen  on  both  sides,  that  no  form  of  agreement  which  has  been  made  at  present  is  satisfactor>'. 
Perhaps  the  nearest  approach  to  it  is  the  strvice-at-cost  plan.  That,  I  think,  has  in  it  a 
fundamental  weakness,  which  was  touched  upon  briefly  this  morning,  but  was  not  brought  out, 
and  that  is,  1  do  not  beheve  that  by  making  a  fixed  return,  which  a  utility  cannot  exceed, 
you  can  keep  that  utility  up  to  efficient  operation  or  that  you  can  keep  its  executives  and 
managers  interested  in  cutting  its  costs  and  cutting  corners  and  keeping  things  as  low  as 
possible.  That  simply  is  not  human  nature.  You  have  got  to  give  some  incentive  to  do  the 
thing  you  want  to  do,  if  you  want  to  do  it  for  any  length  of  time. 

"Commissioner  Beall :  Suppose  the  maximum  is  not  fixed,  how  then?  Suppose  there 
is  no  maximum  there  fixed,  but  that  the  rates  as  in  Montreal,  rise  to  whatever  height  is 
necessary  to  produce  a  given  revenue  on  a  given  investment.  -Vre  you  referring  to  a  case  of 
that  kind? 

"Mr.  Cummin:  If  you  give  the  utility  a  fixed  return  only,  that  is.  if  it  is  allowed,  say, 
seven  per  cent  on  its  invested  capital,  or  six  per  cent  on  its  invested  capital,  when  it  once  gets 
up  to  six  per  cent,  it  is  not  going  to  exert  itself  to  cut  its  costs,  Iwcause  it  does  not  make 
any  difference,  then,  what  the  earnings  are.  it  can  only  get  its  six  per  cent,  or  its  seven 
per  cent  as  the  case  m.iy  he.  Vou  are  taking  the  incentive  away  from  the  utility.  That  it 
actually  has  that  effect  I  have  seen  in  other  cases  not  connected  with  street  railroads,  but  one 
case  I  think  of,  particularly,  where  an  electric  power  plant  in  a  small  town  had  an  opportunity 
to  buy  current  from  a  big  central  station  plant  at  quite  .idvantageous  terms,  and  they  were 
earning,  at  that  time,  the  maximum  allowed  by  that  State  Public  Service  Commission,  the 
maximum  percentage;  and  when  they  signed  up  the  contract  with  the  Central  Station  Plant,  a 
rate  controversy  was  inaugurated  by  some  citizens  and  taken  up  by  the  Public  Service  Com- 
mission, and  they  lost  all  the  adv.intagc  they  had  gotten  by  signing  the  contract,  and  came 
back  to  whatever  it  was- — 7'j  per  cent.  I   think — that  they  were  allowed. 

"The  man  that  owned  that  utility  and  a  group  of  utilities  besides,  told  me  shortly  after- 
wards that  that  had  cured  hiin  of  ever  trying  to  save  anytKKly  any  money;  and  you  can  see 
how  that  would  happen. 

"I  have  heard  one  other  manager  of  another  group  of  utilities  that  have  specialized  on 
efficient  operation  and  that  are  in  states  where  they  arc  governed  by  commissions,  and  where 
tiny  have  a  fixed  rate  of  return,  and  I  have  heard  him  explain,  on  several  occasions,  that  he 
could  not  see  any  reason  why  they  should  continue  exerting  theinselves  to  hold  the  grade 
of  efficiency  which  they  had  prided  themselves  on,  because  they  absolutely  got  nothing  out 
of  it." 


Rate  of  Return  403 

To  meet  this  weakness,  some  service-at-cost  plans  provide  for  a  sliding  scale 
in  the  rate  of  return,  dependent  upon  fluctuations  in  the  fares  charged,  the  re- 
turn being  highest  when  fares  are  lowest.  This  is  characteristic  of  the  Dallas 
plan.  The  Cincinnati  plan  also  embodies  the  sliding  scale  principle  in  connec- 
tion with  the  distribution  of  the  surplus.  The  Alontreal  plan,  as  well  as  some 
plans  that  are  not  based  on  the  service-at-cost  principle,  such  as  the  Chicago 
settlement  ordinances  of  1907,  the  New  York  subway  contracts  of  1913  and  the 
Kansas  City  settlement  franchise  of  1914,  provide  for  a  share  in  the  surplus 
profits  in  addition  to  the  fixed  or  basic  rate  of  return  upon  the  investment.  The 
Montreal  plan,  and  the  New  York  Electric  Railways  Association  plan  as  em- 
bodied in  the  1920  Jenks  bill,  provide  for  an  operating  bonus  to  encourage  the 
company  to  keep  down  expenditures. 

It  is  obvious  that  however  necessary  it  may  be  to  adopt  some  artificial 
scheme  for  revivifying  motive  under  a  service-at-cost  plan,  the  bonus  reward, 
or  other  stimulus  does  not  properly  attach  to  capital,  but  to  the  management. 
Capital  is  inert  and  cannot  respond  to  such  stimuli.  All  it  wants  is  its  security, 
its  return,  and  peace.  The  bonus  for  good  management  ought  to  be  included 
in  operating  expense,  and  surely  has  no  logical  relation  to  the  rate  of  return 
upon  the  investment,  except  as  some  rate  may  be  used  as  a  measure  of  reward 
corresponding  to  the  magnitude  of  the  enterprise.  The  idea  that  an  extra  frac- 
tion of  a  per  cent  on  the  capital  invested  is  a  proper  form  for  an  operating  bonus 
to  take,  undoubtedly  arises  from  the  fact  that  theoretically  the  stockholders  are 
responsible  for  and  control  the  management.  In  actual  practice  the  reverse  is 
quite  likely  to  be  true.  At  any  rate,  the  bonus  is  not  a  reward  that  attaches  to 
capital  as  such.  It  is  designed  to  stimulate  efficiency,  and  to  accomplish  that 
purpose  it  must  reach  the  management. 

There  is  no  good  reason  for  the  adoption  of  a  sliding  scale  arrangement  in 
the  electric  railway  business  by  which  the  cost  of  capital  will  be  made  to  slide 
up  as  the  cost  of  labor  slides  down,  and  z'ice  versa.  Cheap  capital  never  inter- 
feres with  good  service.  Expensive  capital  always  increases  the  cost  of  service, 
whether  the  latter  is  good  or  bad.  Cheap  management,  on  the  other  hand,  may 
seriously  impair  the  efficiency  of  service.  Therefore,  cheap  capital  is  always  a 
desideratum,  while  cheap  management  and  operation  are  a  desideratum  only  to 
the  extent  that  they  do  not  impair  the  efficiency,  safety,  adequacy  and  continuity 
of  service.  The  problem  of  motive  in  electric  railway  management  is  too  com- 
plex and  too  elusive  to  be  solved  by  any  automatic  device  affecting  the  rate  of 
return  upon  capital.  The  human  element  of  constant  watchfulness  and  respon- 
sibility to  public  opinion  cannot  be  eliminated  without  seriously  endangering  the 
public  welfare. 

It  is  not  at  all  necessary  that  the  rate  of  return  should  be  applied  uniformly 
to  the  entire  investment.  For  example,  in  Cleveland  the  rate  on  the  stock  is 
fixed  at  a  certain  amount,  and  the  rate  on  the  bonds  is  to  be  whatever  the  money 
costs  within  a  prescribed  maximum.  The  recommendation  of  the  arbitration 
board  in  the  7  per  cent  proceeding  is  a  clumsy  and  very  expensive  way  of  meet- 
ing a  temporary  increase  in  the  "cost  of  money"  for  needed  extensions.  To  per- 
petuate an  additional  burden  of  annual  cost  applicable  to  the  entire  capital  when 


404  Electric  Railway  Problem 

the  necessary  result  could  be  obtained  by  the  sale  of  securities  below  par  for  the 
lime  being  with  provision  for  the  amortization  of  the  discount  seems  to  be  very 
poor  finance;  almost  as  bad,  in  fact,  as  consenting  to  a  higher  rate  of  return  to 
cover  risk,  instead  of  removing  the  risk.  The  Cincinnati  plan  is  similar  to  the 
Cleveland  plan  so  far  as  bonds  are  concerned,  except  that  no  arbitrary  limit  is 
set  up  within  which  the  interest  rate  on  bonds  is  to  be  kept.  It  seems  clear  to  me 
that  the  rate  of  return  should  be  fixed  by  contract  when  the  investment  is  made, 
and  that  flexibility  in  the  rate  should  apply  to  new  capital.  Of  course,  in  the 
case  of  bonds  and  notes  the  rate  may  have  to  be  readjusted  whenever  they  are 
refunded,  and  so  far  as  capital  stock  is  concerned  provision  might  be  made  for  a 
reconsideration  of  the  rate  of  return  at  stated  intervals,  and  possibly  for  arbitra- 
tion if  the  two  parties  fail  to  agree  on  the  rate  for  the  ensuing  period. 

Capital  is  attracted  by  security.  It  is  surely  important  that  the  effective 
rate  of  return  should  be  kept  down,  and  that  capital  should  not  be  paid  more 
than  it  asks  for  when  risk  is  reduced  to  a  minimum. 

The  valuation  and  the  rate  of  return  must  be  considered  together.  It  is 
fundamental  that  both  should  be  kept  as  low  as  possible,  without  injustice  to 
investors  or  impairment  of  function,  in  order  that  the  cost  of  local  transporta- 
tion may  be  kept  at  a  minimum. 


Chapter  XL 
UNRESTRICTED    STATE    REGULATION 

Prior  to  1907  the  public  regulation  of  electric  railways  was  almost  exclu- 
sively a  matter  of  franchise  contracts,  local  ordinances  and  the  general  state  laws 
under  which  the  companies  were  incorporated.  Massachusetts  had  a  railroad 
commission  with  certain  powers  of  publicity  and  recommendation,  but  nowhere 
in  the  country  was  there  such  a  thing  as  a  state  public  service  commission  with 
the  general  powers  of  regulation  and  control  which  have  characterized  the  com- 
missions established  in  recent  years.  The  real  beginning  of  comprehensive  regu- 
lation came  in  1907,  when  the  powers  of  the  Wisconsin  Railroad  Commission 
were  extended  by  the  enactment  of  the  Public  L'tilities  Law  of  that  year  and  when 
the  Public  Service  Commissions  Law  of  New  York  was  enacted  and  the  two  New 
York  commissions  established.  After  1907  the  development  of  public  utility 
regulation  w-as  rapid  and  widespread,  until  at  the  present  time  almost  all  of  the 
states,  the  District  of  Columbia,  and  even  our  insular  possessions  have  commis- 
sions whose  jurisdiction  is  based  largely  upon  the  pioneer  legislation  of  Wiscon- 
sin and  New  York.  It  is  seldom  that  a  new  idea  in  state  administration  has 
spread  so  rapidly  and  taken  such  deep  root  in  so  short  a  time.  Yet,  the  present 
condition  of  the  electric  railways,  as  shown  by  the  testimony  before  the  commis- 
sion, is  in  itself  prima  facie  evidence  that  commission  regulation,  as  applied  to 
the  electric  railways,  has  failed. 

The  establishment  of  state  commissions  was  at  first  bitterly  opposed  by  the 
public  utilities,  because  they  were  unwilling  to  be  subjected  to  the  intimate  public 
control  contemplated  by  the  proposed  regulatory  laws.  Later,  after  the  com- 
mission movement  got  well  under  way,  the  public  service  corporations  took  a 
new  tack  and  from  that  time  on  have  generally  favored  the  establishment  of 
state  commissions  and  the  extension  of  their  powers,  especially  where  the  juris- 
diction given  to  them  has  been  such  as  to  exclude  the  municipalities  from  the 
exercise  of  local  control  over  the  utilities. 

The  development  of  commission  jurisdiction  over  the  rates  of  electric  rail- 
ways has  been  more  recent  than  any  other  feature  of  commission  regulation,  due 
to  the  fact  that  almost  universally  the  unit  fare  on  street  railways  was  fixed  by 
franchise  contract,  by  statute  or  by  custom  at  5  cents.  However,  during  the  past 
10  years  the  power  of  the  state  commissions  to  fix  street  railway  fares,  without 
reference  to  the  provisions  of  franchise  contracts,  has  been  rapidly  gaining  recog- 
nition, until  at  the  present  time  a  limitation  of  the  jurisdiction  of  a  state  com- 
mission in  this  respect  is  the  exception  rather  than  the  rule.  In  spite  of  past 
failures  some  of  the  witnesses  before  the  Commission  suggested  the  possibility 
of  finding  a  remedy  for  the  present  plight  of  the  electric  railway  industry  in  the 

405 


406  Electric  Railway  Problem 

establishment  of  unrestricted  commission  regulation,  and  in  fact  the  record  is 
full  of  discussion  as  to  the  relative  merits  of  state  and  local  regulation,  and 
particularly  as  to  the  merits  of  unrestricted  state  regulation  as  an  alternative  to 
a  semi-automatic  service-at-cost  plan  based  upon  contract. 

We  cannot  properly  appraise  the  value  of  this  proposed  remedy  for  the  ex- 
isting ditticulties  without  analyzing  the  results  of  past  experience.  Three  ques- 
tions present  themselves : 

(1)  To  what  extent  has  the  failure  of  state  commission  regulation  been  real,  not 
imaginary  ? 

(2)  To  what  extent  has  any  failure  of  state  commission  regulation  been  due  to  its 
incompleteness  ? 

(3)  To  what  extent  has  any  failure  of  state  commission  regulation  been  due  to  inherent 
difficulties   in   its  administration? 

In  Massachusetts,  full-fledged  state  regulation  of  the  electric  railways  came 
in  with  the  establishment  of  the  Public  Service  Commission  in  1913,  but  back 
of  that  the  Board  of  Railroad  Commissioners,  with  limited  jurisdiction  over 
street  railways,  had  been  in  existence  for  upwards  of  forty  years.  It  is  perfectly 
obvious  that  legislative  and  commission  regulation,  whether  running  tandem  or 
abreast,  although  at  no  time  seriously  embarrassed  by  restrictions  of  local  fran- 
chise contracts,  failed  to  keep  the  electric  railways  of  Massachusetts  in  such  a 
condition,  either  physically  or  financially,  as  to  give  the  investors  full  protection 
or  to  assure  the  public  of  the  continuance  of  adequate  service  at  attractive  rates. 
The  Public  Service  Commission  of  Massachusetts  itself  recognizes  this  failure, 
and  has  officially  pointed  to  public  ownership  as  probably  the  only  policy  by  which 
the  credit  of  the  electric  railways  of  Massachusetts  can  be  restored.  In  fact, 
regulation  by  the  commission  has  already  been  superseded,  with  respect  to  the 
Boston  Elevated  Railway  and  the  Bay  State  Lines,  together  comprising  about 
45  per  cent  of  the  total  electric  railway  mileage  of  the  state,  by  public  operation 
through  boards  of  trustees  appointed  by  the  chief  executive.  Ex-Governor 
luigene  N.  Foss  refers  in  his  testimony  to  the  disasters  that  have  befallen  the 
owners  of  railroad  and  street  railway  stocks  in  Massachusetts,  in  spite  of  the 
protection  which  they  were  supposed  to  be  receiving  under  the  laws  of  the  state. 
At  pages  792  and  793  of  the  Proceedings,  he  says : 

"Again,  we  tried  in  Massachusetts  everything.  We  were  the  first  state  in  the  union  to 
have  a  public  service  commission,  or  a  railroad  commission,  right  there  in  Massachusetts. 
And  (lur  railroad  stocks  there,  you  know,  for  years  have  bi-en  sold  by  the  companies  at  a  prict- 
fixed  l)y  the  Kailroad  Commission,  and  our  investors  have  bought  those  securities.  Widows 
and  orphans  and  trustees  have  put  their  money  into  thc-i'  niilro.ul  seciiritie";  and  i|uasi-publio 
corporation  securities  in  Massachusetts  because  they  thought  they  were  the  next  thing  to 
government  bonds,  because  they  considered  that  nothing  could  happen  to  them,  since  the  state 
fixed  the  price  at  which  the  stock  should  tte  p\it  out  and  also  fixed  the  tariffs  on  the  railroads. 
But  we  saw  New  York.  New  Haven  &  Hartford  stock  go  from  250  to  25.  while  the  Com- 
mission could  .say  the  New  Haven  stock  should  not  be  put  out  at  less  than  S200  a  share, 
which  it  was  worth,  and  I'.ostnn  Klevated.  selling  at  155.  some  of  it.  and  rcallv  $135  today 
represents  every  dollar  put  in  the  property,  still  this  stock  sold  down  to  27  or  28.  Thousands 
of  people  were  ruined.  I  know  of  women  in  Massachusetts  who  are  working  today  who 
had  a  small  competence  put  away   in  these  stocks  which  has  all   been  wiped  out. 

"Now  this  thing  has  got  to  stop.  The  state  is  morally  responsible  for  that  condition 
today  and  ought  to  Ix-  responsible  in  equity  and  the  people  are  going  to  see  to  it  that  they  are. 
These  nuasi-public  con>on(tion  stocks  have  eot  to  cease  being  speculative  footballs.  That  is 
my  judgment  atiout  it." 

Ciovernor  Foss.  himself  an  .idvocatc  of  public  ownership,  readily  assented 
to  the  suggestion  by  Commissioner  Sweet  that  wages  and  the  cost  of  materials 


( 


State  Regulation  407 

entering  into  street  railway  service  have  greatly  advanced,  and  that  the  situation 
of  the  electric  railways  today,  without  an  increase  in  their  income,  is  "one  which 
any  intelligent  man  would  expect  it  to  be,"  and  that  "it  could  not  be  otherwise." 
However,  Governor  Foss  went  on  to  say  that  in  his  opinion  the  street  railways 
have  brought  their  troubles  upon  themselves  by  alienating  public  opinion  to  such 
an  extent  as  to  make  it  politically  difficult  for  state  commissions  to  grant  rate 
increases.  His  testimony  on  this  point  is  found  at  pages  797  and  798  of  the 
Proceedings,  as  follows: 

"You  see,  these  public  service  commissions  in  the  states  and  in  the  nation  have  not  got 
courage  enough  to  advance  these  fares.     They  are  honest  men,  I  appointed  some  of  them 

"Commissioner  Sweet:     Are  they  not  prevented  by  law  in  many  cases? 

"Mr.  Foss:  They  may  be  to  some  e.xtent  but  they  are  not  in  Massachusetts.  I  appointed 
tlie  Railroad  Commission  in  Massachusetts,  most  of  them  who  are  serving  today ;  five  splendid 
men,  who  have  not  courage  enough  to  do  it.  Why  haven't  they  courage  enough  to  do  it? 
Because  the  railroads  have  grafted  and  they  have  stolen  and  have  wrecked  their  properties 
and  have  lost  the  confidence  of  the  public  to  that  extent  that  there  is  no  railroad  commission 
that  can  stand  up  for  a  single  moment  against  the  public  and  do  what  they  ought  to  do 
and  what  they  know  they  ought  to  do.  You  talk  with  any  one  of  these  public  service 
commissioners  in  that  state  or  in  the  nation  and  they  will  tell  you  these  fares  ought  to  be 
doubled;  if  these  roads  go  back  to  private  ownership  the  rates  have  to  go  up,  not  25  per  cent, 
but  SO  per  cent. 

"Commissioner  Sweet :  .'\re  you  not  aware  in  most  states  the  right  to  raise  fares  is 
under  the  control  of  the  state  commissions? 

"Mr.  Foss :     Certainly. 

"Commissioner  Sweet :     Are  they  not  under  governmental  orders  ? 

"Mr.  Foss :     Certainly. 

"Commissioner  Sweet:     Are  they  not  under  governmental  officials? 

"Mr.  Foss :     Yes. 

"Commissioner  Sweet :  Just  the  same  as  they  would  be  if  the  whole  thing  was  under 
the  control  and  operation  of  the  Government  ? 

"Mr.  Foss :     Yes. 

"Commissioner  Sweet :  Are  not  the  companies  as  a  rule  anxious  to  raise  fares  and  are 
they  not  in  many  cases  obstructed  by  these  public  service  commissions? 

"Mr.  Foss:  I  think  the  public  service  commissions  are  ready  if  they  felt  that  public 
sentiment  was  behind  them,  but  the  public  will  not  stand  for  it,  because  they  feel  that  they 
do  not  know  the  whole  truth,  they  have  not  been  treated  right.  That  is  the  condition  in 
Massachusetts.     I  have  talked  with  the  public  service  commissioners  and  they  openly  say   so. 

"Commissioner  Sweet :  Is  not  this  condition  of  not  having  been  treated  right  rather  a 
tradition  from  years  ago  rather  than  a  condition  that  e.xists  at  the  present  time? 

"Mr.  Foss :  Well,  I  think  that  is  true.  I  think  the  condition  in  the  country  today  is 
better  than  it  ever  has  been  as  to  integrity  and  honesty." 

However,  it  was  in  Wisconsin,  not  in  Massachusetts,  that  regulation  of 
street  railway  rates  by  a  state  commission  first  became  eflfective,  and  without 
doubt  the  work  of  the  Wisconsin  Railroad  Commission  in  the  years  following 
1907  had  more  to  do  with  the  conversion  of  the  public  service  companies  through- 
out the  country  to  the  theory  of  state  regulation  than  any  other  one  thing.  Cer- 
tainly, if  unrestricted  commission  regulation  has  had  a  fair  trial  in  any  state  over 
a  considerable  period  of  years,  that  state  is  Wisconsin.  For  this  reason  the  tes- 
timony offered  by  Mr.  James  D.  Mortimer,  on  behalf  of  the  Milwaukee  Electric 
Railway  &  Light  Company  and  affiliated  concerns,  has  unusual  interest  and  sig- 
nificance. At  pages  765  to  77i  of  the  Proceedings,  he  describes  in  considerable 
detail  the  course  of  regulation  in  Wisconsin  as  it  has  affected  the  Milwaukee 
street  railways.  He  tells  the  story  of  the  attempt  of  the  Milwaukee  company  to 
secure  rate  increases  during  the  war  period,  particularly  on  two  occasions  when 
the  conductors  and  motormen  demanded  higher  wages.  The  theory  of  regula- 
tion was  put  to  the  test  in  Wisconsin,  for  the  power  of  the  state  commission 


408  Electric  Railway  Problem 

either  to  increase  or  decrease  fares  without  respect  to  the  hmitations  imposed  by 
local  franchise  contracts  had  been  fully  established  by  the  courts.  The  issue  had 
been  carried  even  to  the  United  States  Supreme  Court  and  decided  in  favor  of 
the  commission.  The  Milwaukee  Street  Railway  property  had  been  valued  by 
the  commission  and  rates  fixed  as  early  as  1912.  With  the  value  of  the  com- 
pany's property  already  established  and  with  complete  facilities  at  all  times  for 
the  ascertainment  of  the  facts  relating  to  the  company's  expense  and  profits,  the 
commission  was  in  a  better  position,  perhaps,  than  any  other  public  service  com- 
mission in  the  United  States  to  act  promptly  and  intelligently  in  adjusting  the 
income  of  the  Milwaukee  street  railways  to  the  increasing  cost  of  the  service. 
Mr.  Mortimer  points  out  that  an  application  was  filed  by  the  company  in  Novem- 
ber, 1915,  asking  for  higher  fares.  Late  in  1916.  while  this  application  was 
pending,  the  company  filed  a  new  petition  with  the  railroad  commission,  asking 
for  emergency  relief  on  account  of  the  necessity  of  making  large  increases  in 
wages  in  order  to  attract  the  labor  necessary  to  operate  the  railway  system,  and 
also  in  order  to  enable  it  to  make  an  eight-hour  day  effective  throughout  the 
railway  department.  This  petition  was  denied  on  the  ground  that  the  emergency 
was  not  such  as  to  justify  the  granting  of  relief  under  the  statute.  The  revalua- 
tion under  the  company's  application  of  November,  1915,  was  finally  completed 
in  August,  1917,  but  still  no  decision  was  forthcoming.  The  resulting  situation 
is  described  by  Mr.  Mortimer  at  page  768  of  the  Proceedings,  as  follows: 

"The  cost  of  living  began  to  very  rapidly  increase,  and  it  became  necessary  for  the  com- 
pany to  consider  making  substantial  increases  in  wages;  first,  to  keep  the  men  on  the  cars; 
and,  second,  to  keep  the  service  going,  that  is,  to  keep  a  sufficient  number  of  trainmen  to 
operate  the  cars. 

"The  matter  finally  came  to  a  head  in  a  demand  made  in  the  latter  part  of  .\pril.  1918, 
by  the  employes  for  an  increase  of  15  cents  an  liour  and  for  an  8-hour  day.  The  company 
told  the  men  that  they  had  no  dispute  with  them  on  the  matter  of  wages,  but  since  wages 
were  so  intimately  related  to  fares  that  the  proper  place  to  make  the  application  was  at  the 
office  of  the  Railroad  Coininission  in  Madison.  The  committee  went  there  and  received  very 
attentive  treatment,  and  were  assured  that  hy  the  first  of  May  there  would  be  an  order 
granting  an  increase  in  fares. 

"Based  upon  the  assurance  given  by  all  three  members  of  the  Railroad  Commission  to 
the  committee,  I  entered  into  a  contract  whereby  the  wages  of  the  men  were  increased  10 
cents  per  hour,  or  approximately  SI  per  day.  .■>[  strike  h.id  been  threatened.  The  cessation 
of  service  had  been  threatened,  and  this  assured  the  continuity  of  service  for  the  time  being. 
The  Railroad  Commission  of  Wisconsin  told  a  committee  that  an  order  would  be  forthcoming 
from  the  15th  of  May,  and  not  later  than  the  19th.  The  15th  came  by,  and  there  was  no 
order,  and  the  19th  came  by  and  there  was  no  order,  and  the  employes  naturally  wanted  to 
know  when  the  case  was  going  to  In?  determined.  I  found  it  necessary  to  tell  the  committee 
that  if  there  was  no  order  forthcoming  by  the  time  the  payroll  for  the  last  half  of  the  month 
of  May.  1918.  was  inade  up.  w^e  would  be  unable  to  pay  the  increase  in  wages  for  the  last 
half  of  the  month  of  May.  because  the  increase  had  Ix^cn  predicated  upon  the  granting  of 
relief  hy  the  Railroad  Commission." 

The  employes  comnumicatcd  with  the  comminission  and  an  order  directing 
the  company  to  discontinue  the  sale  of  tickets  and  to  substitute  therefor  a  straight 
5-cent  fare  was  finally  handed  down  on  June  1,  1918.  Rut  the  company  found 
that  the  results  of  this  increase  in  rates  "were  not  suflficient  to  compensate  for 
the  increase  in  expenses  and  produce  a  reasonable  return  upon  any  measure  of 
utility  capital,"  and  so,  in  August,  1918,  it  filed  an  application  for  a  further  in- 
crease in  fares.  The  commission  appeared  to  be  quite  displeased  that  a  new 
application  from  the  company  should  have  followed  so  closely  upon  the  heels 
of  the  order  of  June  1 ;  and  the  time  set  for  a  hearing  was  not  until  the  latter 


State  Regulation  409 

part  of  October.  Meanwhile,  the  employes  had  become  restive  again  because 
their  wage  scale,  notwithstanding  the  increase  given  in  the  preceding  May,  was 
lower  than  the  scale  fixed  by  the  National  War  Labor  Board  in  its  awards  in 
other  cities.  What  the  company  then  did  and  what  the  employes  did  is  explained 
by  Mr.  Mortimer  at  pages  769  and  770  of  the  Proceedings: 

"When  the  employes  asked  for  further  adjustments  in  order  to  bring  their  scales  into 
line  with  what  they  called  the  Government  wage,  we  told  the  employes  that  it  was  a  question 
of  revenues,  and  that  it  was  up  to  them  to  get  an  increase  in  revenues,  and  that  we  would 
cooperate  to  whatever  e.xtent  we  could,  and  that  we  had  already  had  this  petition  filed. 

"The  employes  employed  an  accountant  to  make  an  examination  of  our  books  of  account 
to  ascertain  whether  or  not  we  were  telling  them  the  facts,  and  the  accountants  reported  to 
them  that  the  facts  were  substantially  in  accordance  with  what  the  company  had  stated. 
Based  upon  this  examination,  the  employes  again  presented  themselves  at  the  Railroad 
Commission.     ***** 

"Then,  the  situation  began  to  become  more  active.  The  company  indicated  its  helpless- 
ness. It  showed  that  the  earnings  on  the  railway  property  were  only  three  per  cent  per 
annum  on  the  appraised  value  of  the  physical  property,  stripped  of  all  considerations  of  stocks 
and  bonds  and  bond  discounts,  and  with  only  very  modest  allowances  for  overhead,  engineer- 
ing overhead. 

"The  employes  made  a  number  of  trips  to  the  Railroad  Commission,  and  they  finally 
went  to  the  Governor  of  the  State.  It  thus  became  more  or  less  of  a  political  issue.  Then 
the  employes  finally  decided  that  they  would  have  to  cease  service  on  the  first  of  January, 
1919,  after  serving  notice  on  the  public,     *****     and  service  was  ceased  for  one  day. 

"The  service  was  resumed  on  the  night  of  January  1st,  upon  the  agreement  of  the  com- 
pany to  pay  to  the  employes  an  increase  in  wages  of  approximately  four  and  a  half  cents  an 
hour,  predicated  upon  the  organization  using  its  influence  to  get  out  of  the  Railroad  Com- 
mission a  prompt  decision  upon  the  company's  application  of  August,  1918." 

The  fact  that  the  company  and  the  men  appeared  to  be  on  friendly  terms 
caused  the  city  attorney  of  Milwaukee  to  claim  that  a  conspiracy  existed  between 
them.  As  a  result,  the  railroad  commission  started  an  investigation,  and  later  a 
special  legislative  committee  was  appointed  to  look  into  the  matter.  Mr.  Mor- 
timer read  into  the  record  a  portion  of  the  findings  of  the  committee,  showing 
the  nature  of  the  deadlock  between  the  company  and  the  commission.  At  pages 
770  and  771  of  the  Proceedings,  we  find  the  following  taken  from  the  committee's 
report : 

"The  Railroad  Commission  in  the  negotiations  with  the  men  always  took  the  position 
that  the  company  should  first  raise  the  wages  of  the  men  and  that  the  Commission  would 
consider  such  raise  as  an  operating  expense  in  its  decision.  It  was  on  this  basis  that  the 
raise  of  May  1st  was  granted,  but  it  was  claimed  on  the  part  of  the  company  that  the  Railroad 
Commission  did  not  at  that  time  give  sufficient  consideration  to  the  increase  in  wage  cost. 
The  cornpany,  therefore,  took  the  position  that  no  further  raise  should  be  made  until  the 
commission  first  acted  on  the  proposed  increased  wage  and  provided  revenues  therefor.  There 
is  a  sharp  difference  of  opinion  between  the  company  and  the  Railroad  Commission  as  to 
the  power  and  duties  of  the  Railroad  Commission  with  reference  to  wages.  The  company 
contends  that  the  commission  has  the  power  and  duty  to  pass  on  the  question  of  wages 
as  a  factor  in  the  administration  of  the  Railroad  Commission  Law,  and  that  where  the 
increased  wage  is  determined  upon  by  the  commission  it  is  its  duty,  as  a  condition  precedent 
to  the  payment  thereof,  to  furnish  the  revenues  lawfully  required  for  that  purpose.  The 
commission  contends  that  it  has  no  power  and  no  duties  in  regard  to  wages,  except  to  con- 
sider them  when  paid  as  an  operating  expense.  It  is  the  opinion  of  the  committee  that  the 
Railroad  Commission  takes  too  narrow  construction  of  the  law  and  that  it  has  the  power 
to  consider  wages  the  same  as  it  has  the  power  to  consider  any  other  factor  in  ordering 
service,  and  if  this  power  is  not  sufficiently  specific  in  the  statutes  as  now  provided  the 
commission  should  be  given  that  power.  In  other  words,  the  commission  should  have  full 
and  comprehensive  administrative  jurisdiction  to  keep  the  wheels  going  and  prevent  cessation 
of  service. 

"The  company  e.xpressed  its  dissatisfaction  with  the  delav  of  the  commission  in  its 
decision  on  the  case  pending  from  November,  1915,  to  June,  1918,  and  seemed  determined 
not  again  to  take  any  chances  on  a  delay  of  that  character  by  advancing  wages  and  waiting 
for  a  subsequent  recognition  of  the  outlay.     It   is  not  only  sought  to  bring  pressure  on  the 


410  Electric  Railway  Problem 

commission  to  decide  the  pending  application  of  August.  1918.  by  encouraging  the  men  to 
bring  pressure  upon  the  commission  to  act.  but  it  sought  to  influence  public  sentiment  against 
the  commission  and  in  its  favor  by  various  means.  This  was  partly  done  through  publications 
which  it  issued  from  the  Public  Service  Building  and  had  distributed  to  the  patrons  of  the 
road  by  its  employes,  and  it  was  done  by  paid  advertisements  in  the  public  press." 

Extracts  from  an  advertisement  published  by  the  company  in  a  Milwaukee 
newspaper  in  December,  1918,  are  given  at  pages  771  and  772  of  the  Proceedings : 

"The  Electric  Company  has  no  dispute  with  its  employes  over  wages,  hours  or  working 
conditions.  Our  relations  have  been  and  are  mo.'^t  friendly.  The  company  deeply  appreciates, 
and  we  believe  the  community  does,  the  fact  that  Milwaukee  Street  Railway  employes  have 
shown  a  high  degree  of  loyalty  and  forbearance  in  keeping  the  cars  moving  during  the  war 
year  notwithstanding  the  wage  was  less  than  that  established  by  the  National  War  Labor 
Board  for  cities  of  Milwaukee's  class.     *     *     *     » 

"The  Railroad  Commission  well  know  and  our  men  through  their  own  accountants' 
investigation  learned  that  the  street  railway  systems  oi  these  companies  entered  the  year 
1918  earning  much  less  than  the  reasonable  return  assured  them  by  state  law.  *  »  •  » 
It  is  in  view  of  the  foregoing  facts  that  our  men  demanded  of  the  Railroad  Commission  car 
revenue  increases  which  as  they  know  are  the  only  means  of  giving  them  adequate  wages. 
They  share  the  company's  belief  that  the  people  of  Milwaukee  are  able  and  willing  to  pay 
the  fair  going  price  for  the  services  they  render  and  that  the  commission  will  fearlessly 
execute  the  plain  intent  of  the  state  utility  regulation. 

******** 

"Punishing  Milwaukee.  *  *  *  *  Wisconsin  Railroad  Commission's  refusal  to  main- 
tain the  State's  good  faith  by  executing  the  plain  intent  of  the  utility  regulation  law  robs 
street  railway  employes  and  investors  and  injures  the  whole  community. 

"Milwaukee  and  surrounding  cities  are  threatened  with  a  strike  stopping  street  railway 
and  electric  service  on  January  1st.  because  the  Railroad  Commission  for  over  two  years  has 
failed  and  refused  to  allow  the  Milwaukee  Electric  Railway  and  Light  Company  and  the 
Milwaukee  Light,  Heat  and  Traction  Company  earnings  enough  to  pay  living  wages. 
*  *  *  *  It  is  because  our  men  through  tlieir  own  accountants'  investigation  know  the 
above  facts  that  they  address  their  demands  for  higher  wages  primarily  to  the  Railroad 
Commission  rather  than  to  the  companies. 

"As  a  direct  and  unavoidable  result  of  this  gross  violation  of  the  State's  good  faith,  the 
employes  of  these  utilities  have  been  underpaid;  the  owners  will  be  robbed  of  a  large  share  of 
return  on  the  investment  which  they  should  have  received  for  the  year  1918;  the  companies 
are  being  compelled  to  pay  a  higher  price  for  new  capital  urgently  needed  to  finance  plant 
growth,  and  service  Ijetterments  desired  by  the  public  could  not  be  provided. 

******** 

"These  companies  and  their  employes  do  not  for  a  minute  doubt  the  good  faith  of  the 
people  of  Wisconsin  nor  of  the  State  of  Wisconsin.  We  feel  sure  that  when  the  facts  are 
known  public  opinion  will  compel  action  by  the  Governor  and  the  Railroad  Commission  to 
maintain  the  State's  good  faith  and  do  justice  to  this  community  and  to  the  employes  of  and 
investors  in  Milwaukee's  electric  service. 

"For  more  than  two  years  last  past  these  companies  have  lieen  quietly  pleading  with  the 
Railroad  Commission  to  do  its  plaui  duty  under  the  stale  law.  The  commission,  in  pos- 
session of  all  the  facts,  has  failed  and  refused  to  do  its  duty. 

"As  a  result  our  employes  arc  now  prepared  to  tie  up  the  system  unless  the  companies 
give  them  wage  increases  which  they  need  and  should  get.  but  which  cannot  be  given  them 
without  robbing  our  creditors. 

"There  is  just  one  way  out.  That  is  for  the  Railroad  Commission  to  fix  fares  that  will 
let  the  companies  pay  the  wages  demanded  and  pay  their  investors  a  fair  yearly  return  which 
the  State  assured  them  when  it  assumed  nMitrol  of  iluir  nites,  services,  finances  and 
accounting." 

The  committee's  conclusion,  awarding  blame  both  to  the  company  and  to 
the  Railroad  Commission,  is  found  at  page  772  of  the  Proceedings: 

"The  committee  finds  that  the  cessation  of  service  on  the  street  car  lines  in  the  City  of 
Milwaukee  on  the  first  day  of  January,  1919,  was  the  result  of  the  company's  failure  to  meet 
the  just  wage  demands  of  the  trainmen  on  the  one  hand,  and  the  failure  of  the  Railroad 
Commission  to  expeditiously   function  on  the  other  hand. 

"The  commission  is  subject  to  reasonable  criticism  through  the  press  or  otherwise,  but 
in  no  case  should  it  Ix-  coerced  into  a  decision  by  a  party  litigant." 


State  Regulation  411 

Mr.  Mortimer  points  out  that  under  the  Wisconsin  law  a  company  can  obtain 
a  rate  increase  only  by  filing  a  petition  with  the  commission,  and  securing  an 
affirmative  order  authorizing  the  new  rate.  The  companies  are  absolutely  de- 
pendent, therefore,  upon  the  commission's  diligence  and  good  faith  in  deciding 
issues  promptly.  At  the  close  of  such  a  story,  it  was  a  crucial  question  that 
Mr.  Warren  put  to  Mr.  Mortimer.  At  page  771  of  the  Proceedings,  we  find 
the  following: 

"Mr.  Warren  :  Are  you  a  believer  or  not  in  the  theory  of  commission  regulation,  state 
regulation  through  commissions? 

"Mr.  Mortimer:  I  am  a  behever  in  the  theory  of  regulation  by  commission,  and  believe 
it  is  the  most  satisfactory  way  of  taking  care  of  the  many  corriplicated  relationships  that 
exist  between  the  public  utility  and  the  community  served,  the  state,  and  the  employes.'' 

"Though  he  slay  me,  yet  will  I  trust  in  him;  but  I  will  maintain  mine  own 
ways  before  him,"  as  Job  says.  Commissioner  Sweet  elicited  from  Mr.  Mor- 
timer certain  constructive  criticisms  of  state  regulation  as  practiced  in  Wisconsin. 
These  appear  at  pages  77i  and  774  of  the  Proceedings : 

"Commissioner  Sweet :  But  you  think  there  should  be  coupled  with  it  a  requirement  for 
prompt  action? 

"Mr.  Mortimer:  Yes;  I  would  even  go  further  than  that  and  suggest  that  the  laws  be 
materially  changed,  so  that  there  should  be  no  shifting  bases  for  commission  regulation. 
That  is  one  of  the  hazards  of  commission  regulation. 

'"Commissioner  Sweet:     What  do  you  mean  by  "shifting  bases'? 

"Mr.  Mortimer:  A  commission  may  shift  its  basis  on  three  principal  things:  first,  the 
item  of  valuation.  One  commission  may  have  one  viewpoint  as  to  what  elements  of  value  are 
to  be  considered,  and  another  commission,  a  subsequent  commission,  appointed  under  the  same 
law,  may  have  an  entirely  different  opinion.  It  is  important  that  that  hazard  of  shifting 
valuation  be  eliminated ;  first,  so  that  the  utility  may  know  where  it  stands  with  respect  to 
earning ;  and,  second,  so  that  the  investors  may  be  assured  when  capital  is  put  into  the 
property,  when  the  property  is  sold  or  subsequently  regulated  for  rate-making  purposes,  it 
will  be  considered  at  the  par  value  of  its  original  investment. 

******** 

"Then,  the  second  element  is  the  amount  to  be  allowed  to  insure  future  replacements. 

'"The  commission  that  had  the  job  in  August,  1912.  when  it  ordered  a  discontinuance 
of  twenty-five  tickets  for  a  dollar  and  thirteen  tickets  for  SO  cents,  used  a  depreciation 
allowance  of  4.46  per  cent. 

"The  commission,  in  June,  1918,  with  a  different  personnel,  used  an  allowance  of  2.82 
per  cent,  a  difference  of  1^  per  cent.  One  and  a  half  per  cent  on  the  valuation  of  twenty 
million  dollars  nms  into  a  substantial  sum  each  year." 

The  third  point  raised  by  Mr.  Mortimer  relates  to  some  definite  determina- 
tion with  respect  to  permanency  in  the  rate  of  return,  which  has  already  been 
discussed  in  the  preceding  section  of  this  report. 

Again,  at  page  780  of  the  Proceedings,  Mr.  Mortimer  says : 

"Now,  regulation  by  the  Wisconsin  Commission  is  presumed  to  embrace  the  theory  of  cost 
of  service.  The  rates  of  fare  are  intended  to  produce  sufficient  revenues  which  will  provide 
all  current  ordinary  operating  expenses,  taxes,  and  an  allowance  to  insure  the  future  replace- 
ment of  physical  property,  and  a  reasonable  return,  and  in  our  railway  utility,  the  commission 
has  held  that  a  7.5  per  cent  return  is  a  reasonable  return,  and  that  has  been  adjudicated 
by  the  Supreme  Court  of  the  State  as  fair  and  proper.  .\t  no  time  during  the  last  two  years 
have  we  earned  any  such  return.'' 

A  little  further  on  follows  the  statement  already  quoted  in  our  discussion 
of  the  rate  of  return :  "Now,  our  experience  with  the  investment  of  capital  in 
a  railway  business  is  such  that  I  would  feel  no  justification  in  recommending 
to  investors  that  they  put  any  additional  money  into  the  railway  business  in 
Wisconsin."     This,  certainly,  does  not  speak  well  for  state  regulation,  although 


412  Electric  Railway  Problem 

Mr.  Mortimer's  lugubrious  outlook  for  the  electric  railways  is  only  partly  due  to 
the  sins  of  the  state  commissions.  In  discussing  the  relation  of  state  regulation 
to  the  cost  of  service,  at  page  780  of  the  Proceedings,  he  says: 

'•Commission  regulation,  as  I  said  before,  contemplates  cost  of  service,  but  it  does  not 
work  out  that  way  in  practice,  because,  first,  of  the  shifting  bases  of  subsequent  commissions, 
and,  second,  because  of  the  long  period  of  time  required  by  the  commission  to  act  upon 
applications  of  utilities  for  readjustments  in  rates.  There  may  even  be  a  valuation  required, 
or  a  revaluation,  or  accountants  may  have  to  have  an  examination.  There  can  be  any  number 
of  things  developed  as  reasons  for  delay  if  the  commission  desires  to  cause  delay." 

Further  on,  at  page  781  of  the  Proceedings,  he  offers  certain  suggestions  cal- 
culated to  overcome  some  of  the  defects  of  state  regulation,  but  still  he  is  unable 
to  become  optimistic  about  the  future : 

"A  proper  state  utility  law  would  provide  something  to  this  effect : 

"That  all  utilities  shall  be  valued,  and  the  utility  capital  shall  be  ditcrmincd  by  the  com- 
mission;  that  before  there  are  any  capital  expenditures  made  the  utility  shall  apply  to  the 
commission  for  authorization  to  make  the  expenditures,  and  the  commission  shall,  at  the 
same  time,  fix  the  return  to  be  allowed  upon  the  capital  expenditure.  If  the  commission  fixes 
too  low  a  return,  the  company  can  say,  'You  get  the  money,  Mr.  Commission.'  If  the  com- 
mission fixes  too  high  a  return,  that  fact  can  be  corrected  in  the  next  application  of  the 
utility,  .\uthorizations  of  capital  expenditures  shall  be  cumulative,  .\uthorizations  of  annual 
return  shall  likewise  be  cumulative,  and  neither  shall  be  changed,  except,  in  the  first  case, 
when  property  is  removed,  taken  out  of  service,  and  abandoned,  and  then  it  shall  be  taken 
out  of  capital  account,  and  the  amount  of  annual  return  that  is  fixed  in  this  manner  shall 
not  be  changed,  except  in  the  event  of  refinancing,  which  may  cause  some  subsequent  change 
in  the  cost  of  money. 

"Some  such  arrangement  as  that  would  be  fair  to  both  parties.  There  is  only  one  defect 
in  it,  and  that  is  the  defect  of  all  cost-of-service  franchises,  and  that  is  you  may  not  be  able 
to  collect  suflicient  revenues  to  pay  the  annual  return.  Operating  expenses  are  rising  so 
rapidly ;  the  demands  of  labor  in  all  lines  of  industry  are  increasing  so  fast,  that  the  electric 
railway  business  is  fast  going  into  the  position  of  the  British  coal  mines,  and  it  is  not  at  all 
sure  that  we  are  going  to  be  able  to  collect  sufficient  revenues  out  of  the  railway  business 
to  keep  it  going.  We  already  have  situations,  as  I  will  instance,  where  I  am  unable  to  see, 
with  substantial  improvements  to  the  railway  system  and  the  addition  of  a  large  amount  of 
rolling  stock  for  the  size  of  the  community,  that  we  could,  under  any  system  of  fares  which 
we  can  devise,  collect  sufficient  revenues  to  pay  the  operating  expenses  and  pay  a  reasonable 
return  upon  the  utility  capital." 

Later  he  comes  back  to  his  pessimistic  outlook  and  mentions  ovcrregulation 
as  one  of  the  causes  of  the  unhappy  situation  into  which  the  electric  railways 
have  fallen.  Obviously,  there  is  nothing  in  the  following  statement,  found  at 
pages  808  and  809  of  the  Proceedings,  to  indicate  that  unrestricted  state  regu- 
lation is  the  solution  of  the  problem : 

"The  electric  railway  industry  for  a  great  many  years  past  has  been  gradually  losing  its 
commercial  aspects.  It  has  become  an  industry  that  is  regulated  in  the  extreme  by  the 
governmental  authorities,  and  it,  of  course,  has  Ixrcn  one  where  the  net  earnings  have  been 
declining. 

"It  appears  that  the  railway  industry  has  not  been  increasing  its  volume  of  business  as 
rapidly  as  has  Ix-cn  the  general  business  in  community  life  of  the  territory  served.  The 
causes  for  that  are  comparatively  well  known.  They  have  found  themselves  unable  to  attract 
additional  capital  to  expand  facilities,  to  keep  the  railway  utilities  in  line  with  the  growth  of 
business  and  expansion  of  territory,  partly  because  of  the  imposition  of  unremunerative 
expenditures,  both  for  capital  and  for  operating  expenses,  and  partly  because  the  business 
has  been  regarded  as  an  exceedingly  hazardous  one.  Expenses  have  risen  so  rapidly  in  the 
last  two  years  that  it  is  not  at  all  clear  that  there  is  any  uniform  solution  for  the  problem.  In 
fact,  as  t  indicated  in  my  earlier  testimony,  there  are  a  great  many  of  the  smaller  communities 
served  by  track  mileages  nuining  up  ten  or  fifteen,  or  possibly  as  high  as  twenty,  and 
in  places  with  population  as  high  as  .SO.OOO,  where  it  is  doubtful  at  present  wage  levels  and 
commodity  prices,  that  the  business  can  be  made  remunerative  at  all." 

The  Proceedings  do  not  disclose  what  the  Wisconsin  public  thinks  of  state  regu- 
lation, but  it  was  only  a  few  years  ago  tiiat  in  the  neighboring  state  of  Minnu- 


State  Regulation  413 

sota  the  Home  Rule  League  published  a  vitriolic  pamphlet  reviewing  the  work 
of  the  Wisconsin  Commission  from  the  public  point  of  view  and  elaborating  the 
many  reasons  why  municipal  regulation  in  Minnesota  was  to  be  preferred  to 
regulation  by  a  public  service  commission.  This  brochure  was  answered  by  the 
Wisconsin  Commission  or  some  of  its  friends,  but  the  home  rule  sentiment  in 
Minnesota  cities  has  thus  far  prevented  the  enactment  of  a  state  public  utilities 
commission  law.^  In  Illinois,  another  neighboring  state,  a  utilities  commission 
was  established  a  few  years  ago,  and  the  famous  Chicago  settlement  ordinances, 
which,  in  1907,  when  they  were  adopted,  regfistered  the  high  water  mark  of  street 
railway  regulation  in  this  country,  have  been  superseded  in  some  of  their  most 
vital  aspects,  and  a  chronic  state  of  political  and  administrative  warfare  between 
the  City  of  Chicago  and  the  State  of  Illinois  with  respect  to  the  control  of  public 
utilities  has  supervened.-  Unrestricted  state  regulation  was  a  part  of  "the  Wis- 
consin idea"  about  which  we  used  to  hear  so  much  a  few  years  ago,  but  now 
apparently  it  would  have  to  go  begging  for  unqualified  friends  either  in  the  camp 
of  the  public  utilities  or  in  the  camp  of  the  municipalities. 

Let  us  now  turn  to  the  State  of  New  York,  where  Governor  Hughes  won  a 
great  part  of  his  prestige  by  being  a  pioneer  in  the  enactment  of  a  public  service 
commission  law.  The  electric  railway  companies  of  New  York  are  undoubtedly 
very  strongly  in  favor  of  state  regulation  as  opposed  to  local  regulation.  And 
yet  Mr.  James  L.  Quackenbush,  general  counsel  for  the  Interborough  Rapid 
Transit  Company  and  the  New  York  Railways  Company  or  its  predecessor  ever 
since  before  the  establishment  of  the  Hughes  commissions,  takes  a  very  dis- 
couraging view  of  public  service  commission  regulation,  particular  in  New  York 
City,  from  the  companies'  point  of  view.  Testifying  on  July  24,  1919,  twelve 
years  after  the  first  district  (New  York  City)  commission  was  established,  he 
certainly  made  a  sweeping  indictment,  from  his  point  of  view,  of  the  commis- 
sion's activities.  I  have  already  quoted  from  him  in  Chapter  XVII  of  this  report 
in  connection  with  our  discussion  of  the  part  played  by  public  regulation  in  the 
impairment  of  electric  railway  credit.  It  will  be  remembered  that  he  said,  at 
page  817  of  the  Proceedings: 

"The  first  time  that  anything  has  been  done  by  the  Public  Service  Commission  in  the 
first  district  *  *  *  *  of  the  sHghtest  benefit  to  the  railroads  was  done  last  week  by 
Commissioner  Nixon." 

Mr.  Quackenbush  referred  to  the  order  establishing  a  charge  of  two  cents 
for  transfers  except  at  points  where  free  transfers  are  required  by  contract. 
From  the  point  of  view  of  the  electric  railways,  it  might  be  said  that  state  regu- 
lation in  New  York  is  unsatisfactory  because  of  its  incompleteness,  inasmuch  as 
the  highest  court  of  the  state  has  held  that  the  legislature  has  not  conferred  upon 
the  public  service  commissions  authority  to  set  aside  street  railway  rates  of  fare 
which  are  fi.xed  by  franchise  contract,  and  has  even  left  it  open  to  question 
whether  the  legislature  could  constitutionally  grant  this  power  to  the  commis- 
sions.^ But  Mr.  Quackenbush's  complaint  against  the  first  district  commission 
is  not  based  on  the  incompleteness  of  its  authority.  At  page  817  of  the  Pro- 
ceedings, he  says : 

"Fundamentally,  I  think  the  laws  of  New  York  are  satisfactory.  The  trouble  in  New 
York  has  not  been  with  the  law  but  with  its  administration." 


I 


414  Electric  Railway  Problem 

It  seems  that  in  New  York  the  public  service  commissions  are  like  the 
prophet  who  "is  not  without  honor  save  in  his  own  country";  for  Mr.  Quacken- 
bush  admits  that  the  up-state  commission,  with  which  his  companies  have  not 
been  concerned,  has  administered  the  law  more  to  his  liking  than  the  first  district 
commission  before  which  he  has  been  appearing  continually  for  twelve  years  past. 
Of  his  home  commission,  Mr.  Quackenbush  says  at  pages  819  and  820  of  the 
Proceedings : 

"Now,  the  New  York  City  commission  took  office  in  July.  1907.  when  the  surface  lines 
were  tottering  towards  bankruptcy,  and  became  bankrupt  in  September.  They  were  getting 
an  inadequate  fare  there  at  that  time.  Through  excessive  use  of  free  transfers,  the  average 
fare  had  been  descending  until,  at  the  time  of  the  insolvency  in  September,  1907,  it  was  roughly 
3.5  cents. 

"The  receivers  of  the  New  York  City  Railway  Company,  which  then  operated  all  the 
lines  on  Manhattan  Island,  found  the  leases  of  the  Third  ."V venue  and  many  of  the  others 
unprofitable,  and  returned  them  to  their  owners,  under  the  instructions  of  the  United  States 
Court.  That  meant  that  the  duty  to  exchange  transfers  ceased,  because  the  law  of  New  York 
did  not  require  transfers  from  otherwise  independent  and  competing  lines. 

"The  Public  Service  Commission  knew  what  the  rate  of  fare  was.  but  the  public  service 
commissioners  made  speeches  in  various  portions  of  the  city,  announcing  that  they  would 
restore  the  transfers,  and  during  the  years  1907,  1908,  1909,  1910  and  1911  wc  were  engaged 
in  efforts  to  persuade  them  not  to  do  that." 

After  telling  how  the  commissioners  went  to  the  legislature  in  1912  and 
succeeded  in  getting  a  bill  through  both  houses  reestablishing  free  transfers  be- 
tween the  independent  lines,  Mr.  Quackenbush  goes  on  at  pages  820  to  822  of 
the  Proceedings: 

"They  knew,  of  course,  as  I  knew,  that  the  order  could  not  be  sustained,  because  it  was 
confiscatory,  and  instead  of  leaving  it  as  a  judicial  question,  it  was  sought  to  make  it  a 
legislative  one.     Former  Governor  John  A.  Di.x  vetoed  that  bill. 

"Then,  in  the  latter  part  of  1912,  the  independent  companies  and  the  commission  arranged 
a  modification  of  the  transfer  free  across  S9th  Street,  and  they  waived  the  others,  and  that 
is  the  situation  down  to  the  pre.sent  time. 

"Now,  I  mention  that  as  proof  of  the  correctness  of  my  indictment.  They  knew  better. 
They  knew  that  they  were  not'  protecting  the  property  or  the  service  ia  doing  that. 

"Now.  let  us  pass  that  and  come  to  the  la.st  few  years. 

"h  was  apparent  in  1917.  early  in  1917.  as  soon  as  we  pot  into  the  war — it  was  apparent 
before  we  got  into  the  war,  that  wc  were  going  onto  a  new  price  level.  It  was  perfectly 
apparent  that  the  5-cent  fare,  with  free  transfers  on  the  surface  lines,  would  be  inadequate 
to  keep  them  going.  I  am  not  talking  now  about  return.  I  am  talking  about  keeping  them 
going  in  the  interest  of  the  public,  keeping  the  c(|uipmcnt  up.  so  that  it  could  render  that 
safe  and  adequate  service  that  the  statute  requires;  and  transfers  having  been  the  principal 
cause  of  the  lowering  of  the  average  rate  of  fare,  rather  than  to  ask  for  a  flat  increase  of  fare 
in  the  first  instance,  the  surface  companies  made  application  to  the  commission,  in  May. 
1917,  for  the  privilege  of  abandoning  the  transfers,  as  the  commission  might  direct. 

"Those  proceedings  were  begun  in  May.  1917.  and  when  Commissioner  Nixon  took  office 
on  the  8th  day  of  May.  1919.  he  found  them  pending  undecided. 

"In  the  meaTitinie.  the  New  N'ork  Railways  Company  had  gone  into  the  hands  of  a  receiver. 

"The  Second  .\vcnuc  Railway  Company  in  New  York  has  never  come  out  of  the  hands 
of  a  receiver  since  it  started  there  in  1*>07.  and  now  the  receiver  is  unable  to  earn  interest 
on  the  certificates  issued  by  him  under  the  orders  of  the  court,  and.  rather  faceitously,  he  is 
considering  whether  there  won't  be  a  receivership  of  the  receiver. 

"Now,  that  condition  confronting  that  particular  line  of  railway  on  Second  Avenue  alone 
condemns  the  action  of  the  gentlemen  that  held  those  positions  during  those  years. 

******** 

"In  1917,  when  the  transfer  hearing  was  started,  it  was  only  necessary  to  show  the 
diflFcrence  Iwtween  operating  expenses  and  income  to  show  that  some  emergency  relief  was 
needed.  The  facts  were  there,  but  they  wanted  a  valuation,  and  the  thing  went  along,  exam- 
ination upon  examination  of  the  accounts,  and  all  the  various  things. 

"Coiuisel  for  the  commission  was  nominated  for  district  attorney  that  fall,  and  among 
the  reasons  that  he  gave  the  people  why  he  should  be  elected  district  attorney  was  that  he 


State  Regulation  415 

had  prevented  the  abolition  of  the  transfers,  or  any  charge  for  the  transfers.  He  did  not  get 
elected  on  that  issue,  but  he  ran  on  it. 

"I  am  speaking  of  facts  as  they  are,  because  I  suppose  that  is  what  you  want  to  know. 
These  gentlemen  are  all  friends  of  mine.  I  have  gotten  along  with  them  pleasantly.  I  do 
not  enjoy  stating  what  I  do,  but  the  truth  is  the  truth,  and  it  was  about  time  it  should  be  told 
somewhere  by  somebody,  and  I  propose  to  tell  it  as  long  as  you  want  to  listen  to  it. 

"Now.  I  say  that  for  the  commission,  for  one  day,  to  keep  Judge  Ransom  in  office  after 
he  made  that  a  campaign  issue — and  it  is  in  the  public  prints  that  he  did  it — they  convicted 
themselves  of  an  utter  lack  of  appreciation  of  their  duties  under  the  law. 

"That  has  been  the  trouble  in  New  York." 

In  passing,  it  should  perhaps  be  mentioned  that  Judge  Ransom  was  subse- 
quently so  highly  regarded  by  the  public  utility  interests  of  New  York  that  upon 
his  resignation  as  counsel  for  the  Public  Service  Commission  he  received  retainers 
both  from  the  Interborough  Rapid  Transit  Company  and  from  the  Consolidated 
Gas  Company,  and  it  is  not  apparent  why  Mr.  Ouackenbush  in  July,  1919,  should 
have  seen  fit  to  criticize  his  fellow-counsel ! 

The  next  thing,  he  takes  up  the  subways,  and  condemns  the  Public  Service 
Commission  for  its  policies  in  the  rapid  transit  field.  After  referring  to  the  fact 
that  the  need  of  stibway  extensions  had  become  apparent,  Mr.  Qtiackenbtish,  at 
page  823  of  the  Proceedings,  says : 

"The  fundamental  theory  of  the  public  service  commission  law  in  New  York,  and  of 
course  throughout  the  United  States,  is,  as  Governor  Foss  has  said,  monopoly,  not  com- 
petition, but  regulation  and  monopoly.  It  was  the  commission's  duty  to  regulate  it.  It  had 
all  the  powers  of  regulation. 

"Instead  of  undertaking  to  accept  any  one  of  the  several  offers  that  the  Interborough 
Rapid  Transit  Company  made  to  the  city  to  build  those  natural  extensions  that  I  have 
mentioned,  with  their  own  money,  the  commission  thought  they  had  to  have  competition, 
they  had  to  have  public  operation,  and  they  proceeded  with  a  plan  of  building  an  independent 
subway,  and  that  was  to  have  another  'Z,'  coming  down  Lexington  Avenue  and  crossing 
below  42nd  Street,  and  then  coming  down  the  west  side.  They  called  that  the  Triboroug;^ 
Subway,  and  they  spent  several  million  dollars  in  actually  constructing  it.  That  had  no 
justification   in   finance,   economics,   railroading,  or  common   sen.se. 

"It  was  not  the  fault  of  the  law." 

Mr.  Ouackenbush  was  quite  vehement  in  his  denunciation  of  the  public 
authorities  in  New  York  City  for  not  permitting  an  increase  in  the  fare  to  eight 
cents.  He  showed  that,  without  any  new  legislation,  the  fares  could  be  raised 
at  once  by  joint  action  of  the  Public  Service  Commissioner,  the  Transit  Construc- 
tion Commissioner  and  the  Board  of  Estimate  and  Apportionment.  We  cannot  go 
fully,  in  this  analysis,  into  the  details  of  the  rapid  transit  situation  as  sketched 
out  by  Mr.  Quackenbush  in  his  testimony,  but  we  ought,  perhaps,  to  take  par- 
ticular note  of  what  he  said  as  to  the  moral  obligation  of  the  public  officials  of 
New  York  to  sustain  the  credit  of  the  Interborough  Consolidated  Corporation, 
the  holding  company  for  the  Interborough  Rapid  Transit  Company  and  the  New 
York  Railways  Company.  When  the  new  subway  contracts  of  1913  were  nego- 
tiated, the  Interborough  Rapid  Transit  Company  came  into  the  deal  only  upon 
condition  that  the  city  would  give  it  a  qualified  guaranty  of  its  past  rate  of  sub- 
wa)'  profits  in  the  form  of  a  preferential  payment  out  of  the  pooled  receipts  of 
the  old  and  the  new  subways.  This  preferential,  representing  a  charge  upon 
gross  earnings  in  advance  of  any  return  to  the  city  on  its  capital  invested  in 
new  subways,  amounted  to  $6,335,000  per  annum.  There  was  another  preferen- 
tial of  $1,590,000  based  on  the  past  profits  from  the  operation  of  the  Manhattan 
elevated  lines.     At  page  832  of  the  Proceedings,  Mr.  Quackenbush  outlines  the 


416  Electric  Railway  Problem 

facts  and  states  his  view  of  the  moral  obligations  assumed  by  the  city  with  re- 
spect to  the  holding  company's  securities.     He  says: 

"In  1906,  the  Intcrborous'i  Kapid  Transit  Company,  the  operating  company  of  the  sulv 
way  and  the  elevated,  and  the  New  York  City  Railway  Company,  the  lessee  of  all  the  lines 
on  Manhattan  Island  and  the  lines  in  the  Bronx,  formed  a  consolidation,  not  a  merger,  turned 
in  their  respective  stocks  in  exchange  for  proportions  of  stock  and  bonds  of  the  Interborough- 
Metropolitan  Company,  as  it  was  then  called,  since  by  reorganization  and  now  called  the 
Interborough  Consolidated  Corporation,  which,  by  the  way,  went  into  the  hands  of  a  receiver 
on  the  21st  day  of  March,  1919. 

"Now,  the  Interborough  Consolidated  Con'oration  took  the  thirty-five  millions  of  capital 
stock  of  the  Interborough  Rapid  Transit  Company  and  for  that  exchanged  seventy  millions 
of  its  4^',f  bonds.  That  was  equivalent  to  a  9%  annual  dividend  upon  the  Interborough 
Rapid  Transit  Company's  stock.  At  the  time  we  made  the  contract  with  the  city  in  1913  the 
Interborough-Metropolitan  Company  was  in  existence,  and  through  its  ownership  of  this 
stock  controlled  through  voting  power  the  action  of  the  operating  company  in  making^  the 
contract.  It  was  known  by  everybody  at  the  time  that  the  Interborough-Metropolitan  Com- 
pany had  in  addition  to  the  $70,000,000  of  bonds  $45,000,000  of  preferred  stock.  Now,  the 
$6,335,000,  which  has  come  to  be  called  a  preferential  that  we  arc  entitled  to  take  out  of  the 
subway  earnings,  represented  our  average  net  profits  of  the  years  1910  and  1911.  They  were 
taken  as  a  fair  test  and  agreed  to. 

"I  have  not  said  anything  so  far  alxiut  the  Elevated  features  of  the  contract,  because  the 
city  did  not  have  any  investment  there.  I  wanted  to  impress  upon  you  first  the  fact  that  the 
city's  own  investment  is  not  being  taken  care  of  intelligently  or  faithfully  by  anybody. 

"Now.  we  put  many  millions  of  doll.irs  in  the  improvements  of  the  Elevated  lines  and 
added  and  extended  the  lines  and  third  tracked  them  and  made  an  agreement  with  the  city 
by  which  it  shared  in  the  profits  above  our  average  profits  of  1910  and  1911.  which  in  that 
case  were  $1,590,000.  Now,  the  sum  of  those  two  which  have  been  called  prelereiitials  was 
known  to  everybody  to  be  sufficient,  with  other  non-operating  income  which  we  had,  to  pay 
a  dividend  on  our  preferred  stock. 

"Now,  I  ."iay  tliat  when  those  facts  were  known  and  when  it  was  known  to  the  people 
with  whom  we  were  in  daily  conference  for  three  years  of  time  that  the  Interborough-Metro- 
politan Company  permitted  the  Intcrlvirough  Rapid  Transit  Company  to  make  this  contract, 
and  they  knew  that  that  was  done  on  the  strength  of  these  preferentials,  and  that  those  pref- 
erential were  sufficient  to  pay  the  interest  on  the  ^'/''''r  bonds  plus  a  return  on  the  preferred 
stock,  that  it  is  wicked,  immoral  and  unjust  and  nothing  but  simple  repudiation  morally  for 
anybody  who  took  part  in  that  transaction  or  who  succeeded  those  who  did  take  part  in  it 
to  starve  us  now  into  the  destruction  of  the  values  of  that  preferred  stock  and  of  those  bonds." 

Mr.  Quackenbush  also  maintains  that  the  public  authorities  of  New  York 
were  morally  bound  to  sustain  the  securities  of  the  New  York  Railways  Com- 
pany, issued  at  the  time  of  the  reortjanization  of  the  old  Metropolitan  Street 
Railway  Company.  He  says  that  the  physical  valuations  made  by  the  Public 
Service  Commission  in  1910  indicated  at  least  $50,000,000  of  tangible  property, 
and  that  now  with  only  $48,000,000  underlying  and  general  first  mortgage  bonds 
ahead  of  $30,000,000  of  income  bonds,  the  surface  lines  went  into  the  hands  of 
a  receiver  on  March  20,  1919.  Commenting  upon  this  condition  of  affairs,  at 
page  834  of  the  Proceedings,  he  says: 

"Now.  there  is  .something  wrong  when  that  situation  arises  and  when  under  such  condi- 
tions there  is  any  talk  about  water.  I  never  have  mentioned  the  question  of  the  securities, 
except  as  1  have  mentioned  them  here,  on  the  theory  that  everybixly  knew  they  were  out  and 
made  a  Kirgain  knowing  that  they  were  out,  and  when  people  make  bargains  under  those 
conditions  they  or  their  successors  ought  to  be  ashamed  of  themselves  to  repudiate  them  " 

Mr.  Quackenbush  recognized,  to  a  certain  extent,  the  apparent  inconsistency 

of  the  position  taken  by  electric  railway  companies  which  seek  relief   from  the 

fulfilment  of  their  rate  contracts,  but  be  outlined  a  bold  policv  for  the  relief  of 

the  embarrassment,  and  in  doing  so  stated  most  emphatically  his  belief  that  the 

states  should  not  hesitate  to  override  the  municipal  authorities  in  such  matters. 

At  pages  S37  to  S.^S  of  the  Proceedings,  he  says: 

"Now  as  to  the  other  thing,  and  I  think  that  I  will  mention  this  because  at  a  meeting  at 
which  I   was  present  among  some  of  the  gentlemen   who  are  here  in  this  room,  one  of  the 


State  Regulation  417 

members  said  that  what  troubled  him  in  dealing  with  this  whole  matter  was  how  to  meet  the 
constant  statement  that  you  are  seeking  to  repudiate  your  contracts,  and  of  course  that  view 
does  prevail.  And  I  think  there  this  body  may  do  a  service  if  you  will  get  the  public  to  see 
that  after  all  it  is  the  public  that  is  interested  in  the  question  of  rate,  it  is  their  business,  and 
that  no  matter  if  twenty  years  ago  with  conditions  entirely  different  the  local  authorities  of 
some  little  village  or  some  big  city  and  some  well-intentioned  but  ill-advised  corporation 
managers  made  contracts  that  no  longer  fit  the  case,  that  the  interest  of  the  people  is  the 
supreme  law  and  that  if  the  time  comes  that  the  interest  of  the  people  requires  a  modification 
of  the  rate  and  the  carrier  is  ready  on  its  part  to  modify  them  and  the  people,  represented  by 
their  sovereign  representatives  in  the  legislature,  for  instance,  or  their  delegated  bodies  are 
ready  to  do  it,  and  the  local  authorities  of  the  little  town  or  the  village  or  small  city  or 
medium  sized  city  or  the  big  city  come  up  and  say,  'We  made  a  contract,'  the  answer  is  that 
the  sovereign  people,  represented  by  the  legislature  or  its  delegated  commission,  will  say 
to  the  local  authorities.  'That  contract  was  all  right  as  between  you  and  that  carrier,  that 
contract  probably  today  will  be  recognized  in  the  courts  as  a  judicial  matter,  but  now  the 
principals  are  dealing  face  to  face,  and  I,  the  people  of  the  state,  do  not  any  longer  need 
your  services,  Mr.  Agent,  city,  town  or  village;  now  you  just  step  aside  and  you  forget  your 
little  petty  and  shortsighted  vision  of  this  question  and  I  will  make  a  bargain  with  the  carrier 
that  will  be  in  the  interest  of  the  general  public,  whose  interest  after  all  is  the  only  concern 
of  anybody.' " 

Mr.  Quackenbush  referred  to  the  fact  that  the  salaries  of  the  public  commis- 
sioners under  the  original  Hughes  law  of  1907  were  $15,000  apiece,  or  $150,000 
a  year  for  the  ten  members  of  the  two  New  York  commissions.*  At  the  time, 
a  judge  of  the  Court  of  Appeals  was  paid  only  $12,000  a  year,  but  it  was  ex- 
plained that  "Governor  Hughes  would  appoint  to  the  commissions  men  of  such 
standing  and  ability  that  their  decisions  would  be  accepted  by  the  carriers,  the 
utilities  and  by  the  public  as  final  and  it  would  be  unnecessary  to  go  into  court 
to  review  them ;  he  was  going  to  get  men  of  the  highest  grade."  Mr.  Quacken- 
bush adds : 

"I  have  no  doubt  the  Governor  intended  to  do  so,  and  as  I  have  said,  so  far  as  character, 
integrity  and  intelligence,  he  succeeded,  but  he  did  not  succeed  in  getting  men  who  held  the 
scales  even." 

I  have  cited  Mr.  Quackenbush's  statements  at  some  length,  not  because  his 
inferences  against  the  good  morals  of  the  civic  authorities  are  unchallenged,  but 
to  show  that  from  his  point  of  view  public  regulation  in  New  York  has  been  a 
failure,  and  that,  also  from  his  point  of  view,  the  Public  Service  Commission  in 
the  past  and  the  city  authorities  in  the  present  have  been  equally  recreant  to 
their  moral  obligations  to  the  investors.  Moreover,  Mr.  Warren  stated  that  the 
American  Electric  Railway  Association  was  on  record  as  favoring  state  regula- 
tion ;  yet  Mr.  Mortimer  and  Mr.  Quackenbush,  two  of  the  Association's  leading 
witnesses,  testified  as  I  have  shown. 

The  case  for  state  regulation  brightens  up  a  little  when  we  come  to  the  testi- 
mony of  Mr.  James  O.  Carr,  of  Pittsburgh,  who  was  a  member  of  the  up-state 
Public  Service  Commission  of  New  York  from  1915  to  1918.  Prior  to  that, 
according  to  his  own  statement,  Mr.  Carr  had  been  for  about  twenty  years  "very 
actively  engaged  in  the  operation,  construction  and  reorganization  of  public  util- 
ities, street  railroads,  electric  light  and  gas  companies."  In  his  testimony,  Mr. 
Carr  touched  upon  the  fact  that  the  New  York  commissions  were  restricted  in 
their  power  to  deal  with  rates  which  had  been  fixed  by  franchise  contracts.  At 
pages  846  and  847  of  the  Proceedings,  he  says : 

"I  believe  that  if  public  service  corporations  are  to  be  regulated  by  regulating  commis- 
sions, they  should  have  full  power  to  regulate  them.  I  have  in  mind  particularly  the  New 
York  law  under  which  we  were  operating,  which  gave  the  commission  every  power  that  a 


418  Electric  Railway  Problem 

regulating  body  could  possibly  have,  so  far  as  service  was  concerned.  There  was  no 
limit,  practicallv,  to  what  could  be  required,  but  going  along  with  that  there  was  not  the  same 
power  to  provide  the  means  lor  the  corporation  to  get  the  money  to  make  those  improve- 
ments, if  improvements  were  required,  or  to  provide  such  other  expenses  as  might  be  neces- 
sary to  give  the  service  that  the  public  was  entitled  to  and  which  it  demanded. 

"Mr.  Warren:  That,  in  your  judgment,  is  just  as  essential— the  possession  of  that  power 
is  just  as  essential  as  the  power  over  service;  that  one  without  the  other 

"Mr.  Carr;    One  without  the  other  makes  it  absolutely  incomplete. 

"Mr.  Warren:    Yes.  .    . 

"Mr.  Carr:  That  law,  as  it  now  stands,  gives  every  power  to  the  commission  to  reduce 
fares,  but  it  does  not  give  them  power  to  increase  fares  when  increases  are^  necessary  and 
absolutely  required  in  order  to  enable  the  corporation  to  perform  its  functions." 

Asked  whether  the  state  commissions  in  the  existing  emergency  would  be 
justified  in  furnishing  temporarj'  relief,  Mr.  Carr  said,  at  page  849  of  the  Pro- 
ceedings : 

"With  respect  to  those  commissions  of  which  I  have  any  knowledge,  I  have  no  doubt  that 
every  one  of  them  would  give  relief  today  if  a  plain  statement  of  facts  was  furnished  them, 
if  they  thought  it  correct,  without  waiting  for  any  great  length  of  time  to  get  a  mass  of  evi- 
dence in  front  of  them  that  they  would  have  to  pour  over  and  spend  their  nights  and  Sun- 
days in  digesting.  The  purpose  of  every  one  of  these  commissions  today  is  to  aid  the  cor- 
poration that  needs  help,  but  where  they  are  bound  around  with  statutes  and  with  constitu- 
tional provisions  and  other  things  that  prevent  them  from  giving  that  aid.  they  are  absolutely 
helpless,  no  matter  how  much  they  may  desire  to  help  the  corporation,  and  the  best  evidence 
of  that  is  what  has  happened  in  New  York." 

Mr.  Carr  took  issue  with  some  things  said  by  Governor  Foss  of  Massachu- 
setts with  respect  to  the  pernicious  political  activities  of  public  service  corpora- 
tions in  trying  to  influence  appointments  on  the  public  service  commissions.  His 
own  view  of  the  trouble  with  respect  to  these  appointments  is  set  forth  at  pages 
850  and  851  of  the  Proceedings,  where  he  says: 

"The  trouble  is  that  the  appointing  power,  as  a  rule,  where  the  commissions  are  ap- 
pointed— in  many  ol  the  states  they  are  elected — but  where  they  are  ai)|>ointed.  1  believe  the 
public  service  corporations  are  more  interested  than  anyone  else  to  have  clean,  able,  upright 
men  on  the  commission,  liecause  it  is  to  their  liest  interests  to  have  men  of  that  character, 
yet  in  all  cases  the  trouble  with  the  appointing  power  is  the  politician.  He  is  always  there 
to  sec  that  a  politician  or  someone  who  is  selected  by  the  politician  is  put  on  the  commission, 
because  it  is  considered  a  political  plum. 

"Now.  that  is  the  fact  as  distinguished  from  what  the  Govenior  said,  and  I  think  you 
will  find  that,  if  you  keep  the  politician  away  from  the  appointing  power,  you  will  have  no 
trouble' in  getting  goo<l  men. 

"But  there  is  this  further  fact  to  be  considered:  it  is  difficult  to  get  a  competent  man, 
unless  he  happens  to  be  of  independent  means,  to  be  willing  to  assume  the  burdens  of  public 
service  commissioner  because  he  docs  not  like  to  be  hounded  and  blackmailed,  if  you  please- 
accused  of  everything  in  the  calendar,  and  work  himself  night  and  day  to  do  the  best  he 
can  for  his  state,  with  the  knowledge  all  the  time  that  a  change  in  the  political  power  or 
the  e.\piratioii  of  his  term  of  office  means  that  he  goes  forth  without  honor. 

"And  what  is  the  result?  His  innermost  pride  is  affected,  because  he  feels  that  if  he 
has  done  his  duty  well  the  least  reward  that  he  could  have  would  be  a  reappointment  to  that 
office,  and  you  will  find  that  that  is  very  seldom  done  I  did  not  have  an  op])ortunity  to  meet 
that  experience,  but  I  presume  1  might  have  had  it,  just  the  same  as  many  other  men  have 
had  it;  and  that  is  the  reason  why  it  shcnild  be  eliminated  from  politics.  H  you  have  a 
competent  man  there,  keep  him  on  the  job." 

Mr.  Carr  does  not  believe  that  public  ownership  would  be  successful  in  this 
country  under  our  i)rcsi-in  form  of  government,  but  he  seems  to  have  a  good 
deal  of  faith  in  public  regtilation.  On  this  point  he  speaks,  at  pages  855  and  856 
of  the  I^rocccdings,  as  follows: 

"Commissioner  Meeker:  How  at>out  public  regulation  under  our  present  sy.stem?  Is  it 
possible  to  work  that  ? 

"Mr.  Carr:  I  think  public  regulation  can  work,  and  it  has  worked  very  well.  Of  course, 
it  has  its  evils. 


State  Regulation  419 

"Commissioner  Meeker :     We  have  heard  some  pretty  severe  bumps  handed  to  it  today. 

"Mr.  Carr:  Of  course,  you  have  always  to  consider  that  some  of  the  people  that  do  the 
bumping  also  liave  their  grievances. 

"In  1907,  when  the  New  York  commission  was  formed,  I  might  say  that  a  great  many 
people  with  whom  I  was  associated  were  opposed  to  it,  but  I  was  very  much  in  favor  of  it, 
because  I  felt  I  saw  what  was  coming,  and  I  tried  all  I  could  to  help  make  it  a  law  in  my 
feeble  way,  and  I  believe  if  you  would  put  it  to  a  vote  of  the  public  service  companies  in 
the  state  and  ask  them  whether  they  would  go  back  to  the  old  days  they  would  tell  you 
that  they  would  prefer  to  have  the  regulation  exactly  as  they  are  having  it  today.  Now,  I 
may  be  wrong,  but  that  is  what  they  have  told  me. 

"Commissioner  Meeker :  What  is  the  difference  between  the  politics  that  affects  the 
public  regulators  today  and  the  politics  that  would  affect  the  public  operators  in  case  of 
public  ownership  and  operation,  or  the  public  regulators  under  public  ownership  and  private 
operation? 

"Mr.  Carr:  Well,  all  I  can  speak  for  is  the  commission  I  was  with.  We,  in  the  words 
of  the  President,  adjourned  politics.     We  eliminated  politics  entirely  from  our  operations. 

"The  Chairman :  Is  it  not  true,  Mr.  Carr,  that  although  some  of  the  public  service 
commissioners  may  be  politicians,  and  they  may  be  appointed  for  political  purposes,  yet  when 
it  comes  to  the  question  of  appointing  their  expert  men,  their  expert  rate  men,  engineers  and 
so  forth,  they  always  look  for  the  best  men  in  the  field  that  can  be  secured? 

"Mr.  Carr :     I  think  that  is  true. 

"The  Chairman  :  And  is  it  not  also  true  that  these  public  commissioners  very  generally 
respect  the  recommendations  and  follow  the  recommendations  of  their  expert  forces  in  mat- 
ters coming  before  them? 

"Mr.  Carr:     I  think  it  is." 

The  Railroad  Commission  of  California,  since  it  was  reorganized  in  1912, 
has  had  a  very  high  reputation  for  intelligence,  vigor  and  fairness  in  the  applica- 
tion of  the  regulatory  law.  The  only  California  witness  that  appeared  in  person 
before  the  Federal  Electric  Railways  Commission  was  Mr.  W.  E.  Creed,  counsel 
in  rate  matters  for  the  San  Francisco-Oakland  Terminal  Railways  Company, 
which  operates  as  its  Traction  Division  the  local  street  railway  lines  in  Oakland, 
Berkeley,  Alameda  and  other  East  Bay  cities,  and  also  operates  as  its  Key  Divi- 
sion, in  competition  with  the  Southern  Pacific  Railroad,  the  trans-bay  interurban 
railway  and  ferry  service  to  San  Francisco.  Mr.  Creed  stated  that  his  company 
was  in  very  bad  condition,  but  he  blamed  this  condition  for  the  most  part  upon 
matters  outside  of  the  control  of  the  state  coimiiission.  He  cited  excessive  taxes, 
assessiTients  and  paving  obligations,  the  failure  of  the  municipalities  more  rigidly 
to  enforce  traffic  regulations  with  regard  to  automobiles  and  thus  cut  down  acci- 
dents, and  the  deinand  of  the  municipal  authorities  for  "service  beyond  the 
revenue"  on  particular  lines  and  their  refusal  to  permit  the  abandonment  of 
lines  which  have  not  been  justified.  With  respect  to  the  state  commission,  Mr. 
Creed  says,  at  page  887  of  the  Proceedings: 

"Well,  our  commission  out  there  has  acted  with  commendable  courage  with  regard  to 
the  traction  company  and  we  finislied  the  case  which  involved  the  question  of  an  increased 
fare  in  July  or  about  the  1st  of  July  last  year,  and  in  August  the  commission  granted  the 
6-cent  fare,  on  the  14th  of  August.  We  have  not  yet  gone  to  them  on  the  7-cent  fare,  but 
we  have  pending  an  application  for  an  increase  of  fares  on  the  Key  Division,  and  that  decision 
has  not  yet  come  down. 

"Mr.  Warren:     How  long  has  that  been  pending? 

"Mr.  Creed :     Since  July  of  last  year. 

"Commissioner  Sweet :  The  commission  you  speak  of  is  the  state  public  utility  com- 
mission ? 

"Mr.  Creed:     Yes,  of  state-wide  jurisdiction. 

"Mr.  Warren:     They  have  jurisdiction  to  do  it? 

"Mr.  Creed:  Yes.  They  have  met  the  situation  in  California  very  well.  Of  course, 
there  are  a  good  many  complications  in  connection  with  the  increase  in  the  trans-bay  fare. 
The  question  is  what  the  Southern  Pacific,  which  is  a  competing  service,  will  do,  and  whether 
the  Railroad  Administration  will  go  to  the  same  figure,  and  also  the  question  of  whether 
we  would  dare  to  operate  at  an  increased  fare." 


420  Electric  Railway  Problem 

Later  on,  Mr.  Creed  suggests  that  it  would  be  desirable  for  the  Federal  Elec- 
tric Railways  Commission  to  make  studies  and  findings  with  respect  to  "the 
future  rate-fixing  policies  of  state  commissions  regarding  utilities  in  general  or 
street  railways."  lie  expresses  the  opinion  that  it  is  desirable  to  "have  compen- 
sation and  the  rate  of  fare  as  low  as  is  consistent  with  maintaining  the  credit 
and  service,"  but  he  thinks  it  "essential  that  a  rate-fixing  policy  making  adequate 
provision  for  depreciation  and  contingencies  be  adopted."  With  respect  to  state 
regulation  in  general,  he  expresses  himself  at  page  889  of  the  Proceedings,  as 
follows : 

"I  believe  very  strongly  in  state-wide  regulation.  I  believe  the  great  service  that  that 
has  done  has  been  to  control  the  issuance  of  securities,  and  1  think  it  was  essential  that  that 
be  done,  but  I  think  the  tendency  in  state-wide  regulation  has  been  to  require  companies  to 
give  service  substantially  at  cost.  That  is,  when  you  take  most  of  the  rate  cases  which  have 
been  decided  by  commissions  you  find  they  build  up  the  operating  expenses,  w-hatever  allow- 
ance they  make  for  depreciation,  bond  interest  and  the  dividends  to  the  stock  which  is  used 
for  financing  and  then  there  is  a  little  margin  or  surplus  over,  but  that  margin  has  not  been 
big  enough  to  take  care  of  fluctuations  in  conditions,  and  I  feel  there  ought  to  be  very  care- 
ful thought  and  study  given  to  the  future  policy  with  reference  to  reserves  and  depreciation 
reserves  for  public  utilities  and  particularly  street  railways."' 

Further  on,  Mr.  Creed  testified  that  in  his  opinion  the  California  commis- 
sion has  been  a  very  efficient  body  and  that  he  has  a  very  high  opinion  of  its 
work.  He  thinks  that  prior  to  the  war  the  utilities  of  California  enjoyed  a  very 
fair  measure  of  prosperity.  Their  present  trouble  is  chiefly  an  outgrowth  of 
war  conditions.  He  calls  attention,  however,  to  one  limitation  upon  the  powers 
of  the  California  Railroad  Commission  and  the  state  commissions  generally, 
which,  in  his  opinion,  should  be  removed.  This  limitation  is  their  lack  of  author- 
ity to  compel  the  readjustment  of  old  capitalization  in  connection  with  their 
approval  of  the  issuance  of  new  securities.  His  views  on  this  point  have  already 
been  cited  in  Chapter  XVIH  of  this  report  in  connection  with  our  discussion  of 
the  effect  of  public  regulation  of  stock  and  bond  issues  upon  the  credit  of  the 
electric  railways. 

Mr.  Creed  also  states  that  in  California  fares  cannot  be  raised  in  advance 
of  an  application  to  the  state  commission  and  a  determination  by  it.  He  is  of 
the  opinion  that  it  would  be  "in  the  interest  of  both  the  company  and  the  public" 
to  adopt  the  provisions  of  the  Pemisylvania  law,  authorizing  electric  railway 
companies  to  put  new  rates  into  effect  subject  to  subsequent  modification  by  the 
public  serv^ice  conmiission  upon  investigation.  It  will  be  seen  that  on  the  whole, 
Mr.  Creed's  testimony  was  very  favorable  to  the  California  Railroad  Commis- 
sion and  to  the  general  plan  of  regulation  by  state  commissions.  At  the  same 
time,  it  is  not  clear  that  the  difiiculties  of  the  electric  railways  of  California  would 
be  entirely  overcome  by  the  changes  in  the  regulator}-  laws  suggested  by  him. 

It  is  noteworthy  that  Mr.  Paul  Shoup,  President  of  the  Pacific  Electric  Rail- 
way Company,  which  operates  over  ICXX)  miles  of  interurban  track  in  Southern 
California,  in  his  mcs.sage  of  July  19,  1919,  to  the  president  of  the  American 
Electric  Railway  Association,  which  appears  in  full  at  pages  608  and  609  of  the 
Proceedings,  did  not  voice  or  even  suggest  any  criticism  of  state  regulation  in 
California,  although  stating  that  the  electric  lines  in  that  state  were  in  a  desperate 
situation.  In  fact,  he  says:  "In  some  California  cities  6-cent  fares  have  been 
granted  and  in  a  number  of  other  cities  applications  for  that  rate  are  pending. 


State  Regulation  421 

\'ery  considerable  increases  in  freight  and  passenger  rates  have  been  granted 
interurban  lines,  but  necessary  relief  has  not  followed."  The  remedial  measures 
suggested  by  him  do  not  include  the  abandonment  of  state  regulation  or  any  par- 
ticular enlargement  of  the  functions  of  the  state  commission ;  but  rather  the 
enactment  of  legislation  relieving  the  electric  railways  from  the  burdens  of  special 
taxation,  paving  requirements  and  other  franchise  obligations ;  the  adoption  of 
operating  economies  and  the  shortening  of  the  uniform  fare  zone,  coupled  with 
the  substitution  of  a  7y^-cent  minimum  fare  for  the  nickel  and  the  making  of  a 
new  7j/2-cent  coin.° 

Mr.  Charles  L.  Henry  described  the  system  of  fares  on  the  interurban  lines 
of  Indiana.  The  regular  rates  were  originally  about  ly^  cents  per  mile;  then 
came  the  penny  zone  system,  with  a  cent  for  every  half  mile;  then  in  January, 
1918,  the  rate  was  put  up  to  2i/^  cents  per  mile;  and  finally,  in  February,  1919, 
to  2^:;  cents  per  mile.  Mr.  Warren  asked  whether  there  is  a  minimum  fare. 
Mr.  Henry's  reply  and  his  comment  upon  the  Indiana  Public  Service  Commission 
are  found  at  page  701  of  the  Proceedings,  as  follows : 

"Yes ;  the  mininiiim  fare  used  to  be  5  cents  and  has  been  made  10  cents,  so  that  there  is 
no  fare  now  less  than  10  cents. 

"The  Chairman:     By  order  of  the  commission  or  by  statute? 

"Mr.  Henry :  By  order  of  the  commission.  The  statute  made  no  regulation  of  our  fares. 
Our  rates  are — it  has  all  been  done  by  the  commission,  and  in  that  I  may  say  that  the 
commission,  since  they  got  their  faces  turned  towards  the  East  and  saw  what  was  needed — 
it  was  a  little  difficult  to  get  them  to  see  what  was  needed,  but  as  soon  as  we  got  their  faces 
turned  in  the  right  drection  and  they  did  see  what  was  needed,  they  have  shown  a  disposition 
to  cooperate  with  the  interurbans. 

"The  Chairman :     I  think  you  have  a  good  commission  in  Indiana. 

"Mr.  Henry:  Well.  I  second  the  motion.  We  have.  But  here  is  one  of  the  troubles 
about  it.  We  were  going  in  the  hole  for  from  six  to  nine  months  because  of  the  losses  in 
operating  expenses  before  we  got  an  increase,  and  when  we  got  the  additional  increase  it 
was  the  same  way,  it  took  three  months  to  get  them  to  issue  'the  first  permit  for  2^  cents 
per  mile.  I  presented  the  petition  for  our  road  first,  and  it  took  us  three  months  to  get  action 
on  it  before  we  got  them  in  the  notion  of  really  doing  it.  They  first  thought  maybe  the  2-cent 
fare  law  affected  it,  and  we  showed  them  it  did  not,  it  only  affected  steam  roads,  and  after 
that  they  treated  us.  well,  I  will  not  say  with  liberality,  but  with  all  the  justice  the  situation 
demanded  and  required." 

Mr.  Richard  Schaddelee,  Vice-President  and  General  Manager  of  the  United 
Light  &  Railways  Company,  which  controls  a  number  of  street  railway  and  other 
utility  properties  in  the  Middle  West,  told  about  his  experience  with  the  Illinois 
and  Indiana  public  service  commissions.  He  criticized  both  of  them  on  the 
ground  of  delay  in  the  granting  of  emergency  relief  to  sick  utilities.  He  also 
generalized  about  the  failures  of  commission  regulation.  At  page  859  of  the 
Proceedings,  he  says: 

"The  failure  of  commissions  and  other  rate  regulation  bodies  to  adequately  protect 
utilities  and  grant  them  the  relief  necessary  to  enable  them  to  maintain  good  and  adequate 
service,  as  exemplified  by  the  present  condition  and  future  prospects  of  the  electric  railways, 
is,  in  my  opinion,  due  to  the  personnel  of  these  commissions,  their  manner  of  appointment, 
and  the  influences  they  are  subject  to  much  more  than  the  laws  themselves." 

Mr.  Schaddelee's  idea  of  the  purposes  for  which  state  regulatory  commis- 
sions were  established,  is  set  forth  at  pages  860  and  861  of  the  Proceedings,  as 
follows : 

"State  commissions  were  established  because  the  people  were  dissatisfied  with  the  results 
of  utility  operation  under  franchise  restrictions  or  under  regulation  by  local  municipal  councils. 


422  Electric  Railway  Problem 

"The  people  did  not  enjoy  the  spectacle  of  these  franchises  or  the  regulating  ordinances 
of  their  councils  being  made  and  dictated  largely  by  local  political  and  factional  interests. 
The  American  people,  especially  the  .American  workingmen.  are  intelligent  and  have  a 
passionate  desire  tor  fairness,  justice  and  fair  play,  and  they  can  be  depended  upon  to  be  on 
the  side  of  right  and  justice  once  they  thorouglily  understand  the  merits  of  a  controversy  or 
proposition. 

"They  do  not  like  to  see  a  purely  economic  problem,  affecting  their  personal  and  vital 
interests,  degenerate  into  a  political  problem  and  become  a  political   football. 

"Whatever  the  intent  or  motives  were  of  the  legislature  who  enacted  these  laws,  I  am 
convinced  that  I  have  stated  accurately  the  motives  and  intent  of  the  large  majority  of  the 
people. 

"The  people  knew  that  the  political  manhandling  of  utility  problems  nearly  always  inflicted 
injustice  upon  cither  the  public  or  upon  the  utility  and  often  upon  both." 

While  admitting  that  all  commissions  have  done  some  good  work  and  that 
there  are  "many  able,  conscientious,  capable  and  fearless  members  on  the  com- 
missions," Mr.  Schaddelee  is  convinced  that  as  a  whole,  the  commissions  have 
failed  to  live  up  to  the  expectations  and  the  intent  of  the  people.  At  page  862 
of  the  Proceedings,  he  says : 

"The  main  reason  for  the  failure  of  the  commissions  to  function  effectively  is  the  fact 
that  they  have  not  been  immune  from  political  influence  as  the  people  expected  they  would  be." 

This  view  is  elaborated  in  the  succeeding  pages  of  the  Proceedings.  At  page 
862,  Mr.  Schaddelee  says: 

"These  commissioners  are  but  human.  .As  a  rule  they  like  to  retain  their  positions,  and 
under  the  conditions  cited  they  cannot  be  expected  to  make  purely  judicial  decisions  without 
fear  or  favor. 

"If  they  are  to  function  effectively,  they  must  be  absolutely  removed  from  political  influ- 
ence, and  they  must  be  secure  in  their  tenure  of  office  as  long  as  they  execute  their  duties 
ably,  justly  and  fearlessly. 

"Under  present  conditions  the  commissions  have  no  backbone,  they  have  no  courage,  they 
are  not  free  agents. 

"They  are  much  more  influenced  by  what  the  local  politicians  and  officials  are  saying 
than  by  what  the  people  are  thinking. 

"They  hear  the  vaporings  of  designing  politicians,  but  they  do  not  know  what  the  people 

are  thinking. 

******** 

"The  local  politicians  are  usually  wrong  in  their  interpretation  of  the  people's  attitude 
on  these  matters,  and  the  commissioners  arc  unduly  influenced  by  the  local  politicians. 

"The  commissions  show  by  their  actions  and  decisions  tliat  they  are,  consciously  or 
unconsciously,  dominated  by  the  theory  that  their  duties  are  much  more  largely  toward  the 
people  than  toward  the  company,  and  that  the  people  established  them  mainly  as  rate-reducing 
bodies  instead  of  rate-regulating  bodies. 

"Rate  increases  were  practically  unknown  before  the  war  and  the  habit  of  reducing  rates 
like  other  habits  is  not  easy  to  break." 

The  effect  of  regulation  upon  the  utilities  themselves,  as  Mr.  Schaddelee 
observes  it,  is  set  forth  at  pages  S62  and  863  of  the  Proceedings: 

"These  conditions  have  paralyzed  all  incentive  to  economy  in  the  utility  business,  and  no 
stable  financial  conditions  can  be  created  until  they  are  remedied. 

"The  biggest  handicap  to  a  utility  is  to  ap|K-ar  before  a  utility  commission  with  a  record 
and  data  showing  effective  operation  and  careful,  economical  management. 

"Vou  will  receive  verbal  commendation,  but  a  lower  rate  than  another  company  not  so 
well  operated  or  managed. 

"There  is  really  now  no  incentive  to  economy,  nor  any  incentive  to  spend  efforts  and 
money  to  stimulate  expansion  of  the  business. 

"If  you  spend  money  in  improved  et|uipnient  to  effect  material  economies  in  operation, 
and  thus  increase  your  rale  of  return  over  the  6''''c  or  7'^'r  allowed  you.  the  commission  will 
eventually  confiscate  this  excess  and  maybe  more,  and  will  al-so  confiscate  part  of  the  capital 
you  have  invested  to  procure  these  economics,  fixing  a  so-called  depreciated  value  on  the 
proi)crty  representing  this  capital. 

"In  applications  for  increased  fares  or  rates  the  commissions  examine  too  much  in  the 
(Kist  and  not  enough  in  the  future  or  present. 


State  Regulation  /         423 

"They  are  willing  to  base  their  decisions  on  anticipated  decreases  in  tlie  cost  of  labor 
and  material,  but  never  on  anticipated  increases  in  the  cost  of  these  items." 

That  state  regulation  in  Pennsylvania  has  been  satisfactory,  at  least  from 
the  point  of  view  of  the  electric  railways,  seems  to  be  fully  borne  out  by  the  testi- 
mony of  company  witnesses  from  that  state.  Mr.  C.  L.  S.  Tingley,  Vice-President 
of  the  American  Railways  Company,  which  controls  the  electric  railway  systems 
centering  in  Scranton  and  Altoona,  testified  that  his  companies'  experience  in 
Pennsylvania  "has  not  been  unsatisfactory."  At  page  375  of  the  Proceedings, 
he  says : 

"I  think  the  Pennsylvania  law  is  as  nearly  a  just  and  equitable  law  as  can  be  drawn  to 
both  the  companies  and  the  public,  with  possibly  the  exception,  from  the  public  point  of  view, 
that  their  power  over  security  issues  is  limited." 

His  commendation  of  the  Pennsylvania  plan  is  based  primarily  upon  the 
fact  that  the  commission  has  no  power  to  prevent  a  company  from  putting  new 
rates  into  efifect.     At  page  375,  he  says : 

"The  Pennsylvania  Commission  has  no  power  to  suspend  a  rate  until  after  a  complaint 
and  hearing,  or  upon  its  own  motion  and  hearing,  and  consequently  the  rate  may  become 
effective  in  thirty  days  after  you  file  it." 

On  the  other  hand,  Mr.  Tingley  criticises  state  regulation  in  New  Jersey 
because  of  delay  in  the  decisions  of  the  commission.  There  the  companies  have 
the  right  to  initiate  rates,  but  the  state  commission  has  the  power  to  suspend 
them  for  three  months.  Mr.  Tingley  says,  with  respect  to  New  Jersey,  that  the 
commission  freely  exercised  its  power  of  suspension,  that  its  calendar  was 
crowded,  and  that  "it  took  you  anywhere  from  six  to  nine  months  to  get  a 
decision."  He  adds  that  "in  the  meantime,  the  patient  died."  However,  upon 
particular  inquiry  by  Chairman  Elmquist,  it  was  shown  that  the  report  of  the 
patient's  death  was  "exaggerated." 

Mr.  Tingley  was  inclined  to  favor  state  regulation  on  the  Pennsylvania  plan 
as  opposed  to  a  service-at-cost  plan,  with  local  control.  At  page  377  of  the  Pro- 
ceedings, he  testifies : 

"Commissioner  Meeker:  Do  you  think  commission  control  as  under  the  Pennsylvania 
law  would  be  a  satisfactory  service-at-cost  plan,  so  far  as  you  know  it? 

"Mr.  Tingley :  I  do,  sir,  for  the  simple  reason  that  in  the  service-at-cost  plan  the  city 
council  or  the  city  authorities,  by  whatever  name  they  are  called,  are  prosecuting  attorney, 
judge  and  jury,  and  the  three  offices  are  incompatible. 

"Mr.  Warren ;  Mr.  Tingley,  would  not  that  objection  be  lessened  in  case  of  the  admin- 
istration of  the  service-at-cost  [plan]  by  the  state  commission  in  cases  where  the  state  com- 
mission has  sufficient  jurisdiction  to  change  this  so-called  contractual   franchise? 

"Mr.  Tingley  :     I  do ;  yes,  sir. 

"Mr.  Warren :     They  would  be  apt  to  administer  it  without  that  selfish  purpose. 

"Mr.  Tingley  :     Yes,  sir. 

"Mr.  Warren :     That  is  bound  to  influence  the  other  party  to  the  contract. 

"Mr.  Tingley :     Yes,  sir ;  but  then  you  are  back  to  state  coinmission  regulation." 

The  burden  of  the  complaint  against  state  regulation,  voiced  by  the  wit- 
nesses for  the  American  Electric  Railway  Association,  was  either  politics  or 
delay.  Dr.  Thomas  Conway,  of  Philadelphia,  laid  great  stress  upon  the  advan- 
tages of  the  Pennsylvania  and  Connecticut  laws,  which  are  alike  in  that  they 
permit  the  companies  to  change  their  rates  at  will,  and,  in  case  of  complaint, 
fight  the  matter  out  afterwards  before  the  commissions.  He  advocated  giving 
the  companies  a  very  wide  latitude  to  e.xperiment  with  new  rates.     Commissioner 


424  Electric  Railway  Problem 

Sweet  questioned  him  rather  closely  with  respect  to  this  policy,  as  will  appear 
from  the  following  testimony  found  at  pages  965  and  966  of  the  Proceedings : 

"Commissioner  Sweet ;  *  *  *  *  Dq  you  think  it  would  be  possible  to  induce  the 
public  authorities  of  the  various  municipalities  of  the  United  States,  or  state  commissions, 
to  throw  the  doors  open  as  wide  as  you  suggest  and  give  the  companies  a  free  hand  to  place 
the  fares  wherever  they  please,  right  off,  as  an  immediate  measure? 

"Mr.  Conway:     It  certainly  will  never  be  done  unless  somebody  suggests  it  to  them. 

"Commissioner  Sweet:     Well,  would  it  be  done  if  it  were  suggested? 

"Mr.  Conway:  Perhaps  not,  but  this  far,  Mr.  Commissioner,  I  think  it  will  help:  The 
average  commissioner,  I  believe,  except,  perhaps,  where  it  afifects  his  own  home  town,  his 
own  neighbors,  wants  to  do  the  right  thing.  Now,  if  they  hold  these  cases  up,  you  go  in 
and  talk  to  them  in  their  private  offices,  or  you  meet  them  on  the  street,  and  they  will  freely 
admit  that  these  prolonged  hearings  are  not  fair  to  the  company,  but  they  will  say  to  you, 
'We  must  give  evco'body  in  the  community  all  the  time  he  wants  to  talk  himself  to  death,  or 
he  will  go  out  and  howl  that  the  commission  sat  on  him  and  would  not  give  him  a  fair  hearing.' 

"Commissioner  Sweet:     That  is  true,  isn't  it? 

"Mr.  Conway:     V'es.  sir;  and  it  means  hundreds  of  volumes  of  testimony. 

"Commissioner  Sweet :    Yes. 

"Mr.  Conway:  Most  of  which  is  utter  nonsense.  Xow,  his  time  is  frittered  away  en 
these  things.  My  observation  is  that  the  moment  the  rate  goes  in,  it  is  a  nine-day  wonder  if 
it  does  not  outrage  the  community,  because  it  is  so  ill-advised  and  poorly  conceived.  When 
you  come  to  the  trial  of  the  case,  the  newspapers  in  Pennsylvania  give  it  very  little  notice. 
My  observation  is  that  most  of  the  time  is  taken  up  with  the  disputes  about  facts,  where  you 
have  no  guide.  In  one  city  a  6-cent  fare  is  going  to  give  you  an  18%  increase  and  in  another 
city  an  8%.  Instead  of  spending  time  on  those  questions,  why  not  put  it  in  and  see  what 
it  gives  you? 

"Commissioner  Sweet :  As  I  understand  if,  in  Pennsylvania,  where  the  rate  can  be 
changed  practically  at  the  option,  temporarily  at  least,  of  the  company,  *  »  *  *  there 
has  been  no  instance,  has  there,  where  the  door  has  l)een  thrown  wide  open  and  the  company 
allowed,  at  its  own  sweet  will,  to  place  the  fare  wherever  it  pleased? 

"Mr.  Conway:  Yes;  that  is  the  situation.  Take  the  case  of  the  Pittsburgh  Railways 
Company.  Before  the  6-cent  fare  went  into  effect  the  commission  held  hearings  and  allowed 
the  6-ccnt  fare  to  go  in,  but  required  the  company  to  sell  two  tickets  for  11  cents,  instead 
of  11  tickets  for  55  cents,  as  they  wanted  to  do.  Now,  since  then,  the  company  has  twice 
changed  the  rate,  and  the  matter  has  not  yet  been  decided. 

"Commissioner  Sweet:  But  if  I  understand  you  right,  the  state  commission,  of  its  own 
motion,  could  put  a  veto  on  that? 

"Mr.  Conway :  No,  except  it  went  throu.gh  the  process  of  determining  the  justice  of 
the  rate.    What  the  state  did  was  to  immediately  begin  a  valuation  of  the  property. 

"Commissioner  Sweet:     It  goes  into  effect  immediately? 

"Mr.  Conway :     Yes. 

"Commissioner  Sweet :  But  could  not  the  state  commission,  without  waiting  for  a  com- 
plaint, decide  against  it? 

"Mr.  Conway:  Not  without  getting  the  facts.  In  other  words,  they  cannot  just  arbi- 
trarily say  that  the  rate  is  excessive.    They  have  to  have  evidence  to  support  it. 

"Commissioner  Sweet :  Well,  laying  aside  the  situation  in  Penn.sylvania  and  Connecticut, 
and  taking  other  .states  where  they  have  no  provision  of  that  kind  *  *  *  »  don't  you 
anticipate  that  if  would  be  a  very  difficult  thing,  indeed,  to  bring  about  a  situation  that  would 
permit  the  companies  to  place  their   fares  wherever  they   saw   fit  ? 

"Mr.  Conway:  Mr.  Commissioner,  my  own  judgment  is  that  the  commissions  themselves 
arc  coming  to  this  view." 

Dr.  Conway's  opinion  as  to  the  superiority  of  state  over  local  regulation  is 
given  at  page  965  of  the  Proceedings : 

"Generally  speaking,  there  is  no  doubt  in  my  mind  that  state  regulation,  through  a  utility 
commission,  is  better  than  municipal  regulation. 

"In  the  first  place,  the  state  commission,  assuming  the  same  set  of  men  are  doing  the 
regulating,  will  do  better  work  than  those  men  would  as  municipal  commissioners.  The  state 
commissioner,  if  he  gels  in  there  knowing  nothing  alxiut  the  business,  and  unfortunately 
many  of  them  do  come  to  their  positions  in  that  way,  is  cdiicalcd  ;  he  cannot  sit  there  day 
after  day  and  listen  to  cases  and  to  witnesses  dealing  with  these  matters  without  getting  a 
pretty  gofxl  education  in  the  course  of  a  few  years  on  the  (lucstion.  Now,  you  take  a  coun- 
cilman or  a  mayor.  There  is  only  one  out  of  three  or  four  or  a  half  a  dozen  of  them  that 
ever  has  a  rale  matter  to  consider.     They  come  there  without  very   mtith  knowledge,  and  it 


State  Regulation  425 

is  certainly  true  that  in  that  respect  a  Httle  knowledge  is  a  dangerous  thing,  when  they  have 
any,  and  they  have  no  trained  advisers,  such  as  the  engineers  and  accountants  of  the  com- 
mission. The  cities  have  no  trained  lawj-ers,  such  as  counsel  of  the  commission,  that  can 
hring  out  the  facts,  and  the  consequence  is  that  justice  is  not  done,  because  of  a  lack  of 
knowledge  of  the  judges." 

Mr.  W.  D.  George,  one  of  the  receivers  for  the  Pittsburgh  Railways  Com- 
pany, testified  that  "they  have  a  very  high  regard  for  the  Public  Service  Commis- 
sion in  the  state  of  Pennsylvania.     Public  sentiment  supports  it." 

Mr.  Charles  A.  Fagan,  another  of  the  Pittsburgh  receivers,  gave  very  in- 
teresting testimony  with  respect  to  the  attitude  of  the  City  of  Pittsburgh  toward 
the  company.  In  answer  to  a  question  as  to  how  the  public  looks  upon  the  in- 
creased fare  in  Pittsburgh,  Mr.  Fagan  says,  at  page  619  of  the  Proceedings: 

"The  principal  municipality,  the  City  of  Pittsburgh,  consisting  of  the  Council  and  the 
Mayor,  who  look  after  such  things  as  this,  privately  sympathize  and  commiserate  with  us 
and  say  it  has  to  be  done,  but  publicly  they  oppose  it  and  have  filed  an  objection  before  the 
Public   Service   Commission  against  the  increase." 

Mr.  Fagan  referred  to  overcapitalization  and  the  giving  of  constrttction 
contracts  to  favorite  contractors  in  the  old  days  as  contributory  causes  to  the 
present  condition  of  the  Pittsburgh  street  railway  system.  This  led  Chairman 
Elmquist  to  ask  him  further  with  respect  to  the  extent  of  state  or  local  control 
prior  to  the  receivership.  The  following  testimony,  found  at  page  622  of  the  Pro- 
ceedings, throws  light  upon  the  past,  present  and  future  relations  of  the  electric 
railways  to  regulation : 

"The  Chairman :  Had  the  city  or  the  state  commission  attempted  to  exercise  any  juris- 
diction over  the  operation  or  the  construction  or  the  letting  of  contracts  or  the  expenditure 
of  money  prior  to  the  time  you  became  receiver? 

"Mr.  Fagan:  No,  the  only  activity  that  the  city  has  shown  in  relation  to  this  railway 
company  has  been  to  always  criticize  it,  and  since  the  Public  Service  Commission  was  estab- 
lished— this  Public  Service  Commission  is  a  recent  creation,  it  has  only  been  in  existence  about 
five  years — is  to  file  petitions  against  anything  that  the  railway  company  wanted.  Now,  they 
among  others  were  anxious  to  have  this  receivership  created,  and  we  thought  that  when  the 
receivership  was  created  that  would  probably  end  the  antagonism  of  the  city,  but  instead  of 
that  they  just  carried  it  on  the  same  as  they  always  have.  This  railway  company  heretofore 
has  not  been  a  very  popular  function  in  the  city  of  Pittsburgh  and  politicians  have  always 
taken  advantage  of  the  virtue  of  having  a  propaganda  against  the  railway  company.  Now, 
as  I  say,  we  thought  that  would  end  with  the  appointment  of  receivers,  and  it  did  end  to  a 
very  large  extent,  but  when  any  concrete  proposition  is  made  like  the  increase  of  fares  the 
city  immediately  comes  in  and  files  objections  to  it. 

"The  Chairman:     Were  the  politicians  Iiolding  the  company  up? 

******** 

"Mr.  Fagan ;  *  *  *  *  The  politicians  and  the  promoters  of  street  railways  when 
these  affairs  were  going  on  were  usually  acting  in  concert,  at  least  they  were  in  our  bailiwick. 
I  do  not  know  how  they  were  in  other  places,  although  I  have  heard  of  some  other  places 
where  that  situation  did  exist. 

"The  Chairman:  If  these  properties  go  back  to  private  operation  and  control  again  how 
are  you  going  to  prevent  a  recurrence  of  that  old  condition? 

"Mr.  Fagan:     Well,  of  course — do  you  mean  these  receivers  or  the  public? 

"The  Chairman  :     The  public. 

"Mr.  Fagan  :  I  do  not  know  except  by  the  different  standards  of  honesty  that  prevail 
now  and  the  diflference  in  the  publicity  that  is  given  to  all  these  public  questions.  And  in  our 
state  by  the  existence  of  this  Public  Service  Commission,  which  by  the  way  is  a  very  efficient 
and  capable  body,  which  did  not  e.xist  at  the  time  when  these  corporations  were  put  together. 
At  the  time  when  they  were  put  together  and  when  these  securities  were  exploited  the  only 
test  was  whether  you  could  sell  them.  You  had  to  get  no  consent  from  anybody  like  the 
Public  Service  Commission." 

Mr.  Morris  L.  Cooke,  who,  as  Director  of  Public  Works  in  Philadelphia,  and 
as  Acting  Director  of  the  Utilities  Bureau,  had  abundant  opportunity  to  observe 


426  Electric  Railway  Problem 

and  study  the  relative  merits  of  state  and  local  regulation  in  Pennsylvania  and 
elsewhere,  favors  a  strong  state  commission,  as  shown  by  his  testimony  at  page 
1698  of  the  Proceedings: 

"The  Chairman:  In  your  judgment  what  is  the  best  method  by  which  to  regulate  these 
corporations,  the  method   for  regulating  these  corporations? 

"Mr.  Cooke:  I  believe  we  have  to  have  state  commissions  to  perform  two  functions: 
to  be  the  whole  thing  for  most  of  the  cities  of  the  state  and  for  matters  in  which  more 
than  one  city  is  interested,  and  to  standardize  such  things  as  accounting  practice  and  working 
conditions  and  all  such  things ;  but  I  believe  that  where  the  city  is  large  enough  to  retain 
adequate  technical  advice  a  good  many  of  the  matters  in  connection  with  the  regulation  of 
local  utilities  ought  to  be  in  the  hands  of  municipal  authorities.  I  would  put  it  this  way, 
Mr.  Chairman,  that  what  can  be  best  done  by  the  locality  ought  to  be  done  by  the  locality, 
but  there  are  many  things  *  *  •  »  that  cannot  be  done  efficiently  by  the  localities, 
as  you  know  only  too  well.  For  that  reason  I  believe  in  building  up  a  strong  state  com- 
mission." 

Ohio  may  almost  be  regarded  as  the  cradle  of  the  service-at-cost  idea. 
Cleveland,  Cincinnati,  Youngstown  have  all  adopted  the  plan."  Ohio  is  one 
of  the  states  where  the  state  commission  has  no  authority  to  override  the 
provisions  of  a  municipal  franchise  contract  fixing  rates.  Mr.  Walter  A. 
Draper,  Vice-President  of  the  Cincinnati  Traction  Company,  testified  at  some 
length  respecting  the  service-at-cost  plan  in  effect  in  Cincinnati.  He  was  then 
asked  if  he  knew  of  any  other  solution  of  the  general  problem  confronting  the 
electric  railway  industry.  Upon  this  point,  at  page  507  of  the  Proceedings,  he 
says: 

"The  only  other  solution  tliat  I  can  see  is  to  give  the  state  commission  such  power  that 
it  can  regulate  fares  from  time  to  time  as  the  necessity  would  require. 

"Commissioner  Gadsden :  Do  you  think  that  is  going  to  restore  the  credit  of  this 
industry? 

"Mr.  Draper:     It  would  not  immediately.     It  would  tend  very  largely  to  do  so.    *    *   *    * 

"Commissioner  Gadsden :     Here  is  the  thought  that  I  wanted  to  bring  out — whether  you 
entertained  the  view  that  some  of  them  entertained,  and  testified  to  before  the  Commission, 
that  the  alternative  presented  to  the  industry  at  this  time  in  order  to  permanently  restore  its 
credit  is  either  some  wcll-workcd-out  service-at-cost  plan  or  municipal  ownership? 
******** 

"Mr.  Draper:  I  say.  if  you  give  the  public  utilities  commission  power  to  regulate  rates 
as  the  necessity  would  require,  you  would  restore  its  credit,  it  you  were  assured  that  it  could 
be  worked  out. 

"Commissioner  Gadsden :  Why,  then,  do  we  find  companies  operating  in  states  where 
the  public  service  commissions  have   full  powers,  in  just  as  bad  shape  as  the  others? 

"Mr.  Draper:  Well,  as  I  say,  because  it  does  not  work  out.  The  theory  is  all. right, 
but  it  is  pretty  hard  to  get  at  in  practice.  If  you  fix  something  that  is  automatic,  as  the 
cost-of-service  plan,  then  you  have  it  settled.  You  do  not  have  to  depend  upon  a  human 
agency  at  all." 

Mr.  John  J.  Stanley,  President  of  the  Cleveland  Railway  Company,  took 
the  position  that  he  was  entirely  satisfied  with  local  supervision,  but  would  not 
object  to  state  su])ervision.  His  testimony  on  this  point  appears  at  pages  598 
and  599  of  the  Proceedings,  as  follows: 

"The  Chairman  :  Now.  looking  forward  to  the  best  sort  of  scheme  that  can  be  evolved, 
do  you  feel  that  the  state  commission  should  have  anything  to  do  with  the  control  of  the 
rates,  service,  extcnsiuns.  betterments,  expenditures  and  accnunting.  of  your  company? 

"Mr.  .'>tanley  :     It  surely  depends  entirely  upon  the  i)crsonncl  of  any  board  that  you  go  to. 

"The  Chairman  :  Well,  should  the  state  commission  have  anything  to  do  with  the  things 
that   I   have  mentioned? 

"Mr.  Stanley:     \'es :   I   think  so. 

"The  Chairman:     What  should  they  have  to  do  with  it? 

"NIr.  Stanley:  I  think  we  wnuld  be  safer  in  going  to  the  state  commission  than  we 
would  in  going  to  a  city  commission. 


I 


State  Regulation  427 

"The  Chairman :  Well,  do  you  believe  that  the  state  commission,  then,  should  have  that 
supervision  over  jour  company,  which  is  now  maintained  by  the  city? 

■"Mr.  Stanley  :  The  tact  of  the  matter  is  that  they  have  supervision  over  our  companv 
today,  *  *  *  *  *  because  when  we  appear  before  the  state  commission  for  an  increase 
in  capitalization,  we  have  to  show  our  expenditures. 

"The  Chairman :  Oh,  that  is  true,  but  the  state  commission  has  nothing  to  do  with  the 
service  furnished  by  your  company. 

"Mr.  Stanley:     Not  at  all. 

"The  Chairman:     Or  with  its  construction? 

"Mr.  Stanley  :     No. 

"The  Chairman:     Or  with  its  operation? 

"Mr.  Stanley  :     No. 

"The  Chairman:     Or  its  accounts? 

"Mr.  Stanley :     Well,  only  as   far  as ■ 

"The  ChairiTian :  The  only  supervision  is  as  to  capitalization.  The  city  has  that  (super- 
vision of  rates,  service,  extensions,  betterments,  e.xpenditures  and  accounting)  entirely.  Now, 
then  should  the  state  or  city  have  that  supervision? 

"Mr.  Stanley:     Personally,  I  don't  care  which  has  it. 

"The  Chairman :  Well,  you  must  have  an  opinion.  You  have  been  in  this  business  for 
a  long  w-hile. 

"Mr.  Stanle\- :     I  know  that  the  city  has  had  it,  and  we  have  not  had  any  trouble  so  far. 

"The  Chairman:     Are  you  satisfied  with  the  present  arrangement? 
******** 

"Mr.  Stanley :     Yes ;  I  am." 

One  of  the  greatest  problems  of  public  control  over  electric  railways  arises 
from  the  fact  that  in  so  many  cases  the  street  railway  lines  not  only  extend 
beyond  the  boundaries  of  the  central  municipality,  but  in  fact  reach  out  to  serve 
a  multitude  of  communities.  Sometimes,  these  communities  are  grouped  to- 
gether in  a  metropolitan  area,  but  sometimes  they  are  spread  out  through  an 
entire  section  of  a  state  without  anything  in  common  except  transportation 
service.  These  conditions  unquestionably  militate  against  effective  local  control 
and  even  constitute  a  serious  obstacle  to  municipal  ownership.  The  city  of 
Cleveland  is  comparatively  well  situated  for  local  control,  as  the  suburban  muni- 
cipalities served  by  the  Cleveland  Railway  lines  are  few  and  relatively  unimpor- 
tant. That  street  railway  transportation  is  essentially  a  local  problem  was 
strongly  maintained  by  Secretary  Baker.  He  is  not  averse  to  regulation  by  state 
commissions  where  the  municipalities  are  not  prepared  to  act  for  themselves, 
but  he  thinks  that  the  work  of  the  commissions  should  be  primarily  educational, 
to  teach  the  municipalities  self-help.  His  testimony,  at  pages  1012  to  1014  of 
the  Proceedings,  is  as  follows : 

"The  Chairman :  Do  you  believe  that  where  a  company  extends  through  two  or  inore 
villages  and  also  out  into  suburban  territory  it  would  produce  greater  harmony  and  more 
uniform  service  if  the  state  itself  fixed  the  rate  and  had  control  of  the  service? 

"Secretary  Baker:  No;  I  think  that  would  create  a  riot  in  Cleveland:  if  the  State  of 
Ohio  undertook  to  fi.x  the  street  railroad  rate  in  the  City  of  Cleveland,  I  think  it  would 
create  a  riot. 

"The  Chairman :  That  may  be  so  in  Cleveland,  because  the  question  has  been  so 
thoroughly  debated  there ;  but  as  a  general  proposition,  do  you  think  that  would  naturally 
follow? 

"Secretary  Baker :  No,  I  do  not  think  so,  as  a  general  proposition.  I  think  as  a  general 
proposition  the  state  commissions  have  won  the  confidence  of  the  communities,  and  they  are 
adequately  manned  and  officered  to  perform  their  duties  and  get  the  job  committed  to  them 
done  fairly  expeditiously.  Many  of  the  state  commissions  have  had  on  them  men  of  very  high 
character,  statesmen.  A  great  many  of  them  are  doubtless  known  to  you  as  they  are  to  me. 
In  states  like  that  I  think  probably  the  state's  undertaking  to  adjust  w-ould  be  accepted  by 
the  public  generally.  It  would  not  in  Cleveland,  in  my  judgment.  *  *  *  *  There  has 
been  no  difficulty,  as  a  matter  of  fact,  in  Cleveland  with  the  outlying  municipalities ;  no 
serious  difficulty. 

"The  Chairman  :     It  has  been  suggested  from  some  sources  that  it  might  be  a  good  plan 


428  Electric  Railway  Problem 

to  give  the  city  in  the  first  instance  the  right  to  prescribe  rates  of  fare  and  also  service  regula- 
tions and  extensions,  subject  to  the  right  of  appeal  to  the  state  commission,  thus  appealing  to 
another  technical,  scientific  body,  rather  than  to  a  court. 

"Secretary  Baker :     I  should  be  very  much  opposed  to  that  for  Cleveland. 

"The  Chairman  :     Why  ? 

"Secretary  Baker:  Because  I  think  the  responsibility  for  the  management  of  its  own 
affairs  is  the  greatest  educational  influence  that  the  City  of  Cleveland  has ;  the  fact  that  the 
people  of  that  city  have  studied  and  grasped  and  solved  an  intricate  and  complicated  problem 
like  the  street  railroad  problem,  has  made  them  a  more  self-conscious  and  a  stronger,  more 
virile  people  than  they  were  before  that  problem  was  put  up  to  them;  and  I  should  be  very 
sorry  indeed  to  see  the  responsibility  for  the  management  of  their  own  affairs,  in  as  intimate 
and  important  a  matter  as  street  railroad  service,  taken  away  and  transferred  to  a  state 
agency. 

"The  Chairman:  Would  it  be  taken  away  if  there  were  simply  a  right  of  appeal  by  the 
aggrieved  party  to  the  state? 

"Secretary  Baker:  Oh,  yes.  The  appeal  would  be  control.  Their  original  dealing  with 
the  problem  would  not  even  make  a  prima  facie  case. 

"The  Chairman :  There  are  a  great  many  communities  that  have  not  made  the  intensive 
study  of  this  subject  that  you  have  at  Cleveland. 

"Secretary  Baker :     Certainly. 

"The  Chairman :  And  they  are  perhaps  ill  qualified  to  meet  the  problems  in  a  satisfactory 
way.     Would  it  be  well  to  have  those  people  depend  upon  the  state? 

"Secretary  Baker:  Yes;  I  think  as  long  as  they  are  in  need  of  that  sort  of  assistance 
it  would  be  a  good  thing  for  the  state  to  give  it  to  them ;  but  the  attitude  of  the  state  should 
be  constantly  that  of  education  for  self-help  rather  than  the  substitution  of  the  state  agency 
in  local  concerns. 

"The  Chairman  :  Then,  in  your  judgment,  the  street  railroad  problem  is  one  of  purely 
local  concern,  and  there  should  be  different  conditions  in  the  different  states? 

"Secretary  Baker:  Yes;  I  can  imagine  the  cities  of  Cleveland  and  Cincinnati  having 
entirely  different  problems.    As  a  matter  of  fact  they  do  have — very  different." 

Mr.  Henry  L.  Doherty,  of  New  York,  has  had  considerable  trouble  trying 
to  get  on  peaceably  and  profitably  with  the  City  of  Toledo,  another  Ohio  com- 
munity where  street  railway  transportation  seems  to  be  regarded  as  a  local 
problem.  Mr.  Doherty's  difficulties  with  local  control  are  set  forth  at  page  405 
of  the  Proceedings,  as  follows: 

"The  Chairman :  Could  the  problem  be  solved  by  getting  away  from  fixed  franchise 
rates  and  leaving  it  to  the  utility  commissions  to  determine  the  reasonableness  of  a  rate? 

"Mr.  Doherty:  Yes.  if  the  utility  commissions  would  act  promptly  it  would,  and  I  think 
utility  commissions  are  in  better  shape  to  determine  what  a  rate  should  be  than  the  local 
authorities. 

"I  have  had  one  case  where  we  have  been  trying  to  settle  the  street  railway  difficulty  for 
a  number  of  years  and  we  have  had  continuous  negotiations  I  would  say  for  nearly  five 
years  with  the  city  authorities  and  have  never  reached  a  settlement,  and  largely  1  think 
Ix^cause  the  city  authorities  felt  that  they  had  to  comply  with  what  they  believed  to  be  the 
wishes  of  the  people;  and  yet  in  many  ways  those  conditions  would  have  iK-en  something 
under  which  the  company  could  not  have  lived. 

"In  that  case — I  refer  to  Toledo — we  took  hold  of  the  Toledo  situation  when  it  had  been 
a  matter  of  controversy  for  a  long  time,  and  the  people  there  were  determined  to  have  a 
three-cent  fare,  and  a  great  numlxr,  perhaps  a  majority  of  the  population,  felt  that  if  they 
voted  for  a  three-cent  faro  that  should  entitle  them  to  a  throe-cent  fare,  simply  because 
they  had  voted  for  a  three-cent  fare.  They  had  that  imbued  in  their  minds,  and  when  we 
would  try  to  tell  them  we  could  not  furnish  street  railway  service  at  three  cents  they  would 
say,  'We  voted  to  have  you  do  it.' 

"Now  we  have  never  Ik-cu  able  to  make  the  local  authorities  believe  that  the  people  of  the 
city  understood  that  we  must  have  a  higher  rate  of  fare,  and  yet  1  think  the  people  as  a 
whole  know  that  we  must  have  a  higher  rate  of  fare,  and  I  think  they  would  Ix:  willing 
to  pay  it. 

"I  think  in  most  even,'  case,  if  the  matter  was  laid  properly  before  the  people,  without  any 
confusion  from  the  other  side,  and  was  honestly  presented  from  both  sides,  the  people  would 
\x  willing  to  pay  the  necessary  amoimt  to  provide  adequate  and  proper  street  railway  service." 

Further  on,  at  pages  406  and  407  of  the  Proceedings,  we  find  the  following 
testimony : 


State  Regulation  429 

"The  Chairman:  Now.  it  the  utilities  and  the  puhHc  authorities  can  reach  the  point  where 
these  properties  can  be  properly  valued  and  you  get  away  from  a  fixed  franchise  rate,  have 
you  not  as  a  matter  of  fact  got  about  all  that  a  public  service  corporation  should  have? 

"Mr.  Doherty :  Well,  that  is  all  I  think  that  any  of  the  public  service  corporations 
should  ask  for,  but  they  are  asking  if  possible  that  that  really  be  granted  to  them  very 
quickly. 

"The  Chairman:  Oh,  I  am  asking  questions  now  with  reference  to  a  permanent  policy 
and  not  immediate  relief. 

"Mr.  Doherty:  1  agree  with  that  policy  until  we  can  find  some  better  one,  if  there  is  a 
better  one.  all  right,  but  that  is  the  only  one  I  see  now. 

"The  Chairman:  If  you  can  reach  this  proper  value  and  have  the  state  fix  the  rates, 
is  there  any  reason  why  you  should  adopt  the  cost-of-service  plan? 

******** 

"Mr.  Doherty:  Well,  I  should  think  it  would  be  preferable  to  have  the  state  commission 
determine  the  valuation  *  *  *  *  but  it  seems  to  me  the  matter  of  being  able  to  adjust 
yourself  to  new  conditions  without  a  new  hearing  is  very  valuable.  Now,  here  is  what 
happened,  Mr.  Elmquist,  in  the  matter  of  public  service  commissions.  If  the  day  ever  comes 
when  the  farmer  must  go  to  the  public  service  commission  or  some  agricultural  commission 
and  get  the  consent  of  that  body  to  plant  one  field  in  wheat  and  another  field  in  corn  he  will 
probably  say,  'Oh,  well,  it  is  so  much  trouble,  I  will  just  let  it  go,  I  will  not  plant  anything,' 
simply  on  account  of  the  delay.  We  have  not  been  hurt  so  much  by  public  utility  commis- 
sions, even  where  they  have  shown  their  teeth  in  many  cases,  because  we  have  been  able 
to  tell  our  story  to  them  and  get  it  before  them.  But  we  have  often  been  intensely  hurt  by 
delay,  and  the  street  railway  companies  now  are  in  a  condition  where  they  need  assistance, 
and  they  need  assistance  at  once,  and  if  they  do  not  get  it  at  once  their  credit  is  going  to  be 
permanently  crippled.  The  whole  industry's  credit  is  going  to  be  so  crippled  that  I  doubt 
if  it  can  be  reestablished." 

Mr.  W.  B.  Head,  Vice-President  of  the  Dallas  Railway  Company,  referred 
to  the  fact  that  there  is  no  public  service  commission  in  Texas  and  stated  that 
on  the  contrarj-  there  is  "what  is  known  as  home  rule — an  act  passed  by  the 
legislature  in  1913,  giving  to  all  cities  of  5.000  or  more  practically  all  the  powers 
of  rate  regulation  that  the  legislature  itself  would  have."  At  pages  636  and 
637  of  the  Proceedings,  Mr.  Head  discusses  the  agitation  in  Texas  for  state  regu- 
lation, as  follows : 

"Commissioner  Gadsden :  Is  there  any  agitation  in  Texas  for  a  state  commission,  Mr. 
Head? 

"Mr.  Head :  Yes.  sir,  there  has  been  a  great  deal  of  agitation  for  a  state  commission, 
which  comes  from  two  angles.  The  long  distance  toll  service  in  Texas  is  not  regulated  by 
any  authority.  The  smaller  communities,  in  the  towns  of  less  than  5,000,  have  no  rate 
regulation. 

"Commissioner  Gadsden:     What  is  the  attitude  of  the  public  utilities  towards  that? 

"Mr.  Head:  The  public  utilties  have  taken  the  attitude  of  being  favorable  to  a  state 
commission,  if  the  state  commission  has  final  authority.  There  was  a  bill  introduced  in  the 
last  session  of  the  legislature,  and  it  passed  the  House,  but  did  not  get  by  the  Senate — 
although  it  did  not  reach  a  vote — that  undertook  to  create  a  state  commission,  making  the 
commission's  jurisdiction  in  home  rule  cities  appellate  or  upon  the  request  of  the  municipality. 
That  I  think  will  really  solve  the  situation  in  Te.xas." 

That  urban  transportation  is  essentially  a  local  problem  was  maintained  by 
Mayor  E.  V.  Babcock  of  Pittsburgh.  After  expressing  the  opinion  that  "the 
street  railway  passenger  transportation  problem  in  Pittsburgh  probably  is  more 
complicated  than  in  any  other  large  American  city,"  and  stating  that  "there  are, 
in  Allegheny  County,  57  separate  municipalities  served  by  the  Pittsburgh  Rail- 
ways Company,  all  with  diflferent  municipal  governments  and  each  with  its  own 
municipal  ordinances,"  Mayor  Babcock,  at  page  1899  of  the  Proceedings,  goes 
on  to  say : 

"It  must  be  recognized  that  transportation  is  fundamentally  a  local  problem  and  yet 
with  such  a  large  number  of  separate  municipalities  it  is  practically  impossible,  under  existing 
legislation,  for  all  of  these  municipalities  to  act  in  concert  in  handling  the  problem." 


430  Electric  Railway  Problem 

Further  along,  at  page  1900  of  the  Proceedings,  he  says: 

"There  is  no  panacea  for  the  transportation  ills  of  the  present  day.  Regulation  by  public 
service  commissions,  service-at-cost  plans,  or  municipal  ownership  will  not  usher  in  the  day 
of  the  millenium  in  this  respect.  The  transportation  problems  will  always  be  one  of  the 
great,  if  not  the  greatest  problems  of  our  municipal  life  and  must  be  handled  in  the  same 
manner  that  all  other  great  industrial  and  commercial  enterprises  have  been  worked  out  in 
the  past.  It  is  obvious  that  the  state  public  service  commissions,  while  satisfactory  for  other 
forms  of  public  utilities,  can  never  comi)lctely  solve  the  large  local  problems  of  transportation 
in  our  great  cities.  Transportation  uses  the  local  highways  and  must  necessarily  conform 
to  all  local  developments.  It  is  brought  into  daily  touch  with  the  life  of  the  city  in  such 
a  way  that  there  must  be  the  closest  harmony  and  cooperation  between  the  local  strt-et  railway 
company  and  the  municipal  authorities.  This  inevitably  points  to  some  operating  arrange- 
ment whereby  the  local  municipal  authorities  shall  be  placed  in  a  position  to  exercise  a  large 
amount  of  control,  giving  the  city  government  a  voice  as  to  proper  standards  for  transporta- 
tion service  and  operating  conditions." 

Mr.  Harlow  C.  Clark,  editor  of  Aera,  the  official  organ  of  the  American 
Electric  Railway  Association,  expressed  the  opinion  that  the  state  regulating 
commissions,  where  they  have  control  of  rates  were  "generally  sympathetic" 
during  the  war  period ;  he  thought  that  in  a  large  majority  of  the  cases  they 
granted  the  relief  prayed  for  in  the  companies'  petitions.  At  page  900  of  the 
Proceedings  the  following  question  and  answer  appear: 

"The  Chairman :  Broadly  speaking,  the  industry  has  no  real  complaint  of  the  service 
given  by  the  state  commissions  during  the  war.  has  it  ? 

"Mr.  Clark:  Only  so  far  as  delays  have  occurred,  Mr.  Commissioner,  in  administering 
the  law.  Whether  those  result  from  the  perhaps  unnecessarily  cumbersome  procedure  or  not, 
I  think  you  can  only  discuss  in  individual  cases." 

Mr.  Clark's  outline  of  a  permanent  plan  for  the  solution  of  the  electric 
railway  problem  has  already  been  set  forth  in  Chapter  XXIII  of  this  report  in 
connection  with  the  discussion  of  how  credit  can  be  restored.  It  will  be  remem- 
bered that  one  of  the  features  of  his  plan  contemplates  "power  of  regulation, 
either  by  state  or  municipal  authorities,  in  respect  to  all  matters  affecting  con- 
ditions and  character  of  service,  including  extensions,  improvements  and  better- 
ments." Rates  are  to  be  adjusted  automatically  on  the  basis  of  the  cost  of 
service.  Mr.  Clark  is  inclined  to  favor  a  combination  of  state  and  local  super- 
vision if  it  can  be  worked  out  on  a  proper  cooperative  basis.  The  relative  merits 
of  state  and  local  regulation  are  discussed  at  pages  900  and  902  of  the  Proceed- 
ings, as  follows : 

"The  Chairman:  Now,  in  your  judgment  should  regulation  be  exclusively  in  the 
municipality  or  in  the  slate,  or  should  there  \x  some  sort  of  a  happy  middle  ground  whereby 
you  can  work  out  proper  cooperation  between  both? 

"Mr.  Clark  :  I  think  the  advantages  of  the  two  systems  might  be  stated  in  this  way.  that 
when  you  have  state  regulation  it  is  more  stable,  it  is  less  likely  to  be  aflfected  by  prejudice, 
and  on  the  whole  it  is  perhaps  fairer  both  to  the  company  and  to  the  public  in  the  long  run. 
That  when  you  have  municipal  regulation  such  as  is  extant  in  Cleveland,  that  you  secure 
perhaps  a  greater  degree  of  cooperation  from  the  public  than  you  do  when  the  state  com- 
missions are  in  charge  of  the  regulation.  I  tx-lieve  that  your  suggestion  would  make  an  ideal 
system  of  regulation  it  it  could  be  put  into  elTcct.  if  some  way  of  combining  tiie  two  could  be 
devised. 

"The  Chairman  :  Do  you  think  that  the  state  as  such  should  attempt  to  regulate  the 
service  within  a  village  or  city? 

"Mr.  Clark:    Well,  there  are  a  great  many  questions  entering  into  that,  Mr.  Commissioner. 

"The  Chairman:  When  T  speak  of  service  I  refer  to  speed,  stops,  and  to  the  ordinary 
regulations  which  arc  so  closely  identified  with  the  welfare  of  the  city  itself. 

"Mr.  Clark  :  In  a  mo<Iern  city  the  systems  extend  usually  beyond  the  city  limits,  the 
suburkin  lines  are  part  of  the  city  system,  the  interurban  lines  arc  part  of  the  city  system. 
The  authority  of  a  city   regulatory  commission  would  cease  with   the  city  limits. 

"The  Chairman  :    Yes. 

"Mr,  Clark:     I   refer  particularly   to  Ro'iton,  where  they  have  what   I  think   is  known 


1 


State  Regulation  431 

as  the  Metropolitan  District,  where  the  service  extends  for  miles  beyond  the  city  limits  of 
Boston,  and  while  Boston  City  has  no  particular  jurisdiction  over  those  communities,  it  is 
really  part  of  the  community  life  of  Boston,  and  service  on  those  properties  should  be 
regulated  as  a  whole  and  not  allow  the  City  of  Boston  to  regulate  the  service  within  the  well 
defined  limits  of  the  city  itself  and  allow  the  other  municipalities  to  regulate  it  within  their 
limits,  but  that  there  should  be  some  general  regulation  of  that  system  which  would  make  it 
most  efficient  and  the  best  for  all  the  people  served. 

"The  Chairman :  Well,  referring  now  to  this  Boston  situation,  do  you  think  it  would  be 
fair  to  the  public  as  well  as  to  the  utility  to  permit  the  municipal  authorities  in  Boston  to 
have  jurisdiction  over  the  service  and  extensions  of  street  cars  subject  to  an  appeal  to  the 
state  commission  by  either  party? 

"Mr.  Clark :    I  believe  that  in  that  particular  instance  it  would  not  be  very  workable. 

"The  Chairman:     Why  not? 

"Mr.  Clark :  For  the  reason  that  each  of  these  other  communities  would  also  have  the 
right  of  appeal  to  the  commission  and  that,  as  I  say,  it  would  be  difficult  to  coordinate  the 
entire  system  of  service  to  one  wliole  that  would  most  efficiently  serve  all  the  communities. 
I  think  it  might  be  possible  to  create  a  metropolitan  district  which  would  have  that  right 
of  an  appeal  to  tlie  public  service  commission. 

"The  Chairman:  Do  you  believe  if  the  right  of  appeal  by  these  different  municipalities 
to  the  state  commission  were  granted  it  would  promote  confusion  and  delay  and  uncertainty 
rather  than  stability? 

"Mr.  Qark :     I  am  inclined  to  think  so,  yes,  sir. 

"The  Chairman:     But  vou  would  have  a  final  body  to  determine  the  question? 

"Mr.  Clark :     Yes. 

"The  Chairman:     And  establish  the  general  rules  which  municipalities  must  obey? 

"Mr.  Clark :     Yes." 

Mr.  Clark  gave  an  affirmative  answer  to  Chairman  Elmquist's  question  as 
to  whether  he  did  not  think  that  "there  is  a  very  strong  sentiment  throughout 
the  country  in  favor  of  home  rule  of  these  utilities."  He  called  attention  to  the 
fact,  however,  that  Governor  Smith,  of  New  York,  elected  on  a  home  rule  plat- 
form, vetoed  a  service-at-cost  bill  for  the  City  of  Buffalo  on  the  ground  that  it 
withdrew  the  street  railways  of  Buffalo  from  the  jurisdiction  of  the  Public  Service 
Commission.  With  respect  to  the  general  attitude  of  the  electric  railway  industry 
on  the  question  of  state  or  local  regulation,  Mr.  Clark  said  that  he  knew  a  very 
large  number  of  men  who  preferred  state  regulation  and  a  few  men  who  pre- 
ferred local  regulation.  Personally,  he  believed  that  as  a  mere  matter  of  economy 
and  efficiency  state  regulation  is  necessary  in  the  majority  of  cases.  It  seems 
that  this  particular  conclusion  was  based  upon  the  assumption  that  under  a 
scheme  of  local  regulation  on  the  basis  of  service  at  cost,  the  expense  of  main- 
taining the  regulatory  machinery  would  have  to  be  borne  by  the  railways.  So 
far  as  rates  are  concerned,  Mr.  Clark  was  inclined  to  favor  the  automatic  service- 
at-cost  plan  rather  than  regulation  by  a  state  coinmission,  even  where  the  com- 
mission has  unrestricted  authority.  This  is  shown  by  the  following  testimony  at 
page  906  of  the  Proceedings : 

"The  Chairman  :  Then,  don't  you  believe  that  as  far  as  the  industry  is  concerned,  you 
are  entirely  safe  to  have  either  a  cost-of-service  plan  or  a  scheme  of  state  regulation,  wherein 
the  state  can  fix  the  rates? 

"Mr.  Clark :  I  think  the  industry  as  a  whole  would  feel  very  much  better  than  it  does 
now  if  it  was  possible  to  conduct  state  regulation  under  those  conditions,  but  I  doubt  if  it 
would  feel  as  well  as  it  would  under  an  automatic  system,  by  which  they  were  absolutely 
assured  of  these  increases  as  they  came  up,  and  in  which  situation  the  judgment  of  no  man 
or  no  set  of  men  intervenes." 

Mr.  Harold  L.  Stuart  expressed  himself  in  favor  of  state  regulation,  as 
will  be  seen  from  the  following  quotation  taken  from  page  194  of  the  Pro- 
ceedings : 

"I  am  thoroughly  in  favor,  from  an  investment  banker's  standpoint,  of  supervision  of 
public  utilities. 


432  Electric  Railway  Problem 

"Commissioner  Sweet :  Would  you  make  a  distinction  there  between  it  being  done  by  the 
municipality  itself  or  by  a  state  organization? 

"Mr.  Stuart :  Certainly  I  would  much  rather  it  be  done  by  a  state  public  utility  com- 
mission. I  believe  that  is  freer  from  local  prejudices,  and  it  is  in  a  position  to  render  a 
fairer  judgment  on  any  question  than  the  local  authorities  would  be." 

Mr.  Francis  H.  Sisson,  of  the  Guaranty  Trust  Company,  also  expressed 
himself  as  favorable  to  state  regulation,  but  did  not  appear  to  be  unqualifiedly 
optimistic  about  it.     At  pages  318  and  319  of  the  Proceedings,  he  says: 

"The  commission  form  of  regulation  was  developed  largely  with  a  view  of  remedying 
the  evils  of  the  rigid  franchise  method,  but  even  the  commission  form  of  regulation  is  losing 
esteem  among  the  thinking  people  because  of  the  attitude  many  commissions  have  assumed 
toward  the  public  utility  corporations." 

The  deadlock  between  the  State  Public  Ser\ice  Commission  and  the  City 
Board  of  Estimate  and  Apportionment  in  New  York  makes  Mr.  Sisson  rather 
skeptical  of  a  plan  for  a  combination  of  state  and  local  supervision.  At  pages 
335  and  336  of  the  Proceedings  appears  the  following: 

"Commissioner  Meeker:  Your  opinion,  then,  is  that  an  undinded,  single  authority  is 
to  be  preferred  to  any  cooperative  plan? 

"Mr.  Sisson:     Unless  the  riglit  of  ultimate  decision  is  clearly  fi.\ed,  I  certainly  think  so. 

"Mr.  Warren  :     And  made  apparent. 

"Mr.  Sisson:  I  think  they  might  work  out  some  advisory  relationship  or  something  of 
that  sort,  but  I  think  there  should  be  but  one  authority  in  a  situation  of  that  kind,  and  that 
definitely  fixed." 

At  page  351  of  the  Proceedings,  Mr.  Warren  brings  out  Mr.  Sisson's  speci- 
fic criticisms  of  state  regulation  in  practice: 

"Mr.  Warren :  You  spoke  of  being  in  favor  of  public  service  commission  regulation, 
as  the  Association  which  I  represent  here  is  on  record  as  favoring. 

"Mr.  Sisson :     Yes. 

"Mr.  Warren:  Is  there  any  particular  feature  in  the  administration  of  the  public  service 
laws  which  in  this  present  emergency  you  would  criticize  or  that  you  think  might  be  improved? 

"Mr.  Sisson:  Well,  in  some  instances;  the  matter  that  we  discussed  a  while  ago,  the 
conflict  between  the  public  service  commissions  and  the  local  authority.  I  think  these  laws 
drawn  by  the  states  ought  to  give  the  commission  the  full  power  to  regulate  rates  upward  as 
well  as  downward. 

"Mr.  Warren:  Take  cases  where  they  have  the  complete  power,  as  they  have  in 
Massachusetts  and  in  numerous  jurisdictions,  is  there  still  an>-thing  that  you  think  has  militated 
against  the  application  of  a  remedy  in  this  emergency  in  the  last  year? 

"Mr.  Sisson:  I  think  the  fundamental  thing  that  has  militated  against  it  has  been 
political  controversy. 

"Mr.  Warren:     How  about  the  delay? 

"Mr.  Sisson :  And  the  slowness  of  action  which  has  failed  to  meet  the  crisis,  as  I 
pointed  out  in  my  first  statement." 

Running  all  through  the  testimony,  we  find  unrestricted  state  regulation 
based  upon  the  exercise  of  the  police  power  and  the  service-at-cost  plan  based 
upon  contractual  relations  discussed  as  alternative  policies  for  the  solution  of 
the  electric  railway  problem  under  continued  private  ownership  and  operation. 
Some  of  the  witnesses  seem  not  to  have  fully  grasped  the  fundamental  differ- 
ence between  the  two  ])lans,  while  others  look  to  a  combination  of  them  as  the 
ultimate  solution.  In  Chapter  XXIII  of  this  report,  I  have  already  pointed  out 
the  apparent  inconsistency  in  the  two  positions  taken  by  General  Tripp,  once  in 
favor  of  state  regulation  and  control,  and  later  in  favor  of  a  service-at-cost  ar- 
rangement locally  administered.  Mr.  J.  K.  Newman  and  some  of  the  other  wit- 
nesses had  difficulty  in  seeing  the  distinction  between  the  two  plans.  Mr.  Harlow 
C.  Clark,  as  we  have  seen,  favored  a  combination  of  the  two,  and  Mr.  Luther 


State  Regulation  433 

R.  Nash,  Stone  «&  Webster's  service-at-cost  expert,  also  favored  a  combination 
of  state  and  local  control  in  the  administration  of  the  service-at-cost  franchise. 
Upon  this  point  Mr.  Nash's  testimony  at  pages  469  and  470  of  the  Proceedings 
is  pertinent  to  our  present  discussion,  as  will  be  seen  from  the  following: 

"Mr.  Warren:  If  you  were  recommending  the  supervision  provision  in  such  a  franchise 
should  you  stop  with  the  absolute  jurisdiction  in  the  local  authorities,  or  should  you  provide 
an  appeal,  and  if  so,  to  whom? 

"Mr.  Nash:  I  do  not  think  that  the  absolute  local  supervision  would  work  out  to  the 
best  advantage.  It  has  worked  fairly  satisfactorily  in  the  cases  where  it  has  been  tried,  but 
e.xperience  with  any  of  these  franchises  has  been  comparatively  limited.  It  seems  to  me  that 
in  the  final  analysis  authority  ought  to  be  lodged  with  the  state  regulatory  authorities. 

"Now,  there  are  all  kinds  of  degrees  of  jurisdiction  between  local  and  state  that  might 
be  w'orked  out.  For  example,  the  city  might  appoint  a  representative  who  would  be  called 
a  supervisor  or  he  might  be  an  e.xisting  city  official  who  would  represent  the  city  in  negotia- 
tions with  the  company  with  respect  to  service,  extensions,  changes  in  rates  or  operating 
conditions,  and  in  nine  cases  out  of  ten  the  city  representative  and  the  company  representative 
would  probably  agree  upon  what  should  be  done.  In  cases  where  they  could  not  agree  I 
think  the  logical  appeal  should  be  to  the  state  commission,  partly  because  of  their  wide  ac- 
quaintance with  the  conditions  which  have  arisen  in  some  particular  locality  and  partly 
because  it  removes  the  decision  in  the  case  further  away  from  local  appeal  and  prejudice. 
City  officials  are  apt  to  make  the  best  kind  of  a  trade  they  can  for  their  constituents  and  the 
state  commissions  on  the  other  hand  have  a  broader  view  and  are  more  apt  to  decide  the 
question  upon  abstract  merits  and  with  a  view  to  the  long  range  interests  of  the  community 
rather  than  its  immediate  advantage." 

The  service-at-cost  plan  will  be  analyzed  in  the  next  chapter.  Here  we  are 
primarily  concerned  with  the  suggestion  that  the  entire  problem  of  keeping  the 
electric  railways  well-fed  and  well-groomed  and  in  the  harness  for  efficient  public 
service  be  referred  to  the  state  utility  commissions  "with  power."  Our  review 
of  the  evidence  shows  beyond  a  doubt  that  the  electric  railway  companies  are 
far  from  satisfied  with  the  results  of  state  regulation  thus  far;  that  their  two 
chief  complaints  are  "politics"  and  "delay" ;  that  in  many  instances  the  state 
commissions  have  not  enjoyed  full  powers;  that  where  changes  in  the  law  are 
suggested,  they  take  the  form  chiefly  of  the  elimination  of  municipal  authority 
and  the  enlargement  of  the  powers  of  initiative  of  the  companies  themselves  in 
rate  matters ;  and  that  in  spite  of  the  general  preference  of  the  companies  for  state 
as  contrasted  with  local  control,  public  opinion  in  many  urban  communities  is 
strongly  in  favor  of  home  rule  in  the  control  of  the  electric  railways  on  the 
theory  that  urban  transportation  is  a  matter  primarily  of  local  concern. 

The  possibilities  of  help  through  regulation  are  not  what  they  might  have 
been,  as  witness  Mr.  John  A.  Beeler  states  at  page  1669  of  the  Proceedings: 

"The  electric  railways  were  for  so  many  years  unaccustomed  to  regulation  that  they 
came  to  respect  much  too  slowly  the  value  of  cooperation  with  state  and  municipal  regulatory 
bodies.  Today,  when  the« electric  railway  needs  all  the  cooperation  it  can  get,  it  finds  that 
it  has  been  a  demoralizer  of  public  confidence  in  these  very  commissions  and  local  authorities 
whose  help  would  now  be  so  valuable." 

The  limitations  of  unrestricted  state  regulation  as  a  remedy  for  the  ills 
of  the  electric  railways,  from  the  points  of  view  of  their  owners  and  of  their 
patrons,  respectively,  will  be  discussed  in  a  later  chapter. 


Chapter  XLI 
SERVICE    AT    COST 

The  theory  most  generally  and  urgently  advocated  on  behalf  of  the  electric 
railway  companies  for  the  readjustment  of  their  public  relations  and  for  the 
restoration  of  their  credit  under  private  ownership  and  operation  is  known  as 
"service  at  cost."  With  respect  to  this  theory,  as  with  respect  to  many  other 
things  in  connection  with  the  street  railway  business,  the  tables  have  been  turned 
in  recent  years.  Service  at  cost  originated  with  the  advocates  of  low  fares,  who 
believed  that  5  cents  was  too  much  as  the  price  of  an  average  street  car  ride. 
The  bitter  controversy  between  the  City  of  Cleveland  and  its  local  street  railway 
company,  extending  over  a  period  of  eight  or  ten  years,  finally  culminated  in  the 
settlement  proposed  by  Judge  R.  W.  Tayler  of  the  Federal  District  Court,  and 
since  known  as  the  Tayler  plan.  This  was  the  first  street  railway  franchise  in 
the  United  States,  at  least  so  far  as  the  public  knows,  in  which  the  service-at-cost 
principle  was  embodied,  and  Judge  Tayler  may  properly  be  regarded  as  the 
"father"  of  service  at  cost. 

Ten  years  ago  the  senice-at-cost  idea  meant  that  the  car  riders  were  to  pay 
for  their  rides  just  what  they  cost  and  no  more.  Since  the  cost  of  rides  has  been 
going  up  as  a  result  of  war  prices  the  electric  railway  companies  themselves  have 
adopted  the  idea,  and  to  them  it  means  that  those  who  render  street  railway 
service  shall  get  for  it  what  it  costs  and  no  less.  In  the  old  days  it  was  a  device 
on  the  part  of  the  public  to  pull  fares  down ;  now  it  is  a  device  on  the  part  of 
the  companies  to  push  fares  up.  In  this  respect  it  is  much  like  the  reproduction- 
cost  theorv'  of  valuation,  which  was  advocated  by  the  public  in  the  era  of  low 
prices  in  an  effort  to  get  away  from  the  permanent  capitalization  of  high  prices 
and  possibly  imprudent  expenditures  in  the  early  years  of  railroad  construction  ; 
while  now  the  theory  is  advocated  by  the  companies  for  the  purpose  of  securing; 
the  benefits  of  appreciation  in  land  values  and  also  for  the  pur])ose  of  recouping 
the  losses  which  their  security  holders,  in  conmion  with  all  other  fund  holders, 
have  incurred  by  the  operation  of  economic  law  through  l1ie  decrease  in  the  pur- 
chasing power  of  money.  From  the  standpoint  of  the  car  riders,  the  test  of  a 
service-at-cost  plan  is  that  they  shall  enjoy  as  low  fares  as  possible  while  paying 
the  full  cost  of  the  service.  From  the  standpoint  of  the  companies  the  essentiiil 
test  of  the  service-at-cost  plan  is  not  what  the  car  riders  pay  but  what  the  com- 
panies get.  This  distinction  is  important,  because  from  one  point  of  view  the 
service-at-cost  plan  connotes  a  flexible  fare,  while  from  the  other  it  connotes  a 
flexible  income. 

Some  of  the  witnesses  before  the  Commission  maintained  that  service  at 
cost  is  the  underlying  aim  of  public  regulation,  and  that,  therefore,  the  difTerence 

434 


Service  at  Cost  435 

between  commission  regulation  and  service-at-cost  contracts  is  a  difference  in 
form  rather  than  in  substance.  Where  commission  regulation  is  unrestricted, 
continuous  and  effective,  there  is  considerable  force  in  this  contention,  as  the 
principal  difference  between  the  two  schemes  is  that  regulation  is  more  flexible 
and  more  dependent  upon  the  exercise  of  human  judgment,  while  service-at-cost 
contracts  are  more  definite,  fixed  and  automatic  in  their  operations.  Under 
present  conditions  the  electric  railway  companies  are  eager  for  an  assurance  of 
a  fixed  return  upon  their  investment,  and  in  order  to  get  that  assurance  they  are 
quite  willing  to  give  up  the  advantages  of  a  speculative  investment  where  there 
are  ten  chances  of  loss  to  one  of  profit. 

The  service-at-cost  idea  as  applied  to  electric  railways  is  so  new  that  it  still 
has  to  be  discussed  for  the  most  part  from  the  standpoint  of  theory.  The  only 
ser\'ice-at-cost  experiment  that  has  been  in  operation  for  a  long  enough  time  to 
yield  important  and  relatively  dependable  results  from,  the  point  of  view  of 
practical  experience  is  that  of  the  Cleveland  Railway.  Other  experiments  in  the 
application  of  the  service-at-cost  principle  have  been  embodied  in  the  Dallas 
Railway  franchise  in  effect  in  April,  1917;  the  Massachusetts  legislation  under 
which  the  Boston  Elevated  Railway  system  has  been  publicly  operated  since  July 
1,  1918.  and  the  Bay  State  Street  Railway  system  since  June  1,  1919;  the  new 
Montreal  Tramways  contract,  in  effect  in  February,  1918;  the  Cincinnati  fran- 
chise revision  ordinance,  passed  in  August,  1918,  and  the  Youngstown  franchise, 
in  effect  in  January,  1919.^  A  service-at-cost  plan  was  worked  out  in  Phila- 
delphia, but  was  disapproved  by  the  Pennsylvania  Public  Service  Commission; 
and  service-at-cost  plans  worked  out  for  Chicago,  Denver  and  Minneapolis  were 
all  rejected  by  popular  vote.  Service-at-cost  plans  have  been  under  discussion 
recently  in  many  other  communities,  but  no  one  of  these  can  be  of  value  to  us 
unless  for  purposes  of  theoretical  discussion.  No  two  service-at-cost  contracts 
are  alike,  not  even  excepting  those  enacted  by  the  same  Massachusetts  legisla- 
ture for  the  benefit  of  the  two  big  street  railway  systems  of  that  state. 

Before  analyzing  particular  service-at-cost  plans  that  have  been  put  into 
operation,  we  may  properly  consider  what  the  principal  elements  of  the  cost  of 
street  railway  service  are.  This  is  a  matter  of  prime  importance,  as  it  is  uni- 
versally agreed  that  the  actual  and  necessary  cost  of  service  under  private  owner- 
ship and  operation  must  be  paid  either  by  the  car  riders  or  by  their  friends,  the 
taxpayers.  The  four  principal  elements  entering  into  the  cost  of  street  railway 
service  are:  (1)  ordinary  operating  and  maintenance  expenses;  (2)  taxes  and 
other  public  charges;  (3)  amortization  of  capital  destroyed  through  operation; 
and  (4)   return  upon  capital  invested  in  the  enterprise. 

Operating  expenses  include  mainly  wages  and  salaries,  the  cost  of  power, 
the  cost  of  materials  and  supplies  used  in  operation  and  maintenance,  compen- 
sation for  personal  injuries  and  damages  to  property,  and  miscellaneous  general 
expenses.  At  first  blush  it  might  be  thought  that  the  determination  of  the  operat- 
ing expense  of  an  electric  railway  is  a  perfectly  simple  matter  about  which  there 
need  be  no  dispute,  but  this  is  very  far  from  the  truth.  There  are  endless  oppor- 
tunities for  differences  of  opinion  with  respect  to  the  amount  of  expenses  that 
are  necessary  in  rendering  a  given  amount  of  service.     Here,  questions  may  be 


436  Electric  Railway  Problem 

raised  about  the  salaries  paid  to  general  officers,  the  wages  paid  to  labor,  the 
price  paid  for  power  or  for  coal  and  other  supplies  entering  into  its  production, 
the  waste  of  power  through  inefficient  use,  the  waste  of  labor  and  power  through 
inefficient  schedules  and  improper  routing  of  cars,  and  numberless  other  items 
of  expense  with  respect  to  which  good  policies  and  bad  policies,  or  good  manage- 
ment and  bad  management,  will  bring  widely  different  results.  But  with  respect 
to  itenii;  like  these,  the  actual  expenses  of  operation  can  be  readily  ascertained 
with  reasonable  accuracy.  Whether  particular  items  of  expense  are  proper,  and. 
if  proper,  whether  the  amount  of  the  expense  is  excessive,  are  questions  of  great 
importance  to  those  who  have  to  pay  the  cost  of  service,  but  they  do  not  involve 
doubt  or  uncertainty  as  to  what  the  cost  of  service  during  a  given  period  actually 
is.  However,  there  are  items  that  properly  form  a  part  of  current  operating 
expense  which,  in  many  cases,  do  not  appear  in  the  company's  statement  of  the 
financial  results  of  operation.  The  two  most  important  items  coming  within 
this  class  are  accident  liabilities  and  deferred  maintenance. 

Compensation  for  accidents  is  clearly  a  part  of  the  operating  expense  of  the 
period  within  which  the  accidents  occur.  Yet,  it  is  often  a  matter  of  years  before 
the  extent  of  a  street  railway  company's  liability  for  such  accidents  is  finally 
determined.  It  will  be  found  that  at  the  close  of  any  fiscal  year  an  electric  rail- 
way company,  no  matter  how  well  managed,  has  incurred  liabilities  of  this  char- 
acter which  are  not  yet  liquidated;  yet,  the  extent  of  this  undetermined  liability 
depends,  in  large  measure,  upon  care  in  operation  and  efficiency  in  the  settlement 
of  clainis.  This  is  well  illustrated  by  the  testimony  of  Mr.  C.  J.  Joyce,  repre- 
senting Mr.  Thomas  E.  Mitten,  of  the  Philadelphia  Rapid  Transit  Company. 
In  Chapter  XXXI  of  this  report  I  have  already  cited  Mr.  Joyce's  testimony  to 
the  effect  that  the  number  of  accident  suits  pending  against  the  Philadelphia 
Rapid  Transit  Company  was  reduced  from  4,953  on  December  31.  1910,  to  2,524 
on  December  31.  191S.  It  has  been  the  custom  with  some  companies  not  to 
charge  to  the  expenses  of  operation  for  a  given  year  the  undetermined  liability 
for  accidents.  Where  this  plan  is  followed  it  means  that  the  company  is  always 
worse  ofT  financially  than  it  ap]icars  to  be  ujjon  any  given  date.  There  is  an 
accunnilated  but  indefinite  and  unrecorded  amount  of  operating  expense  that 
constitutes  a  liability  against  the  future.  A  true  service-at-cost  plan  necessarily 
includes  an  accident  reserve  in  order  that  the  compensation  for  injuries  and 
damages  may  be  properly  charged  against  the  cast  of  the  service  during  the 
period  when  the  accidents  occurred. 

The  other  nlajor  item  of  operating  expense  with  respect  to  which  a  com- 
pany's operating  statement  is  likely  to  be  misleading  is  the  maintenance.  In  times 
when  the  management  is  more  interested  in  paying  dividends  than  in  the  upkeeji 
of  the  proiiorty.  or  in  times  when  it  is  diflicult  to  secure  labor  and  materials,  or 
in  times  when  revenues  arc  too  meagre  to  pay  the  full  cost  of  operation,  a  com- 
pany is  likely  to  permit  the  accumulation  of  "omitted"  or  "deferred"  maintenance, 
and  where  this  occurs  it  means  that  the  full  cost  of  oiK-ration  during  a  given  jierioil 
is  not  being  paid  during  that  period,  but  that  the  operating  expenses  are  in  part 
being  postponed,  with  the  result  that  a  double  burden  of  maintenance  will  fail 
upon  the  company  during  a  succeeding  period. 


Service  at  Cost  437 

In  the  cost  of  maintenance,  as  distinguished  from  amortization,  is  included 
not  only  the  cost  of  current  repairs,  but  the  cost  of  those  replacements  which 
become  necessary  from  time  to  time  in  the  ordinary  process  of  keeping  the  prop- 
erty in  condition  for  efficient  service.  Indeed,  after  an  electric  railway  has  gone 
through  what  is  termed  a  "complete  cycle  of  renewals,"  the  accruing  depreciation 
of  the  property  is  fully  offset  by  current  maintenance  and  renewal  expenditures. 
The  cost  of  service  unquestionably  includes  the  wear  and  tear  on  the  property, 
but  if,  at  the  end  of  the  year,  the  property,  exclusive  of  additions  and  better- 
ments made  during  the  year,  is  in  the  same  per  cent  condition  of  cost  new  that 
it  was  in  at  the  beginning  of  the  year,  it  is  obvious  that  the  entire  cost  of  service, 
so  far  as  maintenance  and  depreciation  of  the  old  property  are  concerned,  has 
been  taken  care  of  in  operating  expenses.  On  account  of  fluctuations  in  re- 
newals and  uncertainties  with  respect  to  oncoming  inadequacy  and  obsolescence, 
it  is  important  that  there  should  be  included  in  the  cost  of  service,  as  a  part  of 
operating  expense,  an  extra  allowance  to  build  up  a  reasonable  maintenance 
fund  to  equalize  the  renewals  that  may  come  along  in  bunches. 

It  will  be  seen  that,  with  respect  to  this  maintenance  item,  it  is  necessary  in 
determining  the  true  cost  of  service  to  steer  a  middle  course.  Care  must  be 
taken  to  include  the  full  cost  of  maintaining  the  property  at  the  highest  practi- 
cable standard  of  operating  efficiency,  with  a  sufficient  maintenance  reserve  to 
equalize  the  ups  and  downs  in  renewal  requirements ;  while  at  the  same  time 
care  must  be  taken  not  to  include  in  the  cost  of  service  a  separate  allowance  for 
ultimate  depreciation  that  in  fact  is  not  accruing  during  the  period  for  which 
cost  of  service  is  being  determined. 

With  respect  to  the  second  principal  element  in  the  cost  of  service,  namely, 
taxes  and  other  public  charges,  ordinarily  there  is  little  reason  for  trouble  in 
ascertaining  what  these  items  actually  amount  to.  Here  again  there  is  room  for 
grave  ditiferences  of  opinion  as  to  whether  or  not  particular  taxes  ought  to  be 
levied  or  particular  charges  made,  but  that  involves  questions  of  public  policy 
and  does  not  throw  doubt  upon  the  actual  cost  of  service  so  long  as  the  taxes 
and  charges  referred  to  are  in  fact  levied  against  the  electric  railways.  How- 
ever, even  here,  the  actual  cost  of  service  for  a  particular  period  is  sometimes  in 
doubt  because  a  company  has  refused  to  admit  the  legality  of  taxes  or  other 
public  charges  levied  against  it.  Tax  litigation  often  extends  over  a  number  of 
years,  and  in  that  case  the  true  cost  of  service  for  a  particular  year  cannot  be 
determined  until  the  tax  litigation  has  been  settled.  The  ultimate  result  may  be 
a  decrease  in  the  cost  of  service  if  the  company  wins,  and  an  increase  in  the  cost 
of  service,  on  account  of  the  expenses  of  the  litigation  and  accumulated  interest 
charges,  if  the  company  loses.  It  will  be  seen,  therefore,  that  even  if  for  pur- 
poses of  determining  the  cost  of  service  in  a  given  year  all  taxes  and  public 
charges  levied  against  the  company  are  presumed  to  be  legal  and  are  provided 
for  from  current  revenues,  nevertheless,  if  the  company  loses,  the  expenses  of 
the  unsuccessful  litigation  will  not  have  been  provided  for.  However,  there  should 
be  relatively  little  trouble  in  assigning  to  a  given  period  that  portion  of  the  taxes 
and  public  charges  which  is  properly  to  be  considered  a  part  of  the  cost  of  service. 

The  next  major  item  in  the  cost  of  service  is  the  provision  for  the  amortiza- 


438  Electric  Railway  Problem 

tion  of  capital  destroyed  in  operation  during  the  period  when  the  service  is  being 
rendered.  If  the  capital  value  of  an  electric  railway,  recognized  in  a  service-at- 
cost  plan,  represents  the  original  investment  in  the  property  less  its  accrued  de- 
preciation, and  if  the  property  has  reached  a  condition  of  stable  equilibrium,  the 
wasting  away  of  the  property,  as  I  have  already  said,  will  be  fully  ofYset  by  current 
maintenance  and  renewals,  if  the  proper  standard  of  efficiency  is  maintained.  Addi- 
tions and  extensions,  however,  will  gradually  depreciate  from  a  100  per  cent 
condition  at  the  time  when  they  are  installed  to  a  condition  approximating  the 
permanent  average  for  the  entire  property.  This  depreciation  cannot  be  taken 
care  of  by  maintenance;  nevertheless,  it  is  a  part  of  the  cost  of  service  and  should 
be  provided  for  currently.  Capital  that  is  destroyed  in  the  public  service  must 
be  made  good  to  the  investors  as  a  part  of  the  cost  of  that  service.  As  the  moneys 
contributed  for  amortization  cannot  be  economically  expended  or  used  in  the 
maintenance  of  the  property,  they  should  either  be  returned  to  the  investors  and 
deducted  from  the  capital  value  upon  which  a  return  is  to  be  paid  in  the  future, 
or  else  they  should  be  invested  in  additions  and  extensions,  if  needed,  without 
increasing  the  capital  value.  In  either  way  the  amortization  charge,  if  properly 
estimated,  will  truly  represent  this  particular  element  in  the  cost  of  the  service. 
The  fourth  major  element  in  the  cost  of  electric  railway  service  is  the  cost 
of  money,  or  the  return  'upon  the  investment.  This  is  determined  by  the  recog- 
nized capital  value  and  the  allowed  rate  of  return.  Here  again  many  oppor- 
tunities arise  for  dispute  as  to  the  legitimate  cost  of  capital,  and  also  in  many 
cases  as  to  the  actual  cost  of  capital.  In  general,  the  cost  of  capital  as  an  ele- 
ment in  the  cost  of  service  is  the  return  that  the  company  is  legally  or  eciuitably 
obligated  to  pay  upon  the  investment.  Here,  however,  we  get  into  the  difficulties 
that  arise  from  a  differentiation  between  capitalization  and  valuation.  If  the 
capital  value  upon  which  a  rate  of  return  is  to  be  paid  is  fixed  without  relation  to 
the  outstanding  securities  and  capital  obligations  of  an  electric  railway  company, 
it  may  turn  out  that  the  company  has  to  pay  more  for  the  use  of  borrowed  capital, 
or  capital  held  under  lease,  than  the  full  amount  of  the  fair  return  recognized 
as  equitably  due  to  the  investors  considered  as  a  single  group.  From  the  point 
of  view  of  the  company,  the  cost  of  capital  includes  its  actual  fixed  charges  plus 
a  reasonable  return  upon  the  portion,  if  any,  of  the  investment  furnished  by  its 
stockholders.  In  this  cost  is  included  provision  for  the  amortization  of  bond 
discount  and  expenses,  but  a  question  arises  where,  under  the  terms  of  its  mort- 
gage, a  company  is  required  to  accumulate  a  sinking  fund  for  the  payment  of  its 
bonded  debt.  It  is  clear  that  a  fixed  charge  of  this  nature  is  not  a  legitimate 
part  of  the  cost  of  service,  because  the  effect  of  the  accumulation  of  a  sinking 
fund  for  the  payment  of  bonds  when  they  fall  due  is  to  provide  for  the  ultimate 
transfer  of  the  bondholders'  interest  in  the  property  to  the  stockholders,  and  if 
the  amortization  charges  through  which  this  transfer  is  effectuated  are  treated 
as  a  part  of  the  cost  of  service  and  charged  up  to  tiic  public  in  the  fares,  the  result 
will  be  that  tiie  public  will  pay  for  the  property — or  the  bondholders'  interest  in 
it — and  present  it  to  the  stockholders.  In  earlier  chapters  of  this  report  I  have 
already  discussed  the  valuation  and  the  rate  of  return,  the  two  factors  that  go 
to  determine  the  cost  of  capital.     When  ihnsi-  f.n-ti)r>;  have  been  definitely  fixed. 


Service  at  Cost  439 

there  is  no  further  difficulty  in  ascertaining  what  the  cost  of  capital  amounts  to 
as  an  element  in  the  cost  of  service. 

In  the  foregoing  analysis  I  have  included  in  a  broad  way  all  of  the  elements 
that  go  to  make  up  the  full  cost  of  service  during  any  given  period,  but  we  still 
have  to  consider  the  question  of  the  surplus.  As  a  matter  of  prudence,  it  may 
be  advisable,  especially  in  normal  times,  to  add  to  the  cost  of  service  a  margin 
for  future  contingencies.  This  is  not  strictly  necessary  where  the  business  is 
well  established,  and  where  care  is  taken  to  cover  all  of  the  actual  elements  of 
current  costs  in  the  provision  for  current  revenues.  A  contingent  reserve  fund 
is  by  no  means  so  important  under  a  service-at-cost  plan  as  it  is  under  a  plan 
where  a  fixed  and  unchangeable  rate  of  fare  is  the  principal  source  of  electric 
railway  revenues.  Nevertheless,  it  is  difficult  to  make  any  financial  arrangement 
so  flexible  that  it  will  respond  immediately  and  completely  to  fluctuations  in  the 
cost  of  service,  and  for  that  reason  it  may  be  advantageous  to  include  for  prac- 
tical purposes  in  our  estimate  of  the  cost  of  service  a  little  leeway  for  the  purpose 
of  stabilizing  and  equalizing  the  financial  results  of  successive  periods. 

In  fact,  one  of  the  primary  questions  to  be  determined  in  the  application  of 
the  service-at-cost  theory  is  the  length  of  the  period  within  which  revenues  and 
expenses  are  to  be  equalized.  In  general,  it  may  be  said  that  a  car  rider,  when 
he  drops  his  fare  into  the  box,  pays  the  full  cost  of  the  service  rendered  to  him, 
and  that  the  electric  railway  has  no  other  source  from  which,  either  before  or 
subsequent  to  that  act,  it  can  derive  any  additional  compensation  for  the  service. 
But  obviously,  the  person  who  rides  alone  in  a  car  out  to  the  end  of  the  line,  or 
with  two  or  three  others  during  the  period  of  low  traffic,  is  not  paying  the  full 
cost  of  the  service  rendered  to  him,  while  on  the  other  hand  the  passengers  riding 
for  short  distances,  or  in  crowded  cars  during  the  rush  hours,  are  paying  more 
than  the  cost  of  the  service  rendered  to  them.  In  like  manner,  the  passengers 
who  ride  on  a  stay-at-home  Sunday  pay  less  and  the  passengers  who  ride  on  a 
go-to-town  Saturday  pay  more  than  the  actual  cost  of  the  service  rendered  to 
them.  Also,  there  are  undoubted  fluctuations  in  traffic  and  in  operating  expenses 
between  different  seasons  of  the  year  which  affect  the  cost  of  the  service  at  par- 
ticular times,  but  it  hardly  seems  necessary  to  bring  the  cost-of-service  theory  to 
so  fine  a  point  as  to  cause  fluctuations  in  the  rates  of  fare  on  account  of  seasonal 
changes,  either  in  traffic  or  in  operating  expenses. 

It  remains  a  question  as  to  how  far  the  principle  involved  in  the  flexible 
fare  adjusted  to  the  cost  of  service  should  be  modified  by  the  advantages  of 
stability  in  the  charges  for  transportation  service.  Strikes,  epidemics,  wars,  hard 
winters,  hot  summers,  constitutional  amendments,  and  other  unusual  occurrences 
are  likely  to  cause  a  fluctuation  in  the  cost  of  service,  even  where  the  periods 
compared  are  as  long  as  a  year.  It  is  necessan,',  how-ever,  that  some  definite 
period  shall  be  adopted  as  the  unit  of  time  within  which  the  revenues  are  to  be 
made  equal  to  the  cost  of  service,  or  that  some  other  means  shall  be  devised  for 
securing  reasonable  stability  in  rates. 

It  will  not  be  practicable  to  present  in  this  report  a  complete  analysis  of  all 
the  service-at-cost  arrangements  that  have  been  put  into  effect  or  definitely  pro- 
posed.    Perhaps  it  will  be  sufficient  for  our  purpose  to  analyze  with  some  care 


440  Electric  Railway  Problem 

the  Cleveland  plan,  the  Montreal  plan,  the  Massachusetts  plan,  and  the  Cincin- 
nati plan  as  representing  distinct  types  of  service  at  cost,  and  refer  only  briefly 
to  the  salient  features  of  some  of  the  other  plans,  insofar  as  they  differ  from 
these  and  tend  to  throw  light  on  the  fundamental  problem  with  which  we  are 
concerned,  namely,  the  potential  efificacy  of  the  servicc-at-cost  principle  in  the 
restoration  of  electric  railway  credit. 

Referring  now  to  the  Cleveland  plan,  the  first  important  thing  about  it  is 
that  it  was  the  sequel  to  a  long-continued  struggle  on  the  part  of  the  city  to 
secure  a  3-cent  fare.     The  following  are  its  most  essential  features: 

(1)  The  recognized  capital  value  of  the  property  devoted  to  public  use  at 
the  time  the  contract  became  effective  is  fixed  and  the  method  is  prescribed  by 
which  subsequent  additions  to  capital  value  shall  be  made.  The  capital  value  so 
fixed  is  used  as  the  basis  for  determining  the  return  upon  the  investment  as  an 
element  in  the  cost  of  service,  which  in  turn  determines  the  rate  of  fare.  The 
capital  value  is  also  used  as  the  basis  for  determining  the  purchase  price  in  case 
the  city  at  some  future  time  concludes  to  buy  the  property.  If  the  city  takes 
over  the  property  before  the  expiration  of  the  franchise,  it  will  have  to  pay  a 
bonus  of  10  per  cent  upon  that  portion  of  the  capital  value  represented  at  the 
time  by  capital  stock,  but  if  it  waits  until  the  expiration  of  the  franchise  to  ac- 
quire the  property,  the  purchase  price  will  be  the  capital  value  as  it  appears  at 
that  time,  and  no  more.  Also,  at  the  time  the  Cleveland  ])lan  was  inaugurated, 
the  capitalization  of  the  company  was  cut  down  to  correspond  with  the  recog- 
nized capital  value,  and  the  plan  provides  that  additions  to  capital  value  shall  be 
measured  by  the  par  value  of  the  new  securities  issued  or  the  floating  debt  in- 
curred upon  terms  prescribed  in  the  contract.  It  is  noteworthy  also  that  this 
capital  value  has  been  adopted  by  the  State  Tax  Commission  of  Ohio  as  the 
valuation  of  the  Cleveland  Railway  property  for  purposes  of  taxation.  Thus  we 
see  that  a  fundamental  characteristic  of  the  service-at-cost  plan  as  worked  out 
in  Cleveland  is  the  establishment  of  one  definite  capital  value  for  rate  purposes, 
for  public  purchase  (with  the  qualification  above  mentioned),  for  capitalization 
and,  incidentally,  for  taxation. 

(2)  The  compensation  of  the  investors  takes  the  form  of  a  fixed  rate  of 
return.  For  the  first  ten  years  of  the  experiment  this  rate  of  return  was  6  per 
cent  per  annum  upon  the  approved  capital  stock  outstanding  at  anv  given  time, 
plus  the  actual  interest  and  amortization  charges  paid  on  funded  debt,  not  exceed- 
ing, however,  a  total  effective  rate  of  6  per  cent,  and  6  per  cent  on  the  floating 
debt.  The  plan  as  originally  adopted  did  not  contemplate  anv  future  change 
in  the  rate  of  return  upon  the  company's  capital  stock,  and  made  no  provision 
for  fluctuations  in  the  cost  of  money,  except  as  such  fluctuations  could  be  ab- 
sorbed through  changes  in  the  rate  of  interest  on  borrowed  money  within  the  6 
per  cent  maximum.  As  a  matter  of  fact,  when  the  Tayler  grant  went  into  effect 
on  March  1,  1910,  the  recognized  capital  value  was  represented  by  $14,675,600  of 
capital  stock,  $8,128,000  of  5  per  cent  bonds  and  $1,288,000  of  floating  debt,  mak- 
ing a  total  of  $24.091,<>00;  whereas  nine  years  later,  on  March  1.  1919,  the  capital 
value  was  represented  by  $28,720,055  of  capital  stock  and  $5,495,000  of  5  per 
cent  bonds,  with  no  floating  debt,  making  a  total  of  $34,215,055.     The  change  in 


Service  at  Cost  441 

the  relative  amounts  of  stock  and  bonds  outstanding  indicates  that  under  the 
Cleveland  plan  the  company  has  found  it  most  advantageous  to  finance  itself  by 
the  sale  of  stock  upon  which  the  rate  of  return  fixed  in  the  original  grant  wsls  6 
per  cent.  In  1919,  shortly  after  the  franchise  had  been  renewed  upon  the  old 
terms,  the  trainmen  struck  for  a  large  increase  in  wages.  As  a  concession  to  the 
company  to  induce  it  to  settle  the  strike,  the  city  authorities  consented  to  enter 
into  an  arbitration  proceeding  with  the  company  to  determine  whether  the  fixed 
rate  of  interest  allowed  on  the  capital  stock  should  be  increased  from  6  per  cent 
to  7  per  cent,  and,  as  I  have  already  fully  explained  in  Chapter  XXXIX  of  this 
report,  the  Arbitration  Board,  by  a  majority  vote,  recommended  that  the  con- 
tract be  changed  so  as  to  increase  the  rate  to  7  per  cent.  Thereupon,  the  city 
council  passed  the  necessary  ordinance  amending  the  franchise,  and  unless  it  is 
ultimately  defeated  by  referendum  the  rate  of  return  upon  the  capital  stock 
under  the  Cleveland  plan  will  hereafter  be  7  per  cent.^  No  change  has  been  made 
in  the  provision  limiting  to  6  per  cent  the  rate  of  interest  on  funded  or  floating 
debt,  including  the  cost  of  amortizing  bond  discount,  if  any,  and,  therefore,  it 
will  be  more  than  ever  to  the  interest  of  the  Cleveland  Railway  Company  to 
finance  itself  through  the  sale  of  additional  stock. 

(3)  The  nominal  duration  of  the  franchise  under  the  Qeveland  plan  is 
25  years,  the  limit  set  by  the  Ohio  state  law,  but  the  plan  contains  provisions 
which  offer  an  extraordinary  inducement  to  the  city  to  renew  the  franchise  at  the 
end  of  each  10-year  period.  If  it  fails  to  do  so,  it  will  lose,  during  the  remain- 
ing fifteen  years  of  the  life  of  the  franchise,  the  right  to  initiate  extensions  and 
permanent  improvements,  and  will  lose  the  right  to  control  the  service  under  the 
terms  of  the  contract.  Moreover,  the  company  will  gain  the  right,  regardless  of 
the  actual  cost  of  service,  to  charge  the  maximum  rate  of  fare  permitted  by  the 
contract.  These  inducements  for  renewal  are  so  strong  that  the  Board  of  Arbi- 
tration in  the  seven-per-cent-return  proceedings  recognized  "the  strong  proba- 
bility that  the  grant  will  be  renewed  and  so  become  practically  perpetual."  In 
fact,  the  grant  has  already  been  once  renewed.  Nevertheless,  the  city  has  re- 
served to  itself  the  right  to  terminate  the  franchise  at  any  time  upon  six  months' 
notice,  by  taking  over  the  entire  property  and  paying  therefor  the  capital  value 
plus  a  bonus  of  10  per  cent  on  that  portion  of  the  capital  value  not  represented 
by  the  funded  or  floating  debt  assumed  by  the  city  at  the  time  of  purchase. 
Moreover,  the  city  also  has  reserved  the  right  to  designate  a  licensee  to  take  over 
the  Cleveland  Railway  Company's  property  upon  the  same  terms  upon  which  the 
city  may  take  it  over,  subject  to  the  condition  that  such  licensee  shall  agree  to 
accept  a  smaller  return  upon  the  portion  of  capital  value  represented  by  capital 
stock,  by  at  least  one-quarter  of  one  per  cent,  than  the  return  which  the  Cleve- 
land Railway  Company  at  the  time  is  entitled  to  receive  or  is  then  willing  to 
accept.  In  case  the  franchise  is  not  renewed,  the  city  or  its  licensee  may  acquire 
the  property  when  the  franchise  expires,  without  paying  the  10  per  cent  bonus, 
but  the  city  is  under  no  absolute  obligation  either  to  renew  the  franchise  or  to 
acquire  the  property.  The  city  may  not,  however,  even  at  the  expiration  of  the 
franchise,  grant  a  franchise  to  any  other  company  to  operate  a  railway  over  the 
existing  lines  of  the  Cleveland  Railway  Company  or  any  one  of  them,  except  upon 


442  Electric  Railway  Problem 

condition  that  such  other  company  purchase  the  railway  or  such  portion  of  it 
upon  the  terms  prescribed  in  case  of  purchase  by  the  city.  In  practical  effect, 
the  Cleveland  plan  provides  the  equivalent  of  an  indeterminate  franchise,  termin- 
able at  any  time  when  the  city  is  ready  to  take  over  the  entire  property,  both 
inside  and  outside  of  the  city  limits,  and  pay  therefor  the  recognized  capital 
value  plus  the  10  per  cent  bonus  on  the  amount  of  the  capital  stock  then  out- 
standing. 

(4)  The  Cleveland  plan  provides  that  the  physical  property  shall  always 
be  maintained  at  a  standard  equal  to  70  per  cent  of  its  reproduction  value,  and 
that  when  replacements  are  made  the  full  cost  of  reproducing  the  identical  items 
of  property  withdrawn  from  service  shall  be  paid  as  a  maintenance  charge  re- 
gardless of  the  actual  cost  of  the  original  items  withdrawn.  This  provision  pre- 
cludes the  capitalization,  at  the  time  when  replacements  are  made,  of  the  in- 
creased cost  of  elements  of  the  property  arising  from  the  fact  that  wages  and 
the  prices  of  materials  have  increased.  This  is  not  in  accordance  with  the  rules 
of  accounting  prescribed  by  the  Interstate  Commerce  Commission  and  by  state 
public  service  commissions  generally.  \\'hile  the  general  price  level  is  rising, 
this  rule  tends  to  increase  the  current  cost  of  service  and  to  keep  the  capital 
account  below  the  actual  amount  of  the  investment ;  on  the  other  hand,  when  the 
price  level  is  falling,  the  opposite  effects  will  be  produced  where  the  items  of 
property  being  withdrawn  from  service  and  replaced  represent  original  installa- 
tions at  a  higher  level  of  prices. 

Of  the  original  capital  value  recognized  in  1910,  between  25  and  30  per 
cent  represented  franchise  values,  unpaid  rentals  of  the  Municipal  Traction  Com- 
pany, and  pavement  belonging  to  the  City  of  Cleveland.  Obviously,  these  items, 
or  at  least  the  first  two  of  them,  were  not  proper  items  for  permanent  capitaliza- 
tion; yet,  the  plan  makes  no  provision  for  the  amortization  of  these  elements 
of  the  capital  value.  Furthermore,  the  plan  makes  no  provision  for  the  amor- 
tization of  the  permanent  depreciation  accruing  on  additions  and  extensions  in- 
stalled subsequent  to  the  date  of  the  grant,  and  ultimately  representing  the  dif- 
ference between  the  cost  new  of  such  additions  and  extensions  and  the  70  per 
cent  condition  in  which  the  property  as  a  whole  is  to  be  maintained.  This  means 
that  an  ultimate  depreciation  approximating  30  per  cent  on  all  new  investment 
is  not  directly  provided  for  as  a  part  of  the  cost  of  service  under  the  Cleveland 
plan.  The  amount  to  be  expended  from  month  to  month  on  maintenance  and 
renewals  is  limited  to  a  certain  allowance  per  car  mile.  This  allowance  is  sub- 
ject to  increase  or  decrease  from  time  to  time  by  agreement  between  the  city  and 
the  company,  or,  in  the  event  of  disagreement,  by  arbitration. 

(5)  Operating  expenses,  other  than  maintenance,  are  limited  under  the 
plan  to  a  fixed  allowance  per  car  mile,  but  this  allowance  may  be  changed  from 
time  to  time  by  agreement  or  by  arbitration.  No  provision  is  made  for  an  acci- 
dent reserve,  and  the  deferred  liability  of  the  Cleveland  Railway  Company  on 
account  of  unliquidated  personal  injury  claims  is  not  counted  in  the  cost  of 
sen-ice  for  the  period  within  which  the  accidents  occur.  This  has  the  effect 
of  keeping  the  Cleveland  Railway  Company  constantly  behind  to  the  extent  of 
this  accumulated  accident  liability.     It  docs  not  necessarily  result  in  a  lower  cost 


Service  at  Cost  443 

of  service  or  a  lower  rate  of  fare  in  any  given  year,  as  the  deferred  liabilities 
from  preceding  years  that  are  liquidated  during  a  given  year  may  fully  offset  the 
liabilities  for  that  year  which  are  deferred  to  succeeding  years. 

(6)  Under  the  Cleveland  plan,  the  street  railway  property  is  taxed  the 
same  as  any  other  private  property,  and  the  company  is  required  to  keep  the 
pavements  in  repair  between  the  rails  and  the  tracks  and  to  a  distance  of  one 
foot  on  the  outside  of  the  outer  rail.  The  company  is  not  required  to  repave  or 
to  sprinkle  the  streets  or  keep  them  clear  of  ice  and  snow,  or  to  pay  bridge 
rentals,  or  car  license  fees  or  local  franchise  taxes.  It  is  not  required  to  bear 
the  expense  of  moving  its  structures  to  get  out  of  the  way  of  public  improvements. 
In  Chapter  XXX  of  this  report,  I  have  already  described  the  taxes  and  street 
expenses  incurred  by  the  Cleveland  company  in  1918.  In  brief,  the  service-at- 
cost  plan,  as  worked  out  in  Cleveland,  is  intended  to  free  the  car  riders  from 
carrying  any  burdens  that  are  not  regarded  as  a  legitimate  part  of  the  cost  of 
transportation. 

(7)  On  the  basis  of  the  recognized  capital  value  and  of  the  various  ele- 
ments going  to  make  up  the  cost  of  service  as  above  outlined,  the  Cleveland  plan 
provides  that  the  street  railway  system  shall  be  self-sustaining  through  the  appli- 
cation of  a  flexible  fare  schedule  between  certain  prescribed  minimum  and  maxi- 
mum limits.  Originally,  the  maximum  fare  that  could  be  charged  under  the 
franchise  was  4  cents  cash  and  7  tickets  for  25  cents,  with  a  penny  for  a  transfer. 
Under  the  stress  of  war  conditions  the  franchise  was  amended  so  as  to  provide 
as  the  maximum  possible  fare  6  cents  cash  and  9  tickets  for  50  cents,  with  a 
penny  for  a  transfer.  The  minimum  fare  remains  as  provided  in  the  original 
plan,  namely,  2  cents  cash,  with  a  penny  for  a  transfer  and  a  penny  rebate  upon 
the  taking  up  of  the  transfer.  Including  these  extremes,  the  Cleveland  ordinance 
as  amended  prescribes  15  separate  fare  schediiles  which  constitute  a  sliding  scale 
that  is  automatically  applied  as  the  cost  of  service  fluctuates  from  time  to  time. 
As  a  part  of  this  automatic  device,  the  plan  provides  for  a  special  fund  called 
the  "interest  fund,"  the  amount  of  which  was  fixed  at  $500,000  when  the  contract 
first  went  into  effect  in  1910.  Into  this  fund  are  paid  all  of  the  earnings  of  the 
company  in  excess  of  the  allowances  for  operation  and  maintenance,  and  out  of 
the  fund  are  paid  the  fixed  return  upon  the  capital  value,  taxes,  and  miscellaneous 
charges.  As  an  accounting  matter  the  fund  is  maintained  on  an  accrual  basis. 
Whenever  the  fund  rises  above  $700,000.  that  fact  is  a  signal  for  a  reduction  of 
the  fare  to  the  schedule  next  below  the  schedule  then  in  force,  and  whenever 
the  fund  sinks  below  $300,000  that  is  a  signal  for  an  increase  in  the  fare.  The 
scheme  for  the  adjustment  of  fares  is  not  entirely  inflexible,  however,  for  if 
either  the  company  or  the  city  is  of  the  opinion  that  the  fare  should  be  otherwise 
than  as  indicated  by  the  amount  in  the  interest  fund,  a  different  adjustment  may 
be  effected  by  agreement  between  the  city  and  the  company,  or  if  they  cannot 
agree,  then  by  arbitration.  But  in  any  case,  the  rate  fixed  by  arbitration  may  not 
exceed  the  maximum  rate  stipulated  in  the  franchise. 

(8)  Under  the  Cleveland  plan  public  supervision  is  exercised  through  a 
city  street  railroad  commissioner  appointed  by  the  mayor  with  the  approval  of 
the  city  council,  and  subject  to  removal  at  any  time  by  the  mayor.     The  com- 


444  Electric  Railway  Problem 

missioner  acts  as  the  technical  adviser  of  the  council  in  all  matters  affecting  the 
interpretation  or  application  of  the  contract,  and  in  all  action  under  the  terms 
of  the  contract  affecting  the  quantity,  the  quality  or  the  cost  of  service,  or  the 
rate  of  fare.  In  general,  the  city  has  the  right  to  require  extensions  and  to  con- 
trol the  service,  subject  to  the  limitation  that  the  company  shall  not  be  prevented 
by  any  city  requirement  with  respect  to  service  or  extensions  from  earning  the 
stipulated  return  upon  its  capital  value,  and  in  case  of  dispute  as  to  the  probable 
effect  of  a  particular  requirement  the  matter  shall  be  determined  by  arbitration. 

Under  the  Cleveland  plan  a  great  many  different  matters  affecting  the  in- 
terpretation and  application  of  the  contract  must  be  submitted  to  arbitration 
upon  the  demand  of  either  the  city  or  the  company.  Arbitration,  therefore,  be- 
comes a  very  important  feature  of  the  plan,  and  the  arbitration  provisions  of 
the  contract  are  worked  out  with  unusual  care.  The  parly  demanding  an  arbitra- 
tion must  name  its  representative  and  give  notice  to  the  other  party  of  the  ques- 
tion upon  which  arbitration  is  demanded.  Within  ten  days  the  other  party  must 
name  its  representative,  and  the  two  so  selected  shall,  within  ten  days,  select  a 
third  arbitrator,  but  in  case  the  two  are  unable  to  agree  within  the  time  specified, 
then  the  third  arbitrator,  upon  the  application  of  either  party,  is  to  be  appointed 
by  the  United  States  District  Court  judge  for  the  district  comprising  the  city  of 
Cleveland.  However,  the  party  applying  to  the  judge  for  the  appointment  of  the 
third  arbitrator  must  give  five  days'  notice  to  the  other  party  and  must  fomiulate 
the  questions  to  be  determined  by  the  board  of  arbitration.  Before  making  a 
final  appointment,  the  judge  is  required  to  give  three  days'  notice  to  both  the 
city  and  the  company  of  the  person  or  persons  being  considered  by  him  for  the 
appointment,  and  either  the  city  or  the  company  may,  within  this  period  of  three 
days,  present  objections  to  any  person  or  persons  under  consideration.  The 
board  of  arbitration  is  required  to  decide  upon  the  question  submitted  to  it  within 
30  days  after  the  appointment  of  the  third  arbitrator,  unless  the  board  itself  is 
unanimous  in  agreeing  to  an  extension  of  time.  The  expenses  of  a  board  of 
arbitration,  and  the  expenses  of  the  city  street  railroad  commissioner  in  his  work 
of  supervision  over  the  company,  are  paid  by  the  company  and  included  in  the 
cost  of  ser\'ice.  It  is  noteworthy  that  the  Cleveland  plan  takes  no  cognizance 
whatever  of  state  comnu'ssion  control.  The  actual  jurisdiction  of  the  Ohio  Pub- 
ilc  Utilities  Commission  is  limited,  for  practical  purposes,  to  matters  of  capitali- 
zation, and  apparently,  in  view  of  the  detailed  control  exercised  by  the  city  over 
accounts  and  capital  expenditures,  the  actual  control  of  the  state  conunission  even 
in  this  field  is  little  more  than  perfunctory. 

(9)  The  Cleveland  Railway  system  is  not  confined  to  the  corporate  limits 
of  the  City  of  Cleveland,  but  serves  suburban  municipalities  having  a  consider- 
able population.  Nevertheless,  the  service-at-cost  contract  is  in  the  form  of  an 
agreement  between  the  railway  company  and  the  city.  Indeed,  the  city's  option 
to  purchase  the  property  at  any  time  prior  to  the  expiration  of  the  franchise  is 
conditioned  upon  its  ac(|uiring  the  entire  system,  botli  inside  and  outside  of  the 
city  limits.  If  the  franchise  is  permitted  to  expire  and  the  city  at  that  time  is 
without  authority  to  take  over  the  suburban  lines,  it  may  then  acquire  that 
portion  of  tlie  system  lying  within  the  city  limits  and  may  require  the  company 


Service  at  Cost  445 

at  the  same  time  to  convey  to  a  licensee  designated  by  the  city  the  remainder  of 
the  system.  The  Qeveland  franchise,  however,  does  not  supersede  the  com- 
pany's contracts  with  the  suburban  municipalities,  but  the  cost  of  suburban  ex- 
tensions and  betterments  is  not  to  be  included  in  capital  value  without  the  city's 
consent.  As  the  municipality  of  East  Cleveland  is  now  surrounded  on  three 
sides  by  the  City  of  Cleveland,  the  renewal  of  the  Cleveland  contract  in  effect  in 
1919  prescribes  the  rates  of  fare  between  points  in  the  City  of  Qeveland  and 
points  in  the  City  of  East  Cleveland,  but  otherwise  the  contract  does  not  attempt 
to  fix  the  schedule  of  fares  to  be  charged  by  the  company  beyond  the  limits  of 
the  City  of  Cleveland.  Thus  it  will  be  seen  that  in  Cleveland  the  service-at-cost 
plan  has  been  worked  out  on  the  basis  of  an  arrangement  between  the  central 
municipality  and  the  operating  company  and,  as  Secretary  Baker  testified,  no 
trouble  has  been  experienced  by  reason  of  lack  of  cooperation  between  the  city 
and  the  suburban  communities. 

The  entire  Cleveland  plan  is  based  upon  the  theory  of  cooperation  between 
the  company  and  the  local  authorities  of  the  central  municipality,  and  of  the 
settlement  of  their  differences  by  arbitration  rather  than  by  an  appeal  to  a  higher 
public  authority  such  as  a  state  commission  or  a  court.  The  company's  return 
upon  its  investment  is  definitely  fixed  and  limited.  As  the  board  of  arbitration 
in  the  seven-per-cent-return  proceeding  stated : 

"The   City  does   not   guarantee   the   stock,     *     *     *     *     [,ut   the    franchise   does   protect 
the  stock  in  a  way  equivalent  in  effect  to  a  guaranty." 

Under  the  Cleveland  plan  the  public  has  control  of  service  so  long  as  it  can  be 
shown  that  the  maximum  rate  of  fare  authorized  by  the  contract  will  pay  the  cost 
of  the  service  demanded.  The  city  also  has  an  absolute  check  upon  expenditures 
for  maintenance  and  renewals,  and  a  general  check  upon  capital  expenditures. 
It  has  indirect  control  of  operating  expenses  through  the  car  mile  allowance  for 
operation  subject,  however,  to  the  company's  right  of  appeal  to  arbitration. 

It  is  under  this  franchise  that  the  Cleveland  Railway  Company  went  through 
the  war  "on  easy  street"  and  does  not  know  "what  a  banker  is"  in  its  business, 
to  use  Mr.  John  J.  Stanley's  words.  At  the  same  time,  Cleveland  offers  the 
spectacle  of  a  great  city  in  which  it  has  been  at  no  time  necessary,  even  during 
the  war  period,  to  raise  the  fare  above  5  cents  cash,  with  a  penny  for  a  transfer.^ 
This  rate  went  into  effect  August  4,  1918,  but  remained  in  effect  for  only  11 
months.  On  July  5,  1919,  the  next  lower  rate  provided  by  the  ordinance  which 
includes  tickets  at  the  rate  of  11  for  50  cents,  became  effective,  and  on  December 
16.  1919,  a  further  reduction  of  the  fare  took  place  through  the  sale  of  tickets  at 
the  rate  of  6  for  25  cents.  In  May,  1920,  following  an  increase  in  wages,  the 
tickets  were  again  abolished.  The  5-cent  cash  fare  and  the  penny  transfer 
charge  remain.  Meanwhile,  from  June  1,  1919,  to  the  close  of  the  year,  the 
wages  of  trainmen  were  55  cents  per  hour  for  the  first  three  months  of  employ- 
ment, 58  cents  for  the  next  nine  months,  and  60  cents  thereafter;  the  operating 
expense  allowance  was  23  cents  per  car  mile  for  the  entire  period,  and  the  main- 
tenance allowance  10  cents  per  car  mile  from  June  to  October,  9  cents  per  car 
mile  in  November,  and  8  cents  per  car  mile  in  December.  It  is  worthy  of  note 
that   from   March    1,    1910,   when   the   service-at-cost   plan   became   effective,    to 


4-46  Electric  Railway  Problem 

December  31,  1919,  the  fares  changed  nine  times;  the  wages  of  trainmen  changed 
six  times ;  the  operating-expense  allowance  changed  nine  times ;  and  the  main- 
tenance-expense allowance  changed  twice.  From  March  1,  1910,  to  December 
14,  1917,  a  period  of  nearly  seven  years,  the  fare  was  three  cents  cash,  with  a 
penny  transfer.  Part  of  the  time  the  transfer  charge  was  rebated  as  the  trans- 
fers were  taken  up,  and  part  of  the  time  there  was  no  rebate. 

Secretary  Baker,  who  as  one  of  Tom  L.  Johnson's  trusted  lieutenants  went 
through  the  long  struggle  that  led  up  to  the  Cleveland  settlement,  and  who  was 
mayor  of  Cleveland  for  four  years  after  the  contract  went  into  effect,  described 
to  the  Commission  at  some  length  the  origin  and  principal  characteristics  of  the 
plan.  At  pages  1003  and  1004  of  the  Proceedings,  Mr.  Baker  makes  the  follow- 
ing general  comments  upon  it: 

"There  are  two  or  three  comments  to  be  made  about  it.  In  the  first  place,  it  was  a 
popular  settlement,  in  the  sense  that  the  people  of  Cleveland  understood  it.  1  do  not  think 
it  is  possible  for  me  to  emphasize  too  strongly,  so  far  as  the  expression  of  my  own  belief  is 
concerned,  the  feeling  that  no  street  railroad  settlement  can  be  a  successful  one  which  is  not 
understood  in  its  details  and  approved  by  the  people.  It  is  one  of  the  most  intimate  of  their 
services,  and  they  resent  and  distrust  and  suspect  the  management  unless  they  understand. 

"The  whole  theory  of  the  Cleveland  settlement  was.  first,  that  the  people  understood  all 
that  had  gone  on  in  the  past,  and  all  that  was  proposed  to  be  done,  and  had  a  continuous 
means  of  information  as  to  the  state  of  affairs,  !)y  the  inspection  of  the  city  street  railroad 
commissioner's  books  and  the  publication  at  short  intervals  of  reports  from  him. 

"The  city  street  railroad  commissioner  in  Cleveland  every  month  prints  in  the  public 
newspapers  the  state  of  the  interest  fund,  so  that  people  can  sec  whether  it  is  going  up  or 
whether  it  is  going  down ;  whether  there  is  soon  going  to  be  a  change  of  fare  up  or  down ; 
and  when  the  change  comes,  there  is  never  the  slightest  question  about  it.  The  people  have 
known,  in  advance,  that  they  were  approaching  the  period  where  the  fare  would  go  up  or 
would  go  down,  and  it  is  accepted  without  the  slightest  hesitation  or  objection. 

"The  great  thing  accomplished,  therefore,  in  the  Cleveland  settlement,  was  that  it  was 
accomplished  with  the  intelligent  and  detailed  comprehension  and  undertaking  of  the  people 
of  the  city  and  the  subsequent  working  of  the  ordinance  has  always  been  relatively  easy 
because  of  the  fullness  of  the  disclosures  made  and  the  completeness  of  the  information  the 
public  have  on  the  subject. 

"Perhaps  the  most  striking  defect  in  the  ordinance  is  the  thing  you  would  rather  have 
me  point  out  than  anything  else,  and  that  is  the  lack  of  stimulus  to  the  operators  to  operate 
economically." 

It  is  generally  admitted  that  the  valuation  is  the  fundamental  thing  to  be 
determined  at  the  very  threshold  of  service  at  cost.  The  relatively  low  valuation 
arrived  at  in  Cleveland  is  in  part  responsible  for  the  comparativelv  low  cost  of 
service  there ;  yet  it  may  not  be  amiss  to  take  judicial  notice  of  the  fact  that 
Mr.  Peter  Witt,  another  of  Tom  Johnson's  lieutenants,  and  later  on  the  city 
street  railroad  commissioner  through  Mayor  Baker's  two  administrations,  has 
recently  been  stating  publicly  that  tlie  reduction  in  the  Cleveland  Railway's  cap- 
italization had  very  little  to  do  with  the  low  fares.  He  points  out  that  the  in- 
terest on  $10,000,000  would  add  only  one-fifth  of  a  cent  to  the  average  fare  in 
Cleveland  on  the  basis  of  the  present  traftic.  It  is  agreed,  however,  that  the 
success  of  the  Cleveland  plan  has  resulted  from  the  spirit  of  cooperation  iriani- 
fested  by  the  public.  The  public  belief  that  the  capital  value  fixed  in  the  con- 
tract was  a  fair  measure  of  the  true  investment  was  undoubtedly  an  essential 
condition  upon  which  the  public  good  will  was  founded.  This  is  made  doubly 
clear  by  .Secretary  Baker's  testimony  at  pages  1000  and  1010  of  the  Proceedings, 
where  he  describes  bow  the  Cleveland  valuation   was  made: 

"The  Chairman :  Then  is  the  first  fundamental  proposition  in  all  street  car  questions 
that  wc  must  know  what  the  true  value  of  the  property  is? 


Service  at  Cost  447 

"Secretary  Baker:     Absolutely.     Absolutely  and   fundamentally. 

"The  Chairman :  That  precludes  overcapitalization,  and  inspires  confidence  by  the  public 
in  the  integrity  of  the  plan  ? 

"Secretary  Baker :     Exactly. 

"The  Chairman :  Was  that  valuation  in  Cleveland  made  by  the  state  or  by  experts 
selected  by  the  city  as  well  as  the  company? 

"Secretary  Baker :  It  was  made  by  experts  selected  by  the  city  and  the  company,  and 
they  worked  in  pairs.  The  city  had  a  track  man  and  the  railroad  had  a  track  man.  The 
city  had  a  car  man  and  the  railroad  had  a  car  man,  and  so  on,  with  the  power  house  men, 
etc.;  and  they  worked  in  pairs.  Whenever  they  agreed,  their  agreement  was  reported  to  Mr. 
Gofi  and  Mr.  Johnson,  and  I  do  not  recall  a  single  instance  in  which  they  rejected  an 
agreement  of  the  two  valuers.  Where  there  was  di.sagreement,  Mr.  Goff  and  Mr.  Johnson 
settled  the  disagreement  in  a  public  hearing. 

"The  Chairman:  Do  you  think  that  method  of  valuation  is  as  satisfactory  as  to  have 
it  done  by  a  state  commission? 

"Secretary  Baker :  That  is  two  questions  in  one.  There  are  some  state  commissions 
that  would  do  it  ver>'  well,  and  there  are  some  state  commissions  that  would  do  it  very  badly, 
and  there  are  some  that  would  never  get  done.  I  made  a  calculation  as  to  how  long  it 
would  take  the  state  commission  of  the  State  of  (!)hio  to  reach  a  case  involving  an  electric 
light  controversy  which  I  had  sent  down  there,  and  it  was  something  like  140  years  before 
they  could  get  to  it. 

"The  Chairman:  But  if  the  state  commissions  had  their  organizations  so  perfected  that 
they  could  expeditiously  value  the  physical  property  of  the  street  car  company,  do  you  think 
it  would  be  preferable,  or 

"Secretary  Baker :     I  do  not  think  it  would  be  nearly  so  good  as  the  system  we  have. 

"The  Chairman:     Why? 

"Secretarj'  Baker :  As  I  said  a  moment  ago,  the  street  railroad  is  the  most  intimate 
service  the  people  have  in  a  city.  I  think  it  is  so  intimate  that  they  regard  it  as  their  own, 
as  distinguished  from  any  state  interests.  I  am  inclined  to  think  that  there  is  a  strong  likeli- 
hood that  a  greater  degree  of  confidence  is  inspired  when  the  city  itself  does  it  than  when 
the  state  does   it. 

"The  Chairman :  Do  you  feel  that  the  value  that  was  established  in  Cleveland  is  fairly 
representative  of  the  true  value  of  the  property? 

******** 

"Secretary  Baker :  Very  accurately ;  very  closely.  As  a  matter  of  fact,  there  are  two  or 
three  items  of  half  a  dozen  million  dollars  in  there  which  should  never  have  been  put  in  there, 
in  my  judgment;  but  those  are  differences  of  opinion.  For  instance,  Judge  Tayler  *  *  *  * 
allowed  the  value  of  some  paving  which  the  company  had  done  in  return  for  the  grants  which 
were  given  it.  I  do  not  believe  paving  was  ever  an  investment  value  of  a  street  railroad  in 
Ohio.  I  think  it  was  a  concession  made  to  the  public  for  the  grant,  but  I  do  not  think  it  was 
a  capital  investment  or  should  ever  have  been  so  regarded. 

"The  Chairman :  Does  the  valuation  by  the  municipality  in  that  way  present  the  oppor- 
tunity for  municipal  corruption? 

"Secretary  Baker:     In  the  valuation? 

"The  Chairman:  Yes;  the  company  has  something  to  sell  the  city,  really,  and  it  is 
interested  in  having  the  value  upon  as  high  a  basis  as  it  can  get  it? 

"Secretary  Baker :  Oh,  yes.  It  does  present  it ;  but  it  presents  it  no  more  than  it  does 
when  the  valuation  is  to  be  made  by  a  state  commission. 

"The  Chairman:  Have  you  ever  heard  of  any  state  commission  that  was  subject  to  an 
influence  of  that  kind? 

"Secretary  Baker :  I  never  have  heard  of  it ;  but  they  are  all  human  beings,  they  are 
all  men.  If  a  company  were  to  start  out  to  corrupt  a  judge  who  was  judging  its  property, 
it  would  not.  in  my  opinion,  make  very  much  difference  whether  he  was  a  state  or  a 
municipal  officer.  That  work  can  only  succeed  when  it  is  done  by  men  of  the  highest  char- 
acter and  capacity,  of  course." 

With  respect  to  the  provision  of  the  Cleveland  plan  by  which  the  full  repro- 
duction cost  of  replacements  is  charged  to  maintenance,  Mr.  Baker  says  at  page 
1004  of  the  Proceedings  : 

"We  were  a  little  too  hopeful  about  that  ordinance  in  one  aspect.  We  believed  that  the 
replacements  could  come  out  of  the  maintenance  fund,  and  we  did  not  make  a  sufficient 
apportionment  of  the  replacement  cost  to  capital  account.  Our  effort  was  to  keep  the  capital 
account  down. 

"I  can  illustrate  what  I  mean  by  taking  a  single  instance:  If  the  company  wanted  to 
relay  the  rail  on  Woodland  Avenue,  let  us  assume  that  the  rail  was  ten  years  old,  and  that 
at  the  time  of  the  settlement  its  life  was  only  a  prospective  three  years  more.  Plainly,  cor- 
rectly, when  that  rail  was  relaid  the  three  years  of  lifetime  left  it  at  the  time  of  the  settle- 
ment should  have  been  paid  out  of  maintenance,  but  the  nine  years  of  expired  life  in  that  rail 


448  Electric  Railway  Problem 

ought  to  have  been  paid  out  of  new  capital,  lx:cause  it  was  valued  on  the  basis  of  its  de- 
preciated condition ;  and  there  ought  to  liave  been  an  addition  of  new  capital  in  the  new  rail 
to  the  extent  of  nine  to  three.  \Ve  did  not  do  that.  And,  as  a  consequence,  the  maintenance 
fund  of  the  company  was  constantly  being  called  upon  to  bear  altogether  too  high  a  contribution 
for  replacements  of  property  which  was  nearly  worn  out  at  the  time  of  the  settlement,  and 
which  rapidly  wore  out  when  it  was  in  use  under  the  settlement." 

In  the  testimony  just  quoted,  Mr.  Baker  apparently  confuses  two  issues  that 
are  involved  in  the  Cleveland  replacement  rule.  It  surely  is  perfectly  proper, 
and  indeed  necessary  if  a  gradual  inflation  of  the  capital  account  is  to  be  avoided, 
that  replacements  should  be  charj^ed  to  maintenance  to  the  full  amount  of  their 
cost  new  as  carried  in  the  original  appraisal  upon  which  the  capital  account  was 
based.  It  is  only  by  the  continuous  process  of  substituting  new  items  of  property 
for  worn-out  items  as  they  are  withdrawn  from  service  that  the  average  condi- 
tion of  the  property  as  a  whole  can  be  maintained  at  the  normal  level  for  effi- 
cient operation,  which  in  Cleveland  is  fixed  at  70  per  cent  of  "reproduction 
value."  The  items  going  to  make  up  the  depreciable  property  are  all  of  the  time 
wearing  out  or  becoming  inadequate  or  obsolete  at  varying  rates.  When  the 
particular  rail,  to  which  Mr.  Baker  refers,  that  stood  at  25  per  cent  condition  in 
the  original  appraisal  is  replaced  out  of  the  maintenance  fund  by  new  rail  at 
100  per  cent  condition,  this  does  not  mean  an  increase  in  the  value  of  the  prop- 
erty as  a  whole,  because  other  rail  that  stood  at  100  per  cent  condition  and  75 
per  cent  condition  and  50  per  cent  condition  has  in  the  meantime  gone  down 
25  points,  but  is  not  yet  ready  for  replacement  because  it  is  not  entirely  worn  out. 
On  the  average,  the  new  value  injected  into  the  property  by  replacements  merely 
offsets  the  wear  and  tear  on  elements  of  the  property  not  yet  ready  to  be  replaced. 
It  is  one  of  the  merits  of  the  Cleveland  franchise,  as  contrasted  with  the  Chicago 
settlement  franchises  of  1907,  that  the  former  by  the  very  provision  which  Mr. 
Baker  criticises  prevents  the  gradual  deterioration  of  the  property  as  compared 
with  its  recognized  capital  value,  while  in  Cliicago  where  replacements  are 
charged  to  maintenance  only  to  the  extent  of  the  depreciated  value  of  the  items 
replaced  as  set  forth  in  the  original  appraisal,  the  process  of  "watering"  the 
capital  value  is  going  on  all  the  time  by  putting  back  into  it  the  equivalent  of  the 
accrued  depreciation  that  was  originally  taken  out.  The  real  trouble  with  the 
Cleveland  replacement  provision  is  that  it  charges  to  luaintenance  the  full  present 
cost  of  reproducing  the  worn-out  article,  even  though  this  may  be  double  or 
treble  the  original  cost  new  of  the  article.  Thus,  the  Cleveland  replacement  pro- 
vision prevents  the  gradual  readjustment  of  the  capital  account  to  the  higher 
price  level  now  prevailing,  and  puts  upon  the  farepayers  as  a  part  of  the  current 
cost  of  ser\'ice  the  burden  of  substituting  high-priced  materials  and  labor  for 
low-priced  materials  and  labor  in  the  construction  account.  Some  considera- 
tions of  prudence  and  conservatism  may  be  advanced  in  favor  of  this  rule,  es- 
pecially where  something  is  needed  to  offset  neglect  of  amortization  of  dead 
capital  and  accruing  depreciation  on  new  jiroperty  under  other  provisions  of  the 
plan,  but  standing  by  itself  and  judged  from  the  accounting  standpoint  the 
rule  is  undoubtedly  indefensible. 

It  will  be  recalled  that  Mr.  Baker  referred  to  "the  lack  of  stimulus  to  the 
operators  to  operate  economically"  as  the  most  striking  defect  of  the  Oeveland 
ordinance.     In  elaborating  this  point  at  page  1005  of  the  Proceedings,  he  says: 


Service  at  Cost  449 

"We  faced,  at  the  outset,  the  problem  of  the  complete  control  of  the  service  and  of  the 
property  in  the  interest  of  the  public,  which  you  see  is  reserved  in  this  ordinance,  because  the 
company  can  practically  do  nothing  without  the  consent  of  the  council ;  and  the  alternative 
plan,  which  we  knew  as  the  Boston  gas  plan,  of  an  increasing  return  on  the  capital  invested 
as  an  inducement  to  economical  operation. 

"We  all  put  our  heads  to  it,  and  we  all  tried  to  find  some  way  to  combine  those  two 
things ;  but  it  seemed  illogical,  when  the  city  had  complete  control  of  operation  and  there 
was  nothing  left  for  stimulus  to  the  management  to  do.  So  we  put  in  a  flat  rate  of  return 
on  the  capital  at  6  per  cent. 

"I  think  that  was  a  mistake.  I  think  there  ought  to  have  been  a  provision  that  the  com- 
pany should  have  b'/y  per  cent  as  long  as  it  continued  to  make  enough  money  to  operate  a 
3-cent  fare  fiat,  and  that  it  should  lose  a  half  of  1  per  cent  upon  its  capital  return  when  it 
had  to  charge  an  extra  cent  for  a  transfer,  and  that  it  should  lose  another  quarter  of  a  per 
cent  when  it  had  to  go  to  the  next  higher,  and  that  its  rate  of  return  should  be  based  upon 
the  fare  which  they  were  able  to  maintain.  If  there  had  been  that  inducement  to  the 
management  to  thrift  and  providence  and  economy,  I  think  it  would  have  been  a  better  plan." 

Still,  Mr.  Baker  is  b\-  no  means  sure  of  the  results  that  would  follow  from 
the  adoption  of  his  sliding  scale  suggestion,  as  is  shown  by  his  further  testimony 
at  pages  1014  and  1015  of  the  Proceedings: 

"The  Chairman :  You  have  discussed  the  question  of  efficiency  of  service  under  your 
plan,  and  you  admitted  that  there  was  one  defect  in  your  contract? 

"Secretan.-  Baker :     I  think  there  are  a  good  many.     That  is  the  chief  one. 

"The  Chairman:     That  was  the  chief  defect? 

"Secretary  Baker:     Yes. 

"The  Chairman :  Do  you  believe  that  would  be  taken  care  of  entirely  by  the  provision 
which  you  suggested,  of  having  a  reduced  return  on  capital  as  the  rate  of  fare  goes  up? 

"Secretary  Baker :  I  am  not  sure.  We  thought  about  that  a  verj'  great  deal,  and  found 
it  so  difficult  a  problem  that  we  left  it  unsolved,  as  you  see. 

"The  Chairman :  I  can  see  where  that  might  operate  very  eflfectively  upon  the  owner 
of  the  stock,  and  perhaps  the  officers  of  the  corporation,  but  how  is  that  going  to  influence, 
at  all,  the  conduct  of  the  employes? 

"Secretary  Baker :  I  do  not  know  that  it  can,  unless  it  stimulates  in  the  management 
a  cooperative  spirit  which  will  find  its  response  in  the  operator. 

"The  Chairman:     So  that  it  must  work  from  the  top  dov\'n? 

"Secretary  Baker:     I  should  think  so. 

"The  Chairman :  Is  there  any  way  that  you  can  W'ork  out  a  plan  by  which  you  can 
get  the  real  initiative  and  efficiency  throughout  the  whole  personnel  of  the  company? 

"Secretarj-  Baker :     I  have  no  plan  in  my  mind." 

Mr.  Baker  is  strongly  of  the  opinion  that  the  street  car  question  must  be 
settled  locally,  on  the  basis  of  complete  cooperation  between  the  city  and  the 
company  and  complete  public  knowledge  of  all  the  facts.  At  page  1011  of  the 
Proceedings,  we  find  the  following  question  and  answer : 

"The  Chairman :  From  your  study  of  the  street  railway  question,  do  you  feel  that  the 
Cleveland  plan  could  be  safely  adopted  in  many  of  the  communities  of  the  country? 

"Secretary  Baker :  In  such  communities  of  the  country  as  were  ready  to  study  it  and 
understand  it  and  grve  it  their  real  approval,  it  would  be  a  very  great  advantage;  but  any 
momentary  fascination  with  the  Cleveland  plan  which  led  to  its  adoption  without  a  funda- 
mental appreciation  of  it  and  determination  to  stand  by  it  and  see  it  work  would,  of  course, 
be  inadvisable." 

Further  along,  in  response  to  questions  by  Commissioner  Sweet,  Mr.  Baker 
describes  in  some  detail  the  picturesque  background  of  popular  education  that 
made  the  Cleveland  settlement  possible.     At  pages  1016  to  1018,  we  get  the  story: 

"Commissioner  Sweet ;  *  *  *  *  Can  you  not  suggest  some  way,  as  the  result  of 
your  interest  and  study  of  this  subject  in  Cleveland,  by  which  the  cities  in  general  could  be 
helped  in  solving  this   problem? 

"Secretary  Baker :  Well,  so  far  as  my  own  experience  is  concerned,  Mr.  Sweet,  I  think 
that  the  only  solution  that  will  be  permanently  helpful  will  be  one  which  the  cities  will  work 
out  with  the  companies  themselves. 

"If  I  were  asked  to  advise  Philadelphia  or  Pittsburgh  or  Chicago  or  New  York  or  any 
other  city  about  the  solution  of  its  street  railroad  problem,  I  would  say,  'Get  the  Council  and 


450  Electric  Railway  Problem 

the  Board  of  EHrectors  in  the  same  room,  with  all  the  tacts  and  all  the  figures,  and  let  every- 
body in  the  community  understand  what  they  are.'  I  believe  that  any  community  in  .\raerica 
will  pay  cheerfully  and  willingly  whatever  rate  of  fare  is  necessary  to  carry  people  on  their 
street  railroads  and  to  maintain  good  service  in  their  communities,  if  they  are  sure  that  they 
are  paying  only  proper  operating  expenses,  proper  maintenance  and  a  proper  return  on 
capital.  As  soon  as  they  are  sure  of  that,  I  believe  that  any  community  in  America  will  pay 
whatever  rate  of  fare  is  necessary. 

"Commissioner  Sweet:     You  lay  great  stress  upon  the  education  of  the  people? 

"Secretary  Baker:  Undoubtedly,  sir.  *  •  *  *  Mr.  Frank  Walsh,  of  Kansas  City, 
came  to  see  me  once  when  1  was  City  Solicitor  of  Cleveland,  and  said  that  Mr.  Johnson  had 
sent  him  to  me  to  learn  something  about  our  Cleveland  street  railroad  situation. 

"I  said  to  him:  '1  am  going  to  court  at  this  moment,  and  1  cannot  see  you  until  I  get 
back;  but  if.  in  the  meantime,  you  will  go  down  to  the  Public  S(|uare  and  pick  out  the  most 
unlikely  looking  citizen  on  a  liench  there,  and  ask  him  about  it,  and  then  come  back  to  me 
after  that,  1   will  tell  you  what  he  has  not  told  you." 

"When  I  got  back  from  court.  Mr.  Walsh  came  in  and  said:  "I  don't  think  there  is 
anything  you  can  add  to  what  he  has  told  me.  I  picked  up  a  fellow  with  a  broken  hat  and 
worn-out  looking  shoes  and  of  a  generally  unpromising  aspect,  and  asked  him  about  the 
Cleveland  street  railroad  situation,  and  he  told  me  its  history  from  the  beginning  until  now. 
I   even  know  the  nicknames  by  which  the  officers  of  the  companies  are  called.' 

"He  said  that  he  thought  I  could  add  nothing  to  the  information  that  had  been  given 
to  him;  that  that  man  was  able  to  discuss  even  the  legal  questions,  and  what  the  courts  had 
decided  in  the  fifty-one  injunction  suits. 

"Commissioner  Sweet :  That  was  simply  because,  starting  in  a  fight  that  interested  the 
people,  and  progressing  along  with  referendum  votes  that  the  people  had  to  express  them- 
selves on.  and  the  various  steps,  the  people  had  become  thoroughly  familiar  with  all  angles 
of  the  subject? 

"Secretary  Baker:  Yes.  Mr.  Johnson  had  a  circus  tent — two  of  them,  in  fact — and  he 
used  to  take  this  tent  around  over  the  city  and  put  it  on  vacant  lots,  and  Peter  Witt,  who  is 
now  a  street  railroad  expert,  had  to  make  a  speech  about  forty  minutes  long  on  the  general 
problem  of  street  railroads,  and  then,  as  city  solicitor.  1  spoke  generally  about  an  hour,  dis- 
cussing the  legal  aspects  of  it,  and  the  latest  decisions  of  the  courts,  as  to  why  the  courts 
decided  it  that  way,  and  what  our  adversaries  said  and  what  we  said  on  the  legal  questions, 
and  then  Mr.  Johnson  would  end  with  about  thirty  minutes  answering  questions  from  anybody 
on  any  subject — whether  on  the  subject  of  street  railroads,  or  not ;  any  question  that  anybody 
wanted  to  ask  him. 

"That  went  on  for  weeks  and  months  and  years,  and  as  a  consequence  cvcr>hody  in 
Cleveland  went,  and  became  familiar  with  these  matters.  The  women  went  with  their  baby 
coaches,  and  pushed  them  up  in  the  vacant  space  in  front  of  the  platform,  and  left  the  babies 
there  while  they  sat  back  and  asked  Tom  questions." 

In  connection  with  the  get-together  policy  recommended  by  Secretary  Baker, 
attention  should  be  called  to  the  fact  that  in  Cleveland  when  the  o]>posing  forces 
did  finally  get  togctlier  it  was  not  found  necessary  to  wipe  out  more  than  45 
per  cent  of  the  common  stock  of  the  street  railway  company.  In  many  cities, 
there  can  be  no  doubt  whatever  that  a  conservative  valuation  on  the  basis  arrived 
at  in  Cleveland  would  wipe  out  all  the  common  stock,  and  i)erhaps  even  make  a 
deep  cut  into  preferred  stock  and  bonds.  Where  such  a  condition  prevails,  it 
is  obviously  impossible  for  tiie  city  and  the  company  to  "get  together"  except 
through  a  receiver  or  after  a  complete  reorganization.  This  has  an  important 
bearing  ui)on  the  ability  of  other  communities  to  follow  Secretary  Baker's  advice. 
.\nother  question  as  to  the  potential  eHicacy  of  the  Cleveland  plan  is  raised  in 
connection  with  the  still  increasing  cost  of  sen'ice,  particularly  with  respect  to 
wages,  that  has  already  boosted  the  fares  in  Cleveland  beyond  the  upper  limits 
contemplated  when  the  ordinance  was  originally  drafted,  and  that  in  the  future, 
particularly  if  wages  keep  on  going  up.  may  drive  the  fares  even  beyond  the 
limits  now  prescribed  in  the  Cleveland  ordinance  as  amended  to  meet  war  con- 
ditions. Secretary  Baker's  optimism  is  not  great  enough  to  cover,  without  mis- 
givings, an  increase  in  the  unit  fare  above  five  cents,  as  will  appear  from  his 
testimony  at  pages  1024  and   1025  of  the  Proceedings: 


Service  at  Cost  451 

"Commissioner  Sweet:  Do  you  think  that  if  other  cities  had  gone  through  the  same 
process  ot  education  and  the  public  felt  the  same  way  about  it  and  had  adopted  the  same 
plan,  you  would  get  the  same  results  in  other  cities  ? 

"Secretary  Baker:  I  should  think  so,  Mr.  Sweet.  It  just  occurs  to  me,  take  the  Cleve- 
land situation.  As  the  price  of  wages  went  up  and  of  materials,  the  rate  went  up  in  Cleveland 
so  that  there  was  a  constant  attempt  on  the  part  of  the  rate  to  assimiliate  itself  to  the  needs 
of  the  company.  They  finally  got  to  the  place  where  the  ma.ximum  rate  permissible  under  the 
ordinance  was  not  enough  and  they  went  to  the  Council  and  told  them  so  and  the  Council 
said,  'We  realize  that  on  the  figures  you  have  presented,'  and  they  authorized  a  higher  rate 
temporarily  than  the  ordinance  permitted.  In  other  cities  they  had  adjusted  their  operations 
to  a  fi.xed  rate  of  fare  and  could  not  get  anywhere  at  all  as  the  increase  went  on  in  their 
operating  expenses,  and  their  catastrophies  and  calamities  have  been  precipitated  until  they  all 
came  at  one  time,  while  Cleveland  simply  had  the  little  hump  at  the  top  of  the  hill  where  it 
had  to  pass  over,  where  its  highest  rate  of  fare  would  not  pay  operating  expenses. 

"Commissioner  Sweet:  If  it  should  be  necessary  in  the  course  of  the  ne.xt  year  or  so — 
we  do  not  know  what  is  ahead  of  us — to  go  higher  and  higher,  would  you  from  your  knowl- 
edge of  the  situation  in  Cleveland  and  the  balance  of  the  country  judge  that  the  point  of 
highest  revenue  would  be  at  a  higher  point  of  fare  in  Cleveland?  In  other  words,  that  the 
people  of  the  community  would  be  satisfied  with  paying  a  higher  fare  if  it  was  necessary  to 
do  so  w'ithout  any  resentment  such  as  is  felt  in  an  ordinary  community? 

"Secretary  Baker :  They  are  perfectly  satisfied,  they  will  pay  whatever  is  necessary  to 
carrv-  them  where  they  want  to  go,  because  they  know  they  are  only  paying  a  stipulated 
return  and  stipulated  wages.  But  I  do  not  believe  personally  that  a  rate  of  fare  higher  than 
5  cents  is  economically  justifiable:  that  is,  I  do  not  think  it  is  the  point  of  maximum  return 
if  you  charge  anything  more  than  5  cents.  When  people  have  to  break  a  10-cent  piece  to  pay 
the  fare  they  move  to  a  place  nearer  their  work  so  they  will  not  have  to  pay  it." 

With  respect  to  any  essential  differences  between  the  Cleveland  plan  and 
municipal  ownership,  Mr.  Baker's  opinion  is  found  at  pages  1010  and  1011  of 
the  Proceedings : 

"The  Chairman :  What  is  the  real  difiference  between  the  Cleveland  plan  and  municipal 
ownership  and  operation  ?  I  understand  what  the  technical  difiference  is,  but  in  its  broad 
aspect  as  to  service  and  efficiency  and  rates,  what  is  the  difference? 

"Secretary  Baker :  I  do  not  think  there  is  any  very  substantial  difiference.  I  think  that 
all  of  the  operating  advantages  of  municipal  ownership  are  gotten  by  that  plan. 

"Mr.  Warren :     There  is  no  recourse  to  the  ta.x  levy,  is  there  ? 

"Secretary   Baker :     None. 

******** 

"If  there  is  a  deficiency  of  earnings,  there  is  no  way  to  make  tlie_  tax  payers  pay  it. 
"Commissioner  Sweet:     And  under  municipal  ownership  there  would  be? 
"Secretary  Baker :     Undoubtedly." 

And  so  it  appears  that  in  Secretary  Baker's  opinion  the  Cleveland  plan  gives 
to  the  riding  public  all  the  advantages  of  municipal  ownership  and  operation 
but  leaves  the  investors  without  the  recourse  to  the  tax  levy  which,  under  muni- 
cipal ownership,  would  be  possible  as  an  ultimate  guaranty  that  interest  charges 
will  be  paid;  apparently,  Mr.  Baker  does  not  believe  in  subsidizing  the  car  riders 
under  any  plan  of  operation,  as  will  appear  from  his  testimony  at  page  1027  of 
the  Proceedings : 

"Commissioner  Meeker:  You  think  under  certain  circumstances  it  would  be  justifiable 
to  support  the  street  railways  through  taxation 

"Secretary  Baker :     No,  I  do  not  think  so. 

"Commissioner  Meeker:  If  they  cannot  earn  sufficient  revenue  to  pay  the  current  wages 
and  the  price  of  materials  and  a  reasonable  return  upon  the  capital  investment  you  would 
have  the  lines  discontinued? 

"Secretary  Baker :    Yes. 

"Commissioner  Meeker :     You  would  apply  that  to  Boston  with 

"Secretan,-  Baker :     I   would  apply  it  anywhere. 

"Commissioner  Meeker  :     With  ruthlessness  ? 

"Secretary  Baker :  I  do  not  believe  in  taxing  the  people  of  Boston  to  let  some  people 
ride  on  street  cars.  People  who  get  the  service  from  the  street  cars  pay  for  the  service  they 
get.  and  if  there  are  not  enough  of  them  who  want  the  service  to  justify  its  continuance,  it 
ought  to  be  discontinued." 


452  Electric  Railway  Problem 

The  present  City  Street  Railroad  Commissioner  of  Cleveland.  Mr.  Fielder 
Sanders,  gave  the  Commission  the  benefit  of  the  conclusions  reached  by  him  as  a 
result  of  his  experience  in  the  administration  of  the  Cleveland  contract.  At 
page  1458  of  the  Proceedings,  he  says : 

"The  plan  has  undoubtedly,  in  my  judgment,  been  a  success  from  the  company  stand- 
point. I  think  that  is  undisputed.  The  stockholders  are  amply  protected.  They  have  secured 
their  6  per  cent  dividends,  when  the  company  was  losing  money  in  1917  and  1918.  The  fran- 
chise is  practically,  so  far  as  the  constitution  of  Ohio  allows,  a  flat  guaranty." 

He  expresses  the  opinion  that  the  property  has  been  built  up  under  the 
service-at-cost  contract  until  it  is  "the  finest  surface  line  in  the  country."  At  page 
1458,  he  describes  the  advantages  which  the  public  has  derived  from  the  plan : 

"It  has  been.  I  will  be  frank  to  say,  very  largely  a  success  from  the  public  standpoint. 

"In  the  first  place,  building  up  this  very  fine  property  has  been  a  good  thing  for  the  car 
riders,  because  the  finer  the  property  the  better  the  equipment,  the  better  the  cars,  the  faster 
tlie  service,  and  so  forth,  the  more  satisfied  the  people  arc.  naturally. 

"The  service  has  been  good.  It  has  l)cen  criticised  in  spots,  but  generally  speaking  the 
Cleveland  service  is  considered  to  be  very  Kt)od. 

"The  fare  has  been  uniformly  low.    There  is  no  question  about  that." 

Mr.  Sanders  ascribes  the  success  of  the  plan  to  the  comparatively  low  valua- 
tion, to  the  company's  exemption  from  extraordinary  taxes  and  miscellaneous 
public  charijes.  to  the  development  of  the  latest  ideas  in  operation ;  the  favorable 
topographical  conditions  that  obtain  in  Cleveland ;  the  relative  shortness  of  the 
average  ride ;  and  more  than  everything  else,  to  the  confidence  of  the  public  in 
the  operation.     At  pages  1459  and  1460  of  the  Proceedings,  he  says : 

"I  think  that  the  real  secret  of  the  success  of  the  plan  is  that  it  has  the  support  of  the 
people.  Everybody  turns  in  in  Cleveland  and  helps  to  operate  this  railroad.  There  is  not 
any  knocking,  there  is  not  any  criticism,  there  is  not  any  holding  tack  by  the  people.  They 
ride  on  the  cars  and  pay  their  fares  cheerfully  Ix-cause  tliey  think,  as  I  say.  that  this  line  is 
not  only  operated  at  cost  but  a  large  numl>er  hi  them  think  it  is  operated  by  the  city." 

Mr.  Sanders  points  out  two  serious  disadvantages  of  the  plan  which  have 
developed  in  recent  years,  namely,  the  city's  inadequate  control  over  extensions 
and  the  city's  lack  of  authority  to  deal  directly  with  the  labor  problem.  He  de- 
scribes the.se  difiicultics  at  pages  I4()0  and  1461  of  the  Proceedings,  as  follows: 

"The  disad\-antages  are  two.  In  the  last  two  or  three  years  there  have  been  two  glaring 
things  happened  to  this  franchise  which  are  disadvantages.  One  of  them  is  what  happens 
to  all  private  operation  and  ownership,  namely,  a  reluctance  to  extend  the  lines,  in  other 
words,  a  closeness  of  figuring  in  building  new  extensions.  That  fact  obtains  under  the  Cleve- 
land grant  almost  as  strongly  as  it  does  under  purely  private  ownership  and  operation  without 
any  public  control. 

"The  Chairman :  Why  should  that  reluctance  exist,  when  the  capital  is  guaranteed  in 
its  return? 

"Mr.  Sanders :  I'or  this  reason  :  The  franchise  provides  that  the  city  may  not  require 
any  extensions  to  be  built  which  will  im|)air  their  security,  which  will  impair  their  ability 
to  earn  6  per  cent.  .\nd  in  the  last  two  years,  not  quite  so  much  now  .is  it  was  in  the  last 
two  years,  but  in  the  last  two  years  they  have  refused  to  build  extension  after  extension 
because  of  the  fact  that  they  were  not  quite  sure  of  their  security.  I  am  of  the  opinion  that 
it  is  an  absolute  guaranty,  but  that  reluctance  to  build  extensions  obtains  under  the  Tayler 
grant  as  well  as  under  private  operation. 

"Hut  the  second  fault  is  a  more  serious  one  than  that.  We  could  get  past  that.  The 
second  fault  is  the  labor  trouble  which  is  as  inherent  in  this  as  in  a  private  franchise.  In 
other  words,  this  mmpany  controls  its  own  o))eration.  .Ml  the  city  does  is  to  regulate.  The 
city  docs  not  opor.Tle  The  city  has  no  more  cmitrnl  of  Mr.  Stanley's  motormcn  and  con- 
ductors than  this  Conmiission  has.  He  hires  men  and  di.scharges  them.  He  pays  them  such 
wages  as  he  sees  fit.  In  case  of  labor  disputes  the  City  of  Cleveland  is  practically  helpless. 
The  City  of  Cleveland  and  tin-  car  riders,  althoiich  they  are  the  jK-ople  who  lose  and  not  the 
stockholders  of  the  company,  arc  the  innocent  bystanders. 


Service  at  Cust  453 

"The  Chairman:     Has  tlie  city  any  veto  over  the  wage  allowance? 

"Mr.  Sanders:  The  city  has  a  veto  over  the  wage  allowance  to  this  extent,  that  it  can 
refuse  to  give  the  company  the  money  to  pay  wages  with,  and  then  in  that  case  the  question 
must  be  arbitrated ;  but  the  city  cannot  compel  the  company  to  pay  the  w'ages  that  the  city 
thinks  it  ought  to  pay.     In  other  words,  the  company  fixes  its  own  wages." 

With  respect  to  the  suggestion  that  the  Cleveland  plan  be  amended  so  as  to 
provide  a  sliding  scale  in  rate  of  return  upon  capital  for  the  purpose  of  encourag- 
ing the  management  to  be  economical,  Mr.  Sanders  testifies  as  follows  at  page 
1463: 

"The  Chairman  :  It  has  been  suggested  that  it  might  be  amended  by  adding  in  the  con- 
tract that  as  the  rate  of  fare  goes  down  the  rate  of  return  goes  up.  What  do  you  think- 
about  that  ? 

"Mr.  Sanders:  Six  months  ago  I  was  very  much  in  favor  of  that.  .Academically  that 
is  a  very  good  thing,  but  practically  1  do  not  believe  it  will  work.  1  have  commenced  to 
change  my  mind  on  that. 

"The  Chairman :  Why? 
^  "Mr.  Sanders:  In  the  first  place  the  street  railroad  settlement,  a  franchise,  must  be 
founded  on  popular  approval.  The  fixed  rate  of  return  has  popular  approval,  the  people  like 
it.  They  know  what  they  are  getting.  If  there  is  a  sliding  scale  of  return  they  do  not 
know  what  they  are  getting.  There  is  always  suspicion  that  the  operators  of  the  railroads 
are  getting  something  out  of  it  which  will  detract  from  the  proper  operation.  That  is  a 
political  reason,  it  may  be  good  or  bad,  but  as  a  public  officer  it  strikes  me  as  a  good  reason. 

"In  the  second  place,  there  is  always  a  tendency  with  the  operators  with  a  sliding  scale 
to  skimp  the  property  and  not  render  to  the  riders  what  they  are  entitled  to.  In  a  corpora- 
tion the  size  of  the  Cleveland  Railway,  which  spends  $2,500,000  to  $3,000,000  a  year  in  main- 
tenance. 1  per  cent  on  its  stock,  which  would  be  $300,0000,  could  be  lost  sight  of  in  that 
maintenance.  It  would  be  an  easy  matter  to  skimp  that  property  $300,000  a  year  and  get 
that  e.xtra  per  cent,  but  in  the  long  run  the  car  riders  would  pay  for  it. 

"In  the  third  place.  I  do  not  believe  a  dividend  to  the  stockholders,  if  you  will  grant 
that  you  need  the  incentive,  would  get  your  reaction.  You  ought  to  give  a  dividend  to  the 
operators.  They  are  the  people  that  make  for  efficiency ;  it  is  not  the  stockholders.  Now, 
if  the  salaries  of  the  operators,  if  the  president,  general  manager  and  the  head  of  the  main- 
tenance department  have  their  salaries  raised  dependent  on  how  much  they  save  out  of  their 
allowance.  I  can  see  how  some  results  could  be  obtained.'' 

Mr.  Sanders  concludes  his  testimony  at  pages  1464  and  1465  of  the  Proceed- 
ings by  suggesting  municipal  operation  as  the  cure  for  the  weaknesses  which  the 
Cleveland  plan  has  developed : 

"Notwithstanding  the  fact  that  this  plan  has  worked  fairly  well  there  is  a  great  deal  of 
talk  of  municipal  ownership  in  Cleveland,  but  it  is  not  because  of  antagonism  to  the  company ; 
they  are  satisfied  with  the  company ;  but  because  the  people  there  think  it  is  a  step  forward, 
they  think  some  of  the  defects  of  this  plan  can  be  cured  by  municipal  ownership  and  opera- 
tion, whether  it  is  municipal  ownership  or  only  municipal  operation.  I  have  been  quoted 
myself  many  times,  and  I  am  still  of  the  opinion  that  municipal  operation  would  cure  this 
labor  trouble  defect  I  have  mentioned  and  also  make  the  extensions  possible.  I  am  a  firm 
believer  that  the  people  ought  to  get  exactly  what  they  want  and  are  willing  to  pay  for. 

"The  Chairman:  Do  you  believe  as  a  matter  of  fact  that  municipal  operation  in  Cleve- 
and  would  give  you  better  results  and  cheaper  service  than  you  are  getting  now? 

"Mr.  Sanders :  I  would  not  say  it  would  be  cheaper  service.  The  people  of  Cleveland 
might  be  willing  to  pay  more  for  service  if  the  service  were  extended  out  into  the  country. 
They  might  cheerfully  pay  a  higher  rate  of  fare.  I  do  not  know.  I  do  not  say  it  would  be. 
I  do  not  think  it  would  be  any  more  expensive,  but  I  would  not  undertake  to  say  that  a  lot 
of  money  would  be  saved,  because  municipal  bonds  are  pretty  nearly  on  a  6  per  cent  basis 
now." 

On  behalf  of  the  Cleveland  Railway  Company  certain  modifications  of  the 
franchise  have  been  suggested.  Chief  among  them  are  ( 1 )  the  entire  removal 
of  the  maximum  fare  limitation :  ( 2 )  the  establishment  of  an  amortization  fund 
to  take  care  of  the  dead  capital  that  would  not  be  an  asset  to  the  company  if  the 
value  of  its  property  were  being  fixed  without  regard  to  the  provisions  of  the 
ordinance,  and  (3)  a  depreciation  reserve  for  the  new  investment.     One  of  the 


454  Electric  Railwav  Problem 

provisions  of  tlie  plan  as  it  now  stands  is  to  the  effect  that  if  tlie  city  fails  to 
renew  the  grant,  so  that  at  any  time  it  comes  within  fifteen  years  of  expiration, 
the  company  shall  have  the  right  to  assume  control  of  service  and  charge  the 
maximum  rate  of  fare  stipulated  in  the  ordinance.  The  idea  is  that  under  those 
conditions  the  company  shall  have  the  right  to  protect  its  security  holders  by 
providing  for  the  amortization  of  the  capital  account  out  of  the  earnings  in  excess 
of  the  cost  of  service,  and  in  that  case,  in  the  event  of  acquisition  by  the  city, 
the  purchase  price  will  be  diminished  by  the  amount  of  the  amortization  that 
has  taken  place.  The  Board  of  Arbitration  in  the  seven-per-cent-return  pro- 
ceeding found  by  unanimous  vote  that  this  provision  of  the  contract  would 
"probably  afford  the  company,  even  under  the  present  high  cost  of  operation, 
sufficient  earnings  to  liquidate  the  entire  capitalization"  during  the  fifteen-year 
period.  Yet.  the  arbitrators  found  that  "the  natural  tendency  to  consider  the 
Cleveland  Railway  Company  merely  as  a  public  utility  and  to  put  it  in  the  class 
with  other  public  utilities  which  have  failed  to  give  either  service  or  profit,  and 
to  discredit  any  enterprise  which  is  in  part  politically  controlled,  becomes  a  bur- 
den and  handicap  to  the  company  in  time  of  stress  when  financial  conditions 
are  disturbed."  For  this  reason,  the  arbitrators  recommended  the  setting  up  of 
a  reserve  fund  at  a  rate  of  not  less  than  $,^00,000  a  year,  to  be  held  in  trust  for 
not  less  than  ten  years,  and  at  the  end  of  each  ten-year  period,  to  be  used  in 
the  event  of  the  renewal  of  the  franchise  for  betterments  and  extensions  without 
any  increase  of  capital  value;  and  otherwise  to  be  held  for  the  liquidation  of  the 
stock  at  the  termination  of  the  grant. 

The  company's  demand  that  the  maximum  fare  limitation  be  entirely  re- 
moved has  been  refused  by  the  city.  The  reasons  for  this  refusal  are  set  forth 
in  a  statement  by  tlie  city  street  railroad  commissioner  quoted  at  length  in  the 
company's  annual  report  for  1919.  Ilriefiy,  these  reasons  are:  (1)  that  if  the 
maximum  limit  were  removed,  there  would  be  no  machinery  left  to  control  the 
company's  charges  during  the  last  fifteen  years  of  the  franchise  period  in  case 
the  city  at  any  time  should  fail  or  refuse  to  renew  the  grant  at  the  ten-vear  inter- 
val;  (2)  the  six-cent  maximum  now  provided  by  the  ordinance  is  thought  to 
be  sufficient  to  meet  nil  the  company's  requirements  on  the  present  scale  of 
expenses:  and  ( ,^ )  if  costs  should  go  up  still  further,  some  other  plan  besides 
fare  increases  would  have  to  be  devised  to  meet  them,  because  it  is  believed  that 
the  people  of  Cleveland  would  refuse  to  ride  rather  than  pay  a  fare  higher  than 
six  cents. 

With  respect  to  the  comjiany's  demand  for  a  depreciation  reserve,  it  is  to  be 
noted  that  the  Board  of  .\rbitration  in  ihe  seven-per-cent-return  proceeding 
unanimously  recommended  a  modification  of  the  ordinance  bv  the  substitution 
of  "capital  value"  for  "reproduction  value"  in  the  section  re(|uiring  the  main- 
tenance of  the  entire  property  at  70  per  cent  of  its  reproduction  value.  .Appar- 
ently, this  change  would  mean  that  the  70  per  cent  would  appiv  not  to  the  exist- 
ing physical  property  alone,  but  to  the  eiuire  capital  value  including  the  items 
of  dead  investment  or  iinangibles  to  which  reference  has  already  been  made.  On 
the  other  hand,  this  provision  would  change  the  standard  of  maintenance,  so  far 
as  concerns  the  physical   i)i-o|)erly   in  existence  on   March    1.   1910.  as  replaced 


Service  at  Cost  455 

from  time  to  time,  from  70  per  cent  of  cost  new  to  70  per  cent  of  depreciated 
value,  or  in  other  words,  70  per  cent  of  70  per  cent.  Apparently,  the  change 
suggested  would  introduce  other  confusions  in  place  of  those  that  now  exist. 

From  the  point  of  view  of  service  at  cost  and  ultimate  public  ownership,  it 
is  most  essential  that  the  full  cost  of  service  be  paid  as  we  go  along,  and  that 
the  capital  value  should  be  kept  down  to  a  conservative  figure  and  that  any  ele- 
ments of  dead  investment  or  intangible  values  be  worked  out  as  soon  as  pos- 
sible through  the  process  of  amortization.  While  the  original  Cleveland  valua- 
tion is  frequently  referred  to  as  "conservative"  or  "low,"  both  the  company  and 
the  city  admit  that  it  still  contains  elements  amounting  to  approximately  seven 
million  dollars  that  never  should  have  been  permanently  capitalized.  This  is 
in  a  total  present  capital  value  of  $34,218,500.  In  connection  with  the  seven- 
per-cent  arbitration  proceeding,  I  wrote  the  city  street  railroad  commissioner 
under  date  of  October  3,  1919,  as  follows : 

"I  think  undoubtedly  that  an  increase  in  the  rate  of  return  upon  the  capital  stock  can 
be  postponed  for  the  present  if  the  arbitrators  can  be  induced  not  to  cross  a  bridge  before 
they  get  to  it,  but  if  conditions  require  the  expenditure  of  the  amount  of  money  suggested 
by  the  company  for  extensions  and  improvements  during  the  next  ten  years,  and  if  the  city 
gives  its  assent  to  this  ambitious  program,  I  would  say  that  in  all  likelihood,  unless  financial 
conditions  settle  down  and  street  railways  generally  come  into  better  repute,  it  will  be  neces- 
sary, before  any  considerable  part  of  the  program  of  improvements  is  undertaken,  to  modify 
the  Tayler  franchise  in  one  of  two  directions:  either  to  increase  the  interest  rate  on  stock 
or  the  allowed  interest  rate  on  bonds,  and  thus  give  the  company's  securities  an  increased 
speculative  value:  or  else  to  modify  the  ordinance  so  as  to  give  them  a  better  guaranty  of 
receiving  the  fixed  rate  of  return  now  provided  for.  In  choosing  between  these  two  courses 
of  action,  if  one  or  the  other  of  them  becomes  necessary,  it  does  not  seem  to  me  that  the  city 
should  hesitate  for  a  moment.  An  additional  one  per  cent  in  the  annual  return  upon  the 
investment  will  do  nobody  any  good  but  the  investor.  The  car  riders  will  have  to  pay  the 
interest  as  the  years  go  by,  and  when  the  city  undertakes  to  purchase  the  property  it  will 
have  to  pay  the  full  amount  of  the  capital  value,  receiving  therefor  the  physical  property,  as 
to  the  condition  and  value  of  which  in  relation  to  capital  value  there  is  now  so  much  dispute. 
If.  on  the  other  hand,  the  equivalent  of  the  additional  one  per  cent  on  the  stock,  or  some 
other  amount,  were  to  be  put  into  an  amortization  or  sinking  fund  for  the  reduction  of 
capital,  it  would  serve  the  double  purpose  of  adding  to  the  security  of  the  investors  and  of 
reducing  the  ultimate  purchase  price  of  the  property  to  the  city.  There  can  be  no  doubt  that 
from  the  point  of  view  of  sound  street  railway  finance  and  sound  public  policy  all  elements 
in  the  capital  account  which  do  not  represent  property  ought  to  be  amortized  out  of  earn- 
ings, since  they  cannot  now  very  well  be  cancelled,  having  been  agreed  to  in  the  Tayler 
settlement." 

As  I  have  said,  the  Board  of  Arbitration  was  unanimous  in  recommending 
an  amortization  reserve,  hut  the  majority  of  the  board  also  recommended  a  seven 
per  cent  return.  By  these  combined  recommendations,  the  investor's  position 
would  be  doubly  strengthened  and  the  immediate  cost  of  the  service  would  be 
doubly  increased.  But  both  of  these  additional  charges,  taken  together,  would 
mean  only  one-fifth  of  a  cent  more  per  revenue  passenger. 

In  Chapter  XI  of  this  report,  where  the  discussion  related  to  the  failure 
of  the  electric  railways  to  amortize  the  normal  accrued  depreciation,  I  called 
attention  to  the  testimony  of  Mr.  James  D.  Mortimer,  which  appears  at  pages 
1970  to  1998  of  the  Proceedings,  where  he  attempts  to  show  that  "service  at  cost" 
in  Cleveland  has  been  service  at  less  than  cost.  That  there  may  be  something 
in  Mr.  Mortimer's  contention  is  apparent  from  the  discussion  we  have  just  had, 
but  as  pointed  out  in  the  earlier  chapter,  Mr.  Mortimer's  criticism  implies  that  the 
car  riders  of   Cleveland,  under  the  service-at-cost   franchise,  should   have  been 


456  Electric  Railway  Pkoblem 

called  upon  to  make  up  to  the  company  the  previously  accrued  depreciation  that 
was  cut  out  of  capital  account  at  the  time  of  the  settlement.  This  raises  a  very 
important  issue  that  confronts  a  city  or  a  regiilatory  conunission  whenever  the 
value  of  a  street  railway  property  is  being  fixed  for  the  first  time,  whether  as  a 
basis  for  a  service-at-cost  contract  or  merely  for  purposes  of  regulation.  Is  it 
an  essential  part  of  the  present  and  future  cost  of  service  under  a  new  deal  to 
make  up  to  the  investors  the  previously  accrued  depreciation  of  their  property 
for  which  they  have  failed  to  make  specific  provision  out  of  their  past  earnings? 

The  new  Montreal  contract,  which  has  now  been  in  operation  for  two  years, 
represents  in  many  important  respects  a  radically  different  type  of  service-at- 
cost  franchise  from  the  Cleveland  ordinance  which  we  have  been  discussing. 
First  of  all,  it  is  very  difTerent  in  its  origin.  The  Cleveland  arrangement  came 
as  the  result  of  a  10-year  fight  between  the  city  and  the  street  railway  company ; 
their  differences  being  finally  threshed  out  between  themselves  and  a  settlement 
arrived  at  without  the  interference  of  the  state.  Moreover,  the  Tayler  plan 
went  into  effect  only  after  it  had  been  submitted  to  the  voters  of  Cleveland  and 
received  their  approval.  As  we  have  seen,  it  is  based  entirely  upon  the  theory 
that  street  railway  transportation  is  a  local  problem,  to  be  worked  out  between 
the  operating  company  and  the  public  representatives  of  the  car  riders.  The 
development  in  Montreal  was  very  different.  The  old  contract  between  the  City 
of  Montreal  and  the  Montreal  Street  Railway  Company  ran  for  a  period  of  30 
years  from  1892  and  reserved  to  the  city  the  right,  at  its  expiration  in  1922.  to 
take  over  the  property  at  an  appraised  valuation.  This  franchise,  prior  to  the 
commencement  of  the  European  War,  proved  to  be  very  profitable.  As  the  end 
of  the  franchise  period  approached,  however,  the  usual  disagreements  that  occur 
before  the  expiration  of  limited-term  franchises  developed  between  the  city  and 
the  company,  j)articularly  with  respect  to  extensions  which  the  company  alleged 
that  it  could  not  finance  without  a  renewal  of  its  franchise.  The  company  was 
especially  anxious  to  get  away  from  the  city's  option  to  purchase,  which  would 
become  effective  in  1922.  .'\s  early  as  1911,  the  Montreal  Tramways  Company 
secured  a  charter  from  the  Quebec  legislature,  running  for  a  period  of  42  years, 
together  with  a  franchise  to  acquire,  maintain  and  operate  tramways  in  the  City 
of  Montreal.  The  exercise  of  this  franchise  was  conditioned,  however,  upon 
the  company's  making  a  contract  with  tiie  city  to  determine  the  duration  of  the 
grant  and  the  conditions  of  operation,  maintenance,  equipment,  establishment 
and  extension  of  routes  in  the  city,  rates  of  fare,  percentages  of  gross  earnings 
to  be  paid  the  city,  the  share  of  the  cost  of  paving  and  maintaining  the  streets 
and  of  removing  snow  to  be  paid  by  the  company  and  such  other  terms  and  con- 
ditions as  the  city  might  deem  it  advisable  to  impose.  The  new  company  acquired 
the  existing  street  railway  j)ropcrty,  overcapitalized  itself  in  true  American  style 
and  proceeded  to  negotiate  with  the  city  authorities  for  a  new  franchise. 

These  negotiations,  running  through  a  jicriod  of  several  years,  led  to  public 
scandal,  but  not  to  franchise  progress,  and  the  legislature  in  1917  took  the  matter 
entirely  out  of  the  hands  of  the  City  of  Montreal  and  appointed  a  special  com- 
mission of  five  members,  residents  of  the  metropolitan  area,  to  draw  up  the  con- 
tract  between   the  city  and  the  company.     The   commission   was   authorized  to 


Service  at  Cost  457 

"employ  experts  and  any  other  persons"  whose  services  it  might  deem  necessary 
or  useful  in  the  performance  of  its  work,  and  it  was  authorized  to  inquire  into 
the  facts  over  which  its  jurisdiction  extended,  "by  all  means  suitable  for  enlight- 
ening it."  The  contract  was  to  come  into  force,  after  being  signed  by  the  com- 
mission or  by  a  majority  of  its  members,  on  the  day  that  it  should  be  signed  by 
the  Tramways  company.  This  contract  was  to  bind  the  company  and  the  city 
for  a  period  of  36  years,  except  as  it  might  be  changed  from  time  to  time  by 
mutual  consent  of  the  parties.  At  the  end  of  the  36  years  or  at  the  expiration 
of  any  subsequent  period  of  five  years,  the  city  was  to  have  the  right  upon  due 
notice  "to  appropriate  for  itself  the  railway  of  the  said  company  as  well  as  the 
immovables  and  dependencies,  plant  and  cars  belonging  to  it  and  necessary  for  the 
operation  of  the  said  railway,  by  paying  the  value  thereof  to  be  fixed  by  arbitrators 
and  10  per  cent  over  and  above  the  estimate." 

It  will  be  seen  from  the  above  that  the  Tramways  Commission  was  vested 
with  extraordinary  powers.  It  was  not  required  to  consult  the  civic  authorities 
or  the  people  of  Montreal  with  respect  to  the  terms  of  the  contract  to  be  drafted 
by  it  and  was  not  even  required  to  give  public  hearings  for  the  purpose  of  re- 
ceiving suggestions  and  criticisms.  ■  Its  powers  were  limited  only  by  the  provi- 
sions of  the  statute  and  by  the  necessity  of  securing  the  Tramways  Company's 
approval  of  its  work. 

As  to  the  statutory  limitations,  they  were  few  but  important.  Through  an 
apparent  oversight  the  act  did  not  confer  upon  the  commission  any  power  to 
bind  the  municipalities  served  by  the  company  other  than  the  City  of  Montreal. 
However,  the  commission,  as  soon  as  it  had  studied  the  problem,  saw  the  necessity 
of  dealing  with  the  metropolitan  district  as  a  whole  and  prepared  the  contract  on 
this  basis.  Its  action  was  validated  by  the  subsequent  ratification  of  the  contract 
itself  by  the  legislature. 

The  two  other  limitations  imposed  by  the  statute  were  not  to  be  overcome 
in  this  easy  fashion,  as  the  company  was  interested  in  maintaining  them.  One 
arose  from  the  provision  of  the  act  extending  the  company's  franchise  until  1953, 
and  postponing  the  city's  e.xisting  option  to  acquire  the  property  by  purchase 
from  1922  until  that  date.  This  made  it  impossible  for  the  commission  to  condi- 
tion the  continuance  of  the  contract  upon  the  good  behavior  of  the  company  or 
upon  its  maintenance  of  amicable  relations  with  the  city.  It  placed  the  company 
in  a  position  where  it  would  have  an  assured,  irrevocable  franchise  for  a  period 
of  36  years,  and  where  any  means  adopted  to  secure  adequate  service  at  reason- 
able rates  during  that  period  would  have  to  be  independent  of  possible  recourse 
to  municipal  ownership  and  operation. 

The  third  limitation  prevented  the  commission  from  establishing  the  value 
of  the  property  at  the  present  time  as  a  basis  for  future  purchase  by  the  city, 
and  consequently  prevented  it  from  adopting  any  amortization  scheme  for  the 
gradual  reduction  of  the  purchase  price  out  of  earnings. 

Thus  the  commission's  problem  was  reduced  to  the  devising  of  ways  and 
means  by  which  satisfactory  service  and  reasonable  rates  could  be  secured  to  the 
public  during  a  period  of  36  years  under  private  ownership  and  management. 
There  was  nothing  in  the  act  which  required  the  commission  to  prepare  a  contract 


458  Electric  Railway  Problem 

that  the  company  would  accept,  but  it  was  well  understood  in  Montreal  that  the 
purpose  of  the  Tramway's  Commission  Act  was  to  facilitate  the  settlement  of  the 
relations  between  the  city  and  the  company  by  the  preparation  of  a  contract  that 
the  company  would  accept  and  that  would  complete  and  bring  into  effect  the  pro- 
visions of  the  company's  charter  granted  in  1911  and  of  the  act  itself  extending 
the  company's  franchise  to  1953. 

Early  in  1917,  shortly  after  the  commission  was  organized,  it  held  a  series 
of  public  hearings  for  the  purpose  of  receiving  the  suggestions  of  the  civic  author- 
ities and  various  civic  organizations  and  individual  citizens.  It  employed  an 
electrical  engineer,  a  professor  in  McGill  University,  as  its  technical  adviser. 
After  its  public  hearings  were  closed  the  commission  made  a  trip  to  Chicago, 
Cleveland  and  other  American  cities  for  the  purpose  of  investigating  street  rail- 
way conditions  in  this  country.  Subsequently,  it  caused  a  quick  valuation  of  the 
Montreal  Tramways  property  to  be  made,  and  prepared  a  contract  which  after 
some  negotiation  with  the  company  was  accepted  and  signed  by  both  parlies  Jan- 
uary 2<S,  1918.  and  ratified  by  the  legislature  as  a  part  of  the  Montreal  city  bill  on 
February  9  following. 

The  people  of  Montreal  and  the  suburban  communities  were  not  taken  into 
the  confidence  of  the  commission,  and  the  terni.s  of  the  new  contract  were  not 
published  until  after  the  contract  was  signed.  In  fact,  the  ratification  act  was 
rushed  through  the  legislature  before  copies  of  the  contract  in  English  were  avail- 
able to  the  Montreal  public. 

The  new  contract  applies  in  all  important  respects  to  the  entire  area  served 
by  the  company's  system,  and  all  provisions  of  the  old  municipal  contracts  in- 
consistent with  it  are  superseded  by  its  provisions.  For  the  administration  of  the 
contract  and  for  the  exercise  of  permanent  supervision  over  the  company,  a  per- 
manent Tramways  Commission  is  established  consisting  of  three  Tucmbers  ap- 
pointed by  the  lieutenant-governor  in  council,  that  is  to  say.  by  the  provincial 
authorities.  The  commissioners  are  required  to  reside  in  the  territory  under 
their  control.  They  are  appointed  for  a  term  of  10  years  but  may  be  dismissed 
for  cause  at  any  time  by  the  appointing  power.  Both  the  City  of  Montreal  and 
the  company  al.so  have  the  right  to  apply  to  the  superior  court  for  the  dismissal 
of  any  commissioner  for  fraud,  bribery,  or  refusal  or  neglect  to  carry  out  in 
good  faith  the  powers  or  to  perform  the  duties  assigned  him  by  the  contract. 
This  commission  is  given  complete  authority  over  extensions,  maintenance,  service 
and  all  the  vital  features  of  construction  and  operation,  subject  to  the  limitations 
of  the  contract  itself  and  subject  to  an  appeal  from  its  decisions  in  most  of  the 
important  matters  over  which  it  has  control  to  the  Quebec  Public  Utilities  Com- 
mission. The  ap|)eal  may  be  taken  by  the  company  or  by  the  City  of  Montreal. 
or  by  any  interested  nnmicipality  or  by  any  party  to  the  matter  at  issue.  The 
commission  is  specifically  required  to  hear  and  decide  all  complaints  or  applica- 
tions made  to  it  verbally  or  in  writing  by  any  person  whomsoever. 

Article  92  contains  the  meat  of  the  contract.     It  was  prepared  by  a  com- 
mittee consisting  of  Senator  Charles  P.  Beauhien  of  Outremont  and  Charles  Lau- 
rendeau.  Chief  City  .\ttorney  of  Montreal.     In  the  course  of  their  work  they  be 
came  familiar  with  the  weak  points  in  the  Chicago  and  Cleveland  settlements,  and 


Service  at  Cost  459 

it  was  their  purpose  to  devise,  if  possible,  a  plan  based  upon  the  service-at-cost  idea 
that  would  provide  inducements  to  the  company  to  work  in  the  public  interest. 
They  started  out  by  accepting  the  theory  that  the  character  and  extent  of  service, 
the  financial  requirements  of  the  investment,  the  necessary  operating  expenses 
and  payments  to  the  city  must  first  be  determined,  and  that  rates  must  then  be 
fixed  so  as  to  bring  in  the  revenue  required  for  these  purposes.  They  made  note 
of  the  fact  that  under  the  Cleveland  franchise  the  fluctuations  of  rates  cannot  go 
beyond  the  limits  of  certain  prescribed  schedules  and  that  the  rate  of  return  on 
^e  investment  is  definitely  fixed  so  that  the  company's  motive  for  economy  and 
efficiency  in  operation  as  a  means  of  earning  additional  profit  is  destroyed.  They 
deemed  these  provisions  of  the  Cleveland  scheme  to  be  defects,  and  determined 
not  to  copy  them. 
y  Under  the  terms  of  section  92  of  the  new  contract,  the  Tramways  Company 
is  required  to  provide  out  of  its  own  resources  a  guaranty  fund  of  $500,000 
which  is  to  be  maintained  continuously  at  this  full  amount  and  is  to  be  deposited 
so  as  to  remain  available  at  all  times  for  the  purposes  for  which  it  is  created. 

Gross  revenues  can  be  disposed  of  only  in  the  manner  prescribed  by  the  con- 
tract. Operating  expenses,  naturally,  have  the  first  call,  and  in  order  to  keep 
the  company's  e.xpenditures  under  control  and  to  supply  an  inducement  for  econ- 
omy and  efficiency  in  operation  the  following  plan  was  adopted :  At  the  beginning 
of  each  year  the  Tramways  Commission  is  to  establish  an  allowance  per  car  mile 
for  operating  expenses.  This  allowance  will  include  provision  for  ta.xes,  for 
the  expenses  of  the  commission  itself,  for  insurance,  for  accident  and  damage 
claims  including  a  reserve  for  claims  not  liquidated  during  the  year,  and  for  all 
other  operating  expenses  exclusive  of  maintenance,  renewals  and  depreciation. 
The  commission  is  also  to  fix  at  the  beginning  of  each  year  the  permissible  average 
density  of  traffic  per  car  mile,  so  as  to  prevent  the  company  from  overcrowding 
its  cars.  If  at  the  end  of  the  year  the  company  has  kept  within  its  operating 
allowance,  or  has  not  exceeded  it  more  than  2i4  per  cent,  it  will  be  entitled  to  a 
special  bonus  to  be  known  as  the  operating  profit  which  shall  be  equivalent  to  one- 
eighth  of  1  per  cent  on  the  total  average  capital  value  for  the  year.  At  the  present 
time  this  amounts  to  about  $47,500  per  annum.  If,  on  the  other  hand,  the  com- 
pany has  overspent  its  operating  allowance  more  than  2i/2  per  cent,  it  will  be 
penalized  to  the  extent  of  such  excess  expenditures  by  the  loss  of  the  operating 
profit  and,  if  necessary,  by  being  compelled  to  make  up  the  balance  of  the  excess 
expenditure  out  of  its  own  guaranty  fund.  It  is  recognized,  however,  that  an 
inflexible  operating  allowance  fixed  at  the  beginning  of  a  year  may  prove  to  be 
insufficient  on  account  of  conditions  arising  that  could  not  be  foreseen  at  the  time 
when  it  was  fixed.  It  is  stipulated,  therefore,  that  in  case  the  company  is  able 
to  prove  to  the  satisfaction  of  the  commission  within  60  days  after  the  close  of  the 
year  that  the  excess  expenditure  has  been  necessary  and  unavoidable  in  the  ren- 
dition of  ser\'ice  as  required  by  the  commission,  the  penalty  is  to  be  remitted  and 
the  operating  bonus  allowed.  Any  portion  of  the  operating  allowance  not  needed 
during  the  year  is  to  be  returned  to  gross  revenues. 

The  next  charge  against  gross  revenues  is  for  the  maintenance  and  renewals 
fund.     There,  also,  the  commission  is  to  fix  annually  an  allowance  per  car  mile 


460  Electric  Railway  Problem 

"for  the  purpose  of  maintenance,  renewals,  replacements  and  substitution  made 
necessary  by  wear  and  tear,  age,  obsolescence,  inadequacy,  accidents  or  other 
cause."  The  entire  plant  and  property  of  the  company  used  in  providing  public 
transportation  service  must  be  maintained  at  all  times  at  the  highest  practicable 
standard  of  operating  efficiency.  Whenever  any  item  of  property  contained  in 
the  appraisal  or  subsequently  added  to  the  tramways  system  becomes  worn  out  or 
useless,  it  is  to  be  disposed  of  under  the  commission's  direction  and  the  proceeds 
are  to  be  paid  into  the  maintenance  and  renewals  fund,  unless  other  disposition 
of  such  proceeds  is  made  necessary  by  the  provisions  of  any  deed  of  trust,  and 
in  that  case  the  proceeds  must  be  deducted  from  capital  value.  An  exception  is 
made  in  the  case  of  moneys  received  from  the  sale  of  land  and  buildings,  which 
are  in  all  cases  to  be  deducted  from  capital  value  and  not  to  form  a  part  of  the 
fund.  All  expenses  for  maintenance,  renewals,  replacements  and  substitutions 
are  to  be  paid  out  of  this  fund,  and  moneys  not  needed  for  these  purposes  during 
any  year  remain  in  the  fund  and  are  held  in  reserve  until  required  for  such  pur- 
poses or  for  investment  in  betterments,  additions  and  extensions  as  elsewhere 
provided  in  the  contract.  Whenever  any  portion  of  the  property  is  replaced,  the 
cost  of  the  replacement  up  to  the  full  reproduction  value  of  the  unit  or  article 
as  fixed  by  the  appraisal  ( or  the  actual  cost,  in  the  case  of  items  installed  sub- 
sequent to  the  appraisal),  is  to  be  paid  out  of  the  fund  and  any  cost  in  excess 
of  that  amount  is  to  be  charged  to  capital.  If  the  cost  of  any  replacement  is 
less  than  the  reproduction  cost  (or  the  actual  cost,  as  the  case  may  be)  of  the 
item  replaced,  the  difference  is  to  be  appropriated  from  the  fund  from  time  to 
time  for  the  making  of  betterments,  additions  and  extensions  without  any  in- 
crease in  capital  value.  The  commission  may  change  the  maintenance  allow- 
ance from  year  to  year,  but  the  fund  is  not  to  be  permitted,  except  temporarily, 
to  fall  below  the  sum  of  $500,000.  No  money  can  be  paid  out  of  this  fund,  or 
loaned  or  invested,  except  with  the  commission's  approval.  If  the  city  acquires 
the  ])Iant  at  the  termination  of  the  contract,  the  maintenance  and  renewal  fund 
will  belong  to  the  city  and  will  not  be  added  to  the  purchase  price  of  the  property. 
The  third  charge  upon  gross  revenues  is  the  return  upon  capital.  The  amount 
of  the  investment,  exclusive  of  working  cajjital,  is  fixed  at  $,^6.28().295  as  of  De- 
cember M.  1917.  This  figure  represents  reproduction-cost  new  as  of  July  1, 
1917,  without  depreciation,  except  that  in  the  bargain  the  company  was  induced 
to  "throw  in"  certain  new  e(|uipmeiU  added  during  the  second  half  of  1917  at  a 
cost  of  $896,848,  and  this  amount  may  be  regarded  as  a  partial  offset  to  accrued 
depreciation  or  overhead  charges  included  in  the  appraisal.  W"orking  capital  has 
since  been  fixed  at  $1,5.^0.000.  The  net  amount  of  additions  and  bettennents 
made  subsequent  to  January  1,  1918,  will  be  added  to  capital  value.  The  com- 
pany is  permitted  to  receive  in  quarterly  payments  from  gross  revenues  a  sum 
equal  to  0  j)er  cent  on  capital  value.  From  time  to  time  as  new  money  is  required 
for  additions,  bettennents  and  extensions  approved  by  the  commission,  such  money 
must  be  supplied  by  the  company,  and  the  money  so  supplied  will  be  added  to 
capital  value  and  the  comi)any  will  be  entitled  to  an  annual  return  of  6  per 
cent  upon  it,  but  when  money  is  needed  for  these  purposes,  the  company  nmst 
borrow  temporarily   moneys   in   the  maintenance  and   renewals   fund,  or   in   the 


Service  at  Cost  461 

contingent  reserve  fund  or  in  the  tolls  reduction  finid  hereinafter  described,  to 
the  extent  that  in  the  commission's  judgment  the  moneys  in  such  funds  are 
available.  On  moneys  so  borrowed,  the  company  must  pay  into  the  funds  annual 
interest  at  the  rate  of  6  per  cent,  which  it  in  turn  will  receive  from  gross  earn- 
ings as  its  regular  return  upon  additions  to  capital  value.  On  account  of  the  high 
cost  of  money  during  the  war,  the  contract  gives  the  company  an  additional  allow- 
ance of  1  per  cent  per  annum  on  money  supplied  by  it  for  capital  expenditures 
during  the  continuance  of  the  war  or  within  two  years  after  its  close,  this  addi- 
tional rate  being  limited,  however,  to  a  period  extending  five  years  beyond  the 
close  of  the  war.  Working  capital  is  to  be  furnished  by  the  company  as  ordered 
by  the  commission  and  upon  such  capital  the  company  will  receive  the  regular 
return  of  6  per  cent  per  annum.  In  addition  to  the  allowances  already  described, 
the  contract  specifies  that  the  company  shall  receive  annually  the  sum  of  $181,- 
421.47  out  of  gross  revenues  to  be  expended  solely  for  discount,  commissions, 
printing,  engraving,  etc.,  incident  to  the  issuance  and  sale  of  bonds  or  stock. 
This  flat  stun  is  the  equivalent  of  one  half  of  1  per  cent  upon  the  original  capital 
value  as  fi.xed  by  the  contract.  If  any  portion  of  this  allowance  is  not  required 
in  any  one  year  for  the  purposes  above  described,  it  must  be  kept  in  a  special 
account  and  reserved  for  use  in  subsequent  years  for  similar  purposes.  In  pro- 
curing additional  capital  required  under  the  contract,  the  company  must  limit  its 
issues  of  mortgage  bonds  or  debenture  stock  so  that  they  will  not  aggregate  more 
than  75  per  cent  of  the  total  additional  capital  furnished  under  the  contract. 
The  net  effect  of  the  provisions  relating  to  return  upon  capital  is  that  the  com- 
pany will  be  allowed  6  per  cent  to  be  distributed  in  interest  and  dividends,  an 
additional  I  per  cent  temporarily  on  new  money  supplied  during  the  war  and  the 
equivalent  of  one-half  of  1  per  cent  on  the  original  capital  value  to  cover  the 
expense  of  financing  new  capital ;  subject  to  the  limitation,  however,  that  any 
portion  of  this  special  allowance  not  used  for  this  purpose  shall  not  be  distributed 
to  the  stockholders  during  the  life  of  the  contract,  and  that  the  dividends  paid 
upon  stock  shall  not  during  that  period  exceed  10  per  cent  per  annum. 

The  fourth  charge  against  gross  revenues  is  a  payment  of  $500,000  per 
annum  to  the  City  of  Montreal.  This  is  in  lieu  of  the  percentage  payments  pro- 
vided under  the  old  contract. 

The  fifth  charge  against  gross  revenues  is  an  appropriation  for  the  contin- 
gent reserve  fund.  This  fund  is  to  get  1  per  cent  of  the  revenues  until  it  amounts 
to  $500,000,  when  the  appropriation  from  revenues  will  be  suspended  until  again 
needed  to  restore  the  fund  to  this  full  amount.  This  fund  constitutes  a  surplus 
which  must  be  maintained  as  a  guaranty  that  the  charges  against  gross  earnings 
heretofore  described  will  be  made  up  in  case  of  a  deficiency  in  any  particular 
year.  At  the  termination  of  the  contract  the  moneys  remaining  in  this  fund  will 
be  distributed  in  the  same  manner  as  the  divisible  surplus  now  to  be  described. 

All  the  portion  of  the  gross  revenues  remaining  after  the  payment  of  the 
charges  heretofore  described  will  constitute  the  divisible  surplus  and  will  be  dis- 
tributed at  the  end  of  each  year  in  the  ratio  of  30  per  cent  to  the  city,  20  per 
cent  to  the  company,  and  50  per  cent  to  the  tolls  reduction  fund.  The  portions 
of  the  surplus  paid  to  the  city  and  to  the  company  respectively  will  belong  to  them 


462  Electric  Railway  Problem 

to  be  disposed  of  as  they  see  fit,  subject  to  the  limitation  already  mentioned  that 
the  company  may  not  in  any  year  during  the  life  of  the  contract  pay  dividends 
on  its  capital  stock  in  excess  of  10  per  cent. 

The  tolls  reduction  fund,  which  is  to  be  built  up  year  by  year  from  50  per 
cent  of  the  divisible  surplus,  is  a  fund  to  be  used  for  the  reduction  of  fares  in 
case  the  fares  in  force  at  the  beginning  of  the  contract  or  at  any  subsequent  period 
prove  to  be  unnecessarily  high.  When  this  fund  reaches  the  sum  of  $1,000,000 
the  commission  way  reduce  the  fares,  and  when  it  reaches  the  sum  of  $2,500,000 
the  commission  miisl  reduce  the  fares.  In  order  to  insure  reasonable  stability 
in  the  new  fare  schedules  established  by  the  commission,  the  contract  provides 
that  when  fares  are  to  be  reduced,  one  fourth  of  the  moneys  then  in  the  tolls 
reduction  fund  shall  be  taken  out  and  turned  back  into  gross  revenues,  and  that 
the  amount  of  the  reduction  of  fares  for  the  year  shall  be  at  least  equal  to  the 
amount  so  taken  out  of  the  tolls  reduction  fund  but  shall  not  exceed  that  amount 
plus  an  amount  equal  to  75  per  cent  of  the  annual  flow  from  gross  revenues  into 
divisible  surplus.  Thereafter,  at  the  beginning  of  each  year,  the  commission  is 
to  take  a  like  amount  out  of  the  tolls  reduction  fund  and  turn  it  back  into  gross 
revenues  so  long  as  moneys  are  available  for  this  purpose.  This  plan  was  de- 
vised for  the  purpose  of  stabilizing  rates  as  much  as  possible  and  at  the  same  time 
preventing  the  commission  from  completely  stopping  the  flow  into  the  divisible 
surplus  by  arbitrary  reductions.  If  the  tolls  reduction  fund  becomes  exhausted, 
the  rate  of  fare,  nevertheless,  will  not  be  changed  unless  an  increase  becomes 
necessary.  Whenever  the  contingent  reserve  fund  falls  below  $300,000,  with  all 
prior  charges  upon  gross  revenue  paid  in  full,  the  commission  must  appropriate 
moneys  from  the  tolls  reduction  fund  to  restore  the  contingent  reserve  fund  to 
the  full  amount  of  $500,000,  and  if  no  moneys  are  available  in  the  tolls  reduction 
fund  the  conmiission  must  increase  the  fares  in  an  amount  at  least  sufficient  to 
restore  the  contingent  reserve  fund  and  maintain  it  at  the  full  amount.  At  the 
termination  of  the  contract  any  moneys  remaining  in  the  tolls  reduction  fund 
will  be  the  projjerty  of  the  city  without  any  enhancement  of  the  inirchase  price 
to  be  paid  for  the  company's  plant. 

In  Chapter  XX\TI1  of  this  report  1  have  already  described  the  Montreal 
fare  schedule  in  eft'ect  under  the  old  contract  and  the  two  schedules  that  have 
been  put  into  effect  under  the  new  one.  It  will  be  recalled  that  the  present  cash 
fare,  except  during  the  night,  is  seven  cents,  with  general  ticket  fares  at  six  cents 
or  a  little  less.  The  average  of  all  fares  paid  in  November,  1919.  under  the 
present  schedule,  was  5.S4  cents,  as  compared  with  5.37  cents  in  Cleveland  during 
the  first  half  of  1919  when  the  highest  rate  of  fare  thus  far  charged  was  in  effect. 

It  will  be  seen  that  the  Montreal  settlement  was  based  on  the  theory  that 
no  franchise  contract  will  enforce  itself;  that  no  matter  how  good  the  scheme, 
it  will  not  work  .lutomatically ;  that  private  operation  of  a  street  railway  system, 
if  the  public  interests  are  to  receive  adequate  attention,  must  be  continuously 
supervised  through  the  application  of  public  intelligence  and  will.  However, 
instead  of  municipal  control,  the  Montreal  contract  provides  for  a  local  metro- 
politan commission  appointed  by  the  provincial  authorities  and  subject  in  almost 
every  respect  to  the  appellate  jurisdiction  of  the  provincial  utilities  commission. 


Service  at  Cost  463 

Arbitration  cuts  no  figure  in  the  Montreal  scheme,  as  pubHc  control  is  theoreti- 
cally complete.  The  people  of  Montreal  and  its  suburbs  can  have  exactly  the 
kind  of  service  that  the  two  commissions  think  is  good  for  them  and  are  willing 
to  make  them  pay  for.  It  should  be  explained  further  that  by  the  terms  of  the 
contract,  a  uniform  tarifY  territory  is  established  to  include  the  City  of  Montreal, 
the  cities  of  Westmount  and  Outremont  and  certain  adjacent  towns  to  which 
the  principal  fare  schedule  applies.  Outside  of  this  territory  are  seven  suburban 
communities  in  each  of  which  a  special  schedule  of  rates  has  been  established. 
Each  of  these  suburban  schedules  is  lower  than  the  city  schedule. 

In  April,  1920,  in  the  closing  weeks  of  the  session,  the  New  York  Electric 
Railways  Association  caused  to  be  introduced  in  the  state  legislature  a  so-called 
service-at-cost  bill  which  was  patterned  somewhat  after  the  Montreal  plan,  but 
was  strikingly  dilTerent  from  it  in  certain  respects.  The  Jenks  bill,  as  it  was 
called,  made  provision  for  a  bonus  as  "the  premium  for  operating  efficiency  and 
economy."  This  bonus,  however,  was  to  be  one-half  of  one  per  cent  on  the 
investment,  or  four  times  the  corresponding  bonus  allowed  in  the  Montreal  plan. 
Moreover,  any  changes  in  wages  that  might  take  place  during  the  year  were  to 
be  automatically  accepted  as  modifying  the  operating  allowance  fixed  at  the  be- 
ginning of  the  year.  Also,  instead  of  a  supervisory  commission  fixing  the  oper- 
ating allowance,  this  was  to  be  done  by  agreement  between  the  city  and  the  com- 
pany or  by  arbitration.  The  "investment  value"  of  the  property  as  a  basis  for 
determining  the  return  to  capital  was  to  be  fixed  by  agreement  or  by  arbitration, 
and  upon  the  amount  so  fixed  the  company  was  to  receive  a  return  of  10  per  cent 
per  annum.  Pending  the  determination  of  the  investment  value  the  company 
was  to  receive  a  rate  of  return  sufficient  at  least  to  pay  "all  e.xisting  fixed  charges, 
rentals  and  all  other  compulsory  obligations  necessary  to  prevent  mortgage  fore- 
closure or  the  disintegration  of  the  system  of  the  company"  as  operated  at  the 
time  of  the  passage  of  the  act. 

For  the  purpose  of  determining  matters  of  difiference  between  the  company 
and  the  municipality  arising  out  of  the  operating  of  the  company's  property 
under  the  service-at-cost  agreement  a  "fare  reduction  board"  was  to  be  estab- 
lished, consisting  of  three  members,  one  to  be  selected  by  the  municipality,  one 
by  the  company,  and  the  third  by  agreement  between  the  municipality  and  the 
company,  or,  in  case  of  their  failure  to  agree  within  thirty  days,  then  by  the 
presiding  justice  of  the  Appellate  Division  of  the  Supreme  Court.  A  municipality 
having  a  service-at-cost  contract  with  a  company  was  to  have  the  right  to  submit 
to  the  company  a  list  of  six  persons,  of  whom  one,  selected  by  the  company, 
should  be  chosen  as  a  member  of  the  board  of  directors.  The  local  authorities 
of  the  municipality  were  to  have  the  right  to  appoint  a  street  railroad  commis- 
sioner, and,  with  the  approval  of  the  fare  reduction  board,  fix  his  compensation, 
which  would  be  paid  out  of  gross  revenues.  Under  this  plan,  when  a  service- 
at-cost  agreement  between  a  municipality  and  a  company  had  been  filed  with  the 
Public  Service  Commission,  the  latter's  jurisdiction  over  service  and  rates  would 
cease  during  the  period  of  the  agreement  or  any  renewal  or  extension  of  it. 

These  agreements  were  to  be  limited  in  the  first  instance  to  five  years,  and, 
unless  they  were  renewed,  the  parties,  at  the  end  of  that  time,  were  to  be  restored 


464  Electric  Railway  Problem 

to  the  status  occupied  by  them  during  the  period  prior  to  the  coming  into  effect 
of  the  service-at-cost  plan. 

Quite  a  number  of  the  detailed  features  of  the  Montreal  contract,  were  pre- 
served in  the  Jenks  bill,  but  three  fundamental  changes,  all  of  them  strongly 
favorable  to  the  companies,  should  be  noted.  First,  the  basic  rate  of  return  upon 
the  investment  was  to  be  fixed  at  10  per  cent  instead  of  6  per  cent.  Second,  the 
companies  were  to  be  relieved  of  all  responsibility  for  wage  increases.  Third, 
the  control  of  service  and  the  administration  of  the  terms  of  the  service-at-cost 
agreement  were  not  to  be  vested  in  public  regulatory  bodies,  but  were  to  be  effected 
by  agreement  between  the  parties  or  by  arbitration.  In  this  last  respect  the  Jenks 
bill  embodied  a  lame  imitation  of  the  Cleveland  arbitration  plan.  Fundamentally, 
the  service-at-cost  plan  outlined  in  the  Jenks  bill  would  supersede  entirely  the 
exercise  of  the  police  power  of  regulation  by  either  state  or  local  authorities, 
and  would  not  give  the  public  the  eft'cctive  right  to  demand  such  service  as  it  is 
willing  to  pay  for. 

The  Jenks  bill  was  defeated  by  a  close  vote  in  the  New  York  Assembly,  but 
it  illustrates  the  extreme  importance  of  the  details  in  any  service-at-cost  or  other 
plan  for  the  readjustment  of  the  public  relations  of  the  electric  railways.  One 
of  the  mistakes  made  in  Montreal  was  the  failure  of  the  original  Tramways  Com- 
mission to  take  the  public  into  its  confidence  and  to  secure  its  approval  of  the 
plan  adopted.  The  public  of  New  York  had  almost  no  opportunity  to  familiarize 
itself  with  the  provisions  of  the  Jenks  bill  while  the  attempt  was  being  made  to 
force  it  through  the  legislature,  and  the  tactics  adopted  by  the  New  York  Electric 
Railways  Association  in  this  case  aroused  the  resentment  of  the  municipalities  of 
the  state.  The  Montreal  plan  contains  some  admiirable  features,  but  the  evidence 
before  the  Commission  makes  it  clear  that  it  is  a  grave  mistake  to  suppose  that 
any  service-at-cost  plan  can  be  successfully  applied  by  mere  imitation,  and,  be- 
yond a  doubt,  if  the  plan  that  is  in  successful  operation  in  one  community  is  to 
be  adopted  in  another,  the  public  cannot  be  expected  to  accept  the  plan  without 
question  after  it  has  been  changed  in  important  respects  by  the  companies  for 
their  own  benefit  and  without  public  consultation. 

The  third  most  distinctive  type  of  service  at  cost  thus  far  jiut  into  effect 
has  been  worked  out  in  Massachusetts,  where  in  1918  three  separate  and  some- 
what different  service-at-cost  acts  were  passed :  one  for  the  operation  of  the  Bos- 
ton street  railway  lines,  another  for  the  operation  of  the  Bav  State  street  railway 
system  serving  most  of  the  cities  of  Massachusetts  north  and  south  of  Boston, 
and  the  third,  a  general  act  for  the  benefit  of  any  other  street  railway  companies 
of  Massachusetts  that  might  choose  to  accept  it  and  comply  with  its  conditions. 
The  two  special  acts  inaugurated  a  system  of  public  operation  by  boards  of 
trustees  appointed  by  the  Governor,  with  the  consent  of  the  council,  without  public 
ownership.  In  both  cases  the  legislative  acts,  having  been  accepted  by  the  bene- 
ficiaries, have  established  service  at  cost  on  the  basis  of  contractual  relations  be- 
tween the  companies  and  the  state. 

In  the  case  of  the  Boston  Elevated  Railway  Act,  the  right  is  reserved  to  the 
commonwealth  or  to  any  political  sub-division  of  it  to  purchase,  at  any  time 
during  the  period  of  public  managciuent  and  operation,  the  company's  "whole 


Service  at  Cost  465 

assets,  property  and  franchises  as  a  going  concern"  by  the  assumption  of  the 
company's  outstanding  indebtedness  and  liabilities  and  by  the  payment  of  an 
amount  in  cash  equal  to  the  amount  paid  in  in  cash  by  the  company's  stockholders 
for  the  stock  then  outstanding.  Special  provisions  are  contained  in  the  act  for 
the  acquisition  of  the  property  of  the  West  End  Street  Railway  Company  (owner 
of  most  of  the  surface  lines  of  Boston)  now  leased  to  the  Boston  Elevated  Rail- 
way Company,  in  case  this  property  shall  have  been  acquired  by  the  lessee  before 
the  date  of  public  purchase.  These  provisions  are  not  to  preclude  the  com- 
monwealth or  any  political  sub-division  of  it  from  acquiring  the  property  and 
franchises  of  either  company  at  any  time  through  the  e.xercise  of  the  power  of 
eminent  domain. 

The  act  specifies  that  there  shall  be  five  trustees  who  shall  serve  for  a  period 
of  ten  years  from  the  date  when  they  assume  the  management  of  the  company 
and  shall  each  receive  a  salary  of  $5,000  per  annum  for  their  services.  The 
trustees  themselves  appoint  a  chairman.  Any  trustee  may  be  removed  for  cause 
by  the  Governor  with  the  advice  and  consent  of  the  council.  The  state  is  to 
manage  and  operate  the  company's  properties  for  a  period  of  ten  years  and  during 
that  time  the  trustees  will  have  the  right  to  appoint  and  remove,  in  their  dis- 
cretion, the  president  and  all  other  officers  of  the  company,  excepting  the  board 
of  directors.  The  trustees  also  have  the  right  "to  regulate  and  fix  fares,  includ- 
ing the  issue,  granting  and  withdrawal  of  transfers  and  the  imposition  of  charges 
therefor."  They  are  to  "determine  the  character  and  extent  of  the  service  and 
facilities  to  be  furnished"  and  in  these  respects  their  authority  is  exclusive  and 
not  subject  to  the  approval,  control  or  direction  of  any  other  state  board  or  com- 
mission. The  trustees  and  their  employes  are  deemed  to  be  agents  of  the  com- 
pany, not  of  the  state,  and  the  company  is  liable  for  their  acts  and  negligence 
to  the  same  extent  as  if  they  were  in  its  immediate  employ.  It  is  stipulated 
that  nothing  in  the  act  shall  affect  the  right  of  the  state  or  any  of  its  sub-divisions 
to  tax  the  company  or  its  stockholders  the  same  as  if  the  company  had  continued 
to  manage  and  operate  its  own  property.  The  public  trustees  have  authority  to 
make  contracts  and  to  issue  stocks,  bonds  and  other  evidences  of  indebtedness  in 
the  name  of  the  company,  but  they  are  not  authorized  to  make  any  additional 
contracts  for  the  operation  or  lease  of  new  subways  or  elevated  or  surface  lines 
which  would  involve  the  payment  of  compensation  beyond  the  period  of  public 
operation.  However,  the  trustees  may  construct  or  purchase  additional  surface 
lines,  even  after  the  consent  of  the  directors  has  been  refused,  if  the  trustees  de- 
termine after  a  public  hearing  that  public  necessity  and  convenience  require  such 
construction  or  purchase. 

Before  accepting  the  act  the  company  was  required  to  raise  the  sum  of 
$3,000,000  in  cash  by  the  issuance  of  preferred  stock  at  not  less  than  par,  such 
stock  being  entitled  to  cumulative  preferential  dividends  not  to  exceed  7  per  cent 
and  such  preferred  stock  is  subject  to  retirement  at  the  request  of  the  trustees, 
or  after  the  period  of  public  operation,  at  105  and  accrued  dividends.  The  pro- 
ceeds, to  the  extent  of  $1,000,000,  were  to  be  set  aside  as  a  reserve  fund  and  the 
remaining  $2,000,000  were  to  be  subject  to  the  disposition  of  the  trustees  to  pay 
the  cost  of  additions  and  improvements  to  the  property.     The  act  prescribes  that 


466  Electric  Railway  Prublem 

the  trustees  shall  from  time  to  time  "fix  such  rates  of  fare  as  will  reasonably 
insure  sufficient  income  to  meet  the  cost  of  the  service,  which  shall  include  oper- 
ating expenses,  taxes,  rentals,  interest  on  all  indebtedness,  such  allowance  as  they 
may  deem  necessary  or  advisable  for  depreciation  of  property  and  for  obsolescence 
and  losses  in  respect  to  property  sold,  destroyed  or  abandoned,  all  other  expendi- 
tures and  charges  which  under  the  laws  of  the  commonwealth  now  or  hereafter 
in  effect  may  be  properly  chargeable  against  income  or  surplus,  fixed  dividends 
on  all  preferred  stock  of  the  company  from  time  to  time  outstanding  and  divi- 
dends on  the  common  stock  of  the  company  from  time  to  time  outstanding  at  the 
rate  of  five  per  cent  per  annum  on  the  par  value  thereof  during  the  first  two  years, 
five  and  one  half  per  cent  per  annum  on  the  par  value  thereof  during  the  next 
two  years  and  six  per  cent  per  annum  on  the  par  value  thereof  during  the  balance 
of  the  period  of  public  operation."  The  act  provides  that  the  dividends  shall 
be  paid  quarterly  beginning  at  the  expiration  of  6  months  from  the  commence- 
ment of  public  operation ;  and  that  the  total  of  the  first  three  payments  shall  aggre- 
gate 5  per  cent  on  the  par  value  of  the  common  stock.  Within  60  days  after 
their  qualification  the  trustees  were  required  to  "fix  and  put  in  operation  rates 
of  fare  which  in  their  judgment  will  produce  sufticient  income  to  meet  the  cost 
of  the  service  as  defined  *  *  *  *  gpj  y^jtliin  sixty  days  thereafter  shall 
adopt  and  publish  a  schedule  of  eight  different  grades  of  fare  of  which  four  shall 
be  below  and  four  above  the  rate  of  fare  first  established ;  and  whenever  by  reason 
of  any  change  in  the  existing  rate  of  fare  there  are  less  than  four  grades  either 
above  or  below  the  rate  then  in  force,  the  trustee  shall  forthwith  adopt  and 
publish  a  schedule  of  additional  grades  of  fare  so  that  there  shall  always  be  not 
less  than  four  grades  of  fare  above  and  below  the  existing  rate  of  fare."  How- 
ever, the  trustees  at  any  time  when  they  think  that  the  rates  of  fare  or  the  schedule 
should  be  changed,  with  respect  to  either  the  method  or  the  basis  upon  which  fares 
and  transfer  privileges  are  established,  or  for  any  other  reason,  may  adopt  and 
put  into  effect  new  schedules  or  rates  of  fare. 

\\'henever  the  company's  income  is  insufficient  to  meet  the  cost  of  service 
as  defined,  the  reserve  fund  is  to  be  used  as  far  as  necessary  to  make  up  the 
deficiency;  and  if,  on  the  other  hand,  the  income  is  more  than  enough  to  meet 
the  cost  of  ser\ice,  the  excess  is  to  be  transferred  to  the  reserve  fund.  The  act 
made  no  provision  for  an  automatic  change,  before  June  30,  1919,  the  end  of 
the  fiscal  year,  in  the  fares  first  established  by  the  trustees,  but  it  does  provide  that 
subsequent  to  that  date  account  shall  be  taken  quarterly  of  the  condition  of  the 
reserve  fund  and,  if  at  the  end  of  any  quarter  this  fund  exceeds  its  original  amount 
by  30  per  cent  or  more,  and  if  during  the  past  quarter  the  income  has  exceeded 
the  cost  of  service,  then  the  trustees  nuist  within  another  month  put  into  effect 
the  next  lower  grade  of  fare;  and  in  like  manner,  if  the  reserve  fund  is  found  to 
be  less  than  70  per  cent  of  the  original  amount,  the  trustees  must  within  a  month 
put  into  effect  the  next  higher  grade  of  fare.  The  act  provides  that  if  on  June 
30,  1919,  or  semi-annually  thereafter  the  amount  remaining  in  the  reserve  fund 
is  insufiicient  to  make  good  any  deficiencies  that  may  have  accrued  in  the  cost  of 
service,  the  State  of  Massachusetts  shall  pay  to  the  company  the  amount  of  such 
deficiencies,   less   the   amount,   if    any,    in    the   reserve    fund    applicable    thereto. 


Service  at  Cost  467 

Thereafter,  if  the  reserve  fund  exceeds  its  original  amount  at  the  end  of  any  half 
year,  the  trustees  must  apply  the  excess  as  far  as  necessary  to  reimbursing  the 
state  for  moneys  previously  advanced  by  it  under  the  provisions  just  described. 
The  moneys  advanced  by  the  state  are  in  the  first  instance  to  be  borrowed  by  the 
state  treasurer,  but  for  the  amounts  so  advanced  assessments  are  to  be  levied  upon 
the  cities  and  towns  in  which  the  company  renders  service  in  proportion  to  the 
number  of  persons  in  such  cities  and  towns  using  the  company's  service,  as  de- 
termined by  the  board  of  trustees. 

During  the  continuation  of  public  management  the  trustees  are  bound  "to 
maintain  the  property  of  the  company  in  good  operating  condition,  and  to  make 
such  provision  for  depreciation,  obsolescence  and  rehabilitation  that,  upon  the 
expiration  of  the  period  of  public  management  and  operation,  the  property  shall 
be  in  good  operating  condition."  Public  management  is  to  continue  after  the 
expiration  of  the  10-year  period  until  the  state  elects  to  discontinue  it,  and  its 
discontinuance  may  be  accomplished  only  by  appropriate  legislation  passed  not 
less  than  two  years  before  the  date  fixed  for  turning  the  property  back  to  the 
company.  Whenever  moneys  advanced  by  the  state  and  collected  from  the 
municipalities  are  repaid  by  the  company,  they  are  to  be  redistributed  to  the  muni- 
cipalities in  proportion  to  the  amounts  previously  collected  from  them.  Upon  the 
termination  of  the  period  of  public  management  the  company  is  to  operate  the 
property  and  "may  fix  and  collect  such  just  and  reasonable  fares  as  will  produce 
an  income  sufficient  to  pay  the  reasonable  cost  of  the  service''  as  defined  in  the 
act,  including  dividends  upon  the  common  stock  at  the  rate  of  6  per  cent  per 
annum  on  the  par  value,  but  no  more,  and  the  company  may  establish  fare 
schedules  that  will  automatically  increase  or  decrease  in  the  same  manner  as 
authorized  during  public  control.  The  act  stipulates,  however,  that  the  state  shall 
not  be  under  any  liability  to  make  payments  to  the  company  for  deficiencies  in 
income  accruing  after  the  discontinuance  of  public  operation.  Thereafter,  the 
company  is  to  be  subject  to  public  regulation  and  supervision  in  such  mann'er  as 
may  be  determined  by  the  legislature,  but  "such  regulation  and  supervision  shall 
not  be  exercised  so  as  to  reduce  the  income  below  the  reasonable  cost  of  the 
service''  as  defined  in  the  act.  The  act  contains  a  provision,  however,  that  none 
of  its  provisions  shall  be  construed  to  constitute  a  contract  binding  upon  the 
state  other  than  the  provisions  which  define  the  terms  and  conditions  under  which 
the  property  is  to  be  managed  and  operated  by  the  trustees  during  the  period  of 
public  management  and  the  provisions  of  the  section  requiring  the  trustees  to 
maintain  the  property  at  all  times  in  good  operating  condition. 

It  appears  from  this  analysis  that  service  at  cost  as  applied  to  the  Boston 
Elevated  Railway  system  means  (  1  j  public  operation;  (2)  a  fixed  and  guaranteed 
return  upon  capital;  (3)  an  obligation  on  the  part  of  the  state  to  rehabilitate  the 
property  and  maintain  it  in  good  condition;  (4)  a  flexible  fare  sufficient  to  pay 
the  entire  cost  of  service,  including  rehabilitation  and  dividends;  (5)  the  right 
of  purchase  either  by  the  state  or  by  a  municipality  upon  repayment  to  the  stock- 
holders of  their  actual  investment  in  the  property  (or  as  an  alternative  bv  con- 
demnation proceedings);  (6)  operation  by  state-appointed  trustees  entirely  in- 
dependent of  any  supervision  or  control  by  the  local  authorities  or  by  the  Public 


468  Electric  Railway  Problem 

Service  Commission;  (7)  the  right  on  the  part  of  the  state  to  bring  the  policy  of 
public  management  to  an  end  at  any  time  after  the  expiration  of  10  years,  but 
with  the  promise,  which  however  is  not  en  forcible  as  a  contract,  that  in  case  the 
property  is  turned  back  to  private  control,  the  company  will  be  given  the  right  to 
fix  its  own  rates  as  may  be  necessary  to  enable  it  to  get  revenues  sufficient  to  pay 
the  full  cost  of  service,  including  6  per  cent  dividends,  but  without  a  guaranty 
that  deficiencies  in  revenues  will  be  made  up  from  taxation. 

The  Boston  Elevated  service-at-cost  act  was  not  submitted  to  the  local 
authorities  of  Boston  or  to  the  people  of  Boston  for  their  approval  and  it  is 
clear  from  the  testimony  before  the  Commission,  as  well  as  from  other  sources 
of  information,  that  in  its  operation  the  Boston  plan  has  been  very  unpopular. 
As  we  have  already  seen,  the  5-cent  fare  was  discontinued  one  month  after  the 
public  trustees  took  hold.  The  unit  fare  was  put  up  to  7  cents  on  August  1,  1918; 
to  8  cents  on  December  1,  1918,  and  to  10  cents  on  July  10,  1919,  and  it  was  not 
until  the  latter  part  of  September,  1919,  that  the  company's  current  revenues  were 
sufficient  to  meet  the  full  cost  of  the  service  as  defined  in  the  act  and  as  fixed 
by  the  trustees.  However,  after  September,  1919,  the  10-cent  fare  yielded  more 
than  the  cost  of  service  during  every  month  up  to  February.  1920,  when  there 
was  a  loss  of  about  $372,000,  said  to  have  resulted  principally  from  the  enormous 
expense  incident  to  the  winter  snow  storms.  The  loss  under  the  first  year  of 
public  operation  ended  June  30.  1919.  was  $4,980,000  of  which  nearly  $4,000,000 
had  to  be  made  up  out  of  taxes.  With  the  10-cent  fare  in  effect  all  but  the  first 
ten  days  of  the  period,  the  loss  for  the  eight  months  ended  February  28.  1920, 
including  certain  items  of  back  pay  reaching  back  into  the  preceding  fiscal  year, 
was  approximately  $7vW.0OO.  It  is  no  wonder,  perhaps,  that  the  Bostonese  have 
not  been  greatly  pleased  with  a  service-at-cost  plan  that  has  imposed  upon  them 
a  heavy  burden  of  taxation  without  delivering  them  from  the  10-cent  fare.  As 
taxpayers  they  doubtless  would  enjoy  the  prospect  of  having  the  $4,000,000 
already  advanced  to  make  up  the  deficiency  in  street  railway  earnings  returned  to 
them  out  of  the  future  profits,  but  as  farepayers  they  cannot  view  with  com- 
placency the  fad  that  the  10-cent  fare  is  now  yielding  only  a  small  and  somewhat 
uncertain  margin  over  the  current  cost  of  service  and  that  no  reduction  in  fares 
can  be  effected  until  the  accumulated  deficiencies  of  more  than  $5,000,000  have 
been  made  up  nut  of  earnings. 

In  Chapter  XI 1  of  this  report.  I  have  already  quoted  at  some  length  the 
testimony  of  Chairman  McLeod.  of  the  Massachusetts  Public  Service  Commission, 
with  r('S|)ect  to  the  <k'|)reciation  policy  of  the  Boston  Elevated  service-at-cost  act 
as  administered  by  the  public  trustees.  Discussing  the  reasons  for  the  present 
high  cost  of  service  in  Boston.  Mr,  McLeod.  at  page  1443  of  the  Proceedings,  says: 

"The  in.iintcn.iiicc  charges  on  the  Boston  Elevated  tlurins  the  [<Ast  year  have  exceeded 
the  maintenance  expeiuHliires  for  the  year  heforc  hy  substantially  two  and  a  half  million 
dollars,  which  represents  pretty  nearly  donblc  the  expenditures  for  maintenance  alone,  and 
there  has  Ix-en  an  expenditure  of  a  little  over  $.?.(KK).0(X)  of  depreciation  reserves  over  and 
alxive  that  amount,  of  which  $l.().'iO,00()  represents  the  increase  over  the  previous  year.  In 
other  words,  the  company's  maintenance  ami  depreciation  proRrams  toRcther  liavc  repre-icnted 
an  exiienditnre  of  over  $4.(KK).(HX)  more  under  public  control  than  was  cxi>cnded  imder  private 
control,  and  that  of  course  has  Ihhmi  one  very  siRnificant  element  in  hrinRintf  about  the  finan- 
cial situation  and  dcvclopinR  the  increased  opcratiiiR  cost  which  has  necessitated  an  advance 
in  fares," 


Service  at  Cost  469 

Mr.  McLeod  brings  out  the  fact  that  before  the  Boston  plan  was  adopted  the 
Massachusetts  Pubhc  Service  Commission  tried  in  vain  to  get  it  changed  in  certain 
respects  where  the  commission  thought  the  interests  of  the  public  were  not  prop- 
erly safeguarded.  At  pages  1444  and  1445  of  the  Proceedings,  we  find  the  fol- 
lowing testimony : 

"The  Chairman :  Is  the  company  charging  all  its  depreciation  and  maintenance  to  oper- 
ation ? 

"Mr.  McLeod :  It  is  charging  all  to  operation ;  so  far  as  the  depreciation  requirement  is 
concerned,  it  is  significant  to  remember  that  this  depreciation  fund  is  not  intended  to  cover 
depreciation  in  roadway  and  track ;  that  renewals  in  ties  and  paving  and  roadway  are  made 
as  part  of  the  maintenance  charge.  Now,  in  accounting  practice  it  has,  I  think,  been  most 
common  to  include  the  depreciation  of  your  rails  and  the  depreciation  of  your  ties,  except 
perhaps  so  far  as  minor  renewals  and  patching  up  is  concerned,  as  coming  under  your  depre- 
ciation program.  But  under  the  system  adopted  by  the  trustees,  which  was  in  accordance 
with  the  plan  outlined  in  Mr.  Beeler's  report,  this  maintenance  program — this  entire  program 
of  track  reconstruction — is  charged  up  to  maintenance  and  not  charged  to  depreciation. 

"The  Chairman:  Now,  if  the  Board  continues  this  practice,  at  the  end  of  ten  years  you 
are  going  to  have  a  splendidly  equipped  plant  to  turn  back  to  the  corporation.  The  cost  of 
putting  that  plant  in  condition,  charged  to  operating  expenses,  is  all  borne  out  of  the  revenue. 
That  means  that  the  cost  to  the  taxpayers  or  rather  to  the  passengers  has  been  excessive 
during  that  ten  years.  What  method  has  been  adopted,  if  any,  to  reimburse  the  public  for 
the  money  which  it  expends  for  that  purpose? 

"Mr.  McLeod:  There  has  been  no  method  adopted,  and  that  is  simply  one  point  and 
perhaps  the  most  conspicuous  point  of  several  points  that  might  be  mentioned  where  the 
public  interest  was  not  adequately  served  in  the  legislation  that  was  passed.  I  know  when 
that  matter  came  up  the  commission  in  a  prepared  statement  and  I  myself  orally  before  the 
committee  argued  as  strongly  as  I  possibly  could  the  lack  of  equity  in  the  very  point  that 
you  have  raised  and  suggested  that  the  Act  in  that  respect  should  be  drawn  upon  the  analogy 
of  the  law  and  practice  of  the  Railroad  .-Xdministration  where  ample  provision  is  made  pro- 
tecting the  public  from  having  the  investors  profit  *  ♦  *  *  by  any  increments  of  value 
added  to  the  j)roperty  during  the  period  of  public  control.  But  no  such  safeguards  have  been 
put  into  the  Massachusetts  .\ct,  although  the  commission  used  all  its  eflforts  to  see  that  a 
provision  of  that  kind  was  embodied  in  it." 

Mr.  Grenville  S.  MacFarland,  representing  the  Hearst  newspaper  interests, 
was  an  important  factor  in  the  formulation  and  negotiation  of  the  Boston  Ele- 
vated service-at-cost  plan.  As  a  witness  before  the  Commission,  Mr.  MacFarland 
advocated  public  ownership  and  operation,  but  his  support  of  the  Boston  plan 
in  its  origin  was  evidently  based  upon  the  conviction  that  public  operation,  even 
with  private  ownership,  would  do  away  with  the  most  serious  evils  of  the  old 
regime.     At  page  1356  of  the  Proceedings,  he  says: 

"I  think  the  gravamen  of  the  evil  of  the  present  situation  is  not  in  private  ownership;  it 
is  in  private  operation,  private  control.  For  instance,  Glasgow  for  19  years  tried  public 
ownership  and  private  control,  and  it  did  not  work ;  it  was  a  miserable  failure  in  every 
respect,  politically,  economically,  financially  and  socially.  And  then  they  took  over  the  public 
control  and  it  has  been  the  classic  example  of  the  success  of  municipal  operation  in  the  world. 

"Under  private  ownership  and  public  operation,  if  the  operation  is  complete  and  the 
separation  between  the  ownership  and  the  operation  is  as  complete  as  it  is  under  our  plan  in 
Boston,  your  stockholder  becomes  nothing  more  than  a  government  bondholder." 

At  page  1355  of  the  Proceedings,  he  refers  to  the  Boston  contract  as  follows: 

"In  consideration  of  the  public  operation — taking  over  the  possession  of  the  property — 
we  agreed  to  give  them  a  return  on  their  investment  which  they  could  not  possibly  earn  under 
the  contract,  and  in  consideration  of  that  they  agreed  to  turn  over  the  possession  of  their 
property. 

"The  Chairman:    Do  you  think  that  was  a  fair  solution  of  the  problem? 

"Mr.  MacFarland:  I  do  think  it  is  a  fair  solution  with  this  qualification,  .^t  the  time 
a  very  good  bargain  was  not  driven  by  the  public.  I  do  not  think  anybody  in  Boston  who 
was  acting  on  the  public  side  had  any  idea  of  the  extent  to  which  that  property  was  gutted; 
that  is  to  say.  the  extent  to  which  dividends  were  paid  out  of  capital,  and  nhsnlescenci-  and 
maintenance  had  been  neglected  and  the  railroad  had  been  allowed  to  run  down.  And  now 
the  public,  of  course,  has  got  to  rebuild  it  and  make  a  new  milch  cow  out  of  it.     That  is  to 


470  Electric  Railwav  Problem 

say,  if  the  old  stockholders  ever  contemplate  taking  it  back  again.  And  in  any  event  they 
are  building  it  up  against  themselves  if  they  ever  decide  to  purchase  it. 

"The  Chairman:     Kates  are  going   up  by   leaps  and   tKunuls   in    Boston. 

"Mr.  MacFarland:  Well,  they  have  gone  up  to  10  cents,  and  the  counsel  for  the  railroad 
who  is  here  just  told  me  that  they  are  making  money." 

Asked  what  he  thought  of  the  Cleveland  service-at-cost  plan,  Mr.  MacFarland 
says  at  page  1357  of  the  Proceedings: 

"I  think  it  has  worked  pretty  well  in  Cleveland  under  special  circumstances,  under  cir- 
cumstances that  you  will  not  be  able  without  great  struggle  to  effect  in  other  cities,  and 
under  circumstances  to  bring  about  which  1  think  you  would  find  the  owners  of  the  street 
railways  would  prefer  public  ownership  and  operation.  That  is,  they  went  through  a  reor- 
ganization in  Cleveland  at  the  beginning  of  the  cost-of-service  plan  and  that  reorganization 
squeezed  out  a  great  deal  more  water  than  you  are  liable  to  get  the  stockholders  of  these 
convalescent  roads — I  will  not  say  convalescent  roads  but  sick  roads — to  consent  to  even  in 
their  contrite  mood  now.  Their  cost-of-service  plan  contemplates  the  cost  of  service  after 
paying  the  cost  of  the  capitalization  which  now  exists  in  the  roads. 

"The  Chairman:  Now,  referring  to  the  principle  involved  rather  than  to  the  practical 
difficulties,  do  you  believe  that  if  the  property  of  the  plant  is  properly  valued,  either  by  the 
city  or  by  some  state  tribunal,  and  the  contract  made  which  secures  the  proper  return  to  the 
capital  invested  with  efficient  regulation  over  the  service  and  capital  expenditures,  the  main- 
tenance requirements  and  of  the  accounting — would  that  Ix;  satisfactory  and  properly  safe- 
guard the  public   interest? 

"Mr.  MacFarland:  For  a  while,  while  the  public  was  interested  in  it.  It  would  be  like 
a  new  broom  that  sweeps  clean.  But  just  as  surely  as  those  things  have  worked  out  in  that 
way  in  the  past,  in  the  long  run  the  man  who  is  interested  in  the  private  property,  in  the 
company  under  that  management,  will  find  ways  by  stealth  or  hook  or  crook  of  cumulating 
a  profit  that  was  not  contemplated  in  the  original  contract.  It  always  has  been  so  and  always 
will  be  so." 

Mr.  MacFarland's  testimony  brings  into  sharp  relief  the  testimony  of  Mr. 
Roger  W.  Rabson  and  other  witnesses  who  insist  that  a  service-at-cost  plan 
ought  to  offer  the  investors  a  chance  for  additional  profit,  in  excess  of  the  mini- 
mum return,  as  an  incentive  to  efficient  and  economical  inanagement.  It  will  be 
recalled  that  Mr.  Babson  suggested  as  his  solution  of  the  electric  railway  problem, 
the  lifting  of  all  restrictions  as  to  rates  and  the  equalization  of  public  burdens 
and  service  requirements  as  between  the  railways  and  their  jitney  competitors. 
He  expressed  the  opinion  that  the  street  car  fares  in  Boston  would  be  lower  under 
such  an  arrangement  than  they  are  today  under  public  operation.  lie  gave  as 
his  reason  for  this  opinion  the  fact  that  "the  state  is  holding  the  umbrella"  and 
the  stockholder's  interest  is  gone.  At  pages  1055  and  1056  of  the  Proceedings, 
he  goes  on  to  say : 

"The  wage  worker  is  in  the  same  position.  He  looks  upon  it  as  a  grab-bag,  you  might 
say — that  it  is  not  coming  out  of  anybody  especially,  that  it  is  coming  out  of  the  whole 
public  in  general,  and  that  the  spirit  of  the  age  is  to  grab,  and  consequently  his  restraints 
are  off. 

"It  may  work  out  all  right,  but  I  feel  very  strongly  that  before  we  go  headlong  into 
municipal  ownership  or  service  at  cost  we  should  free  the  street  railways  from  their  shackles, 
that  we  should  stop  iK-r.secuting  them,  and  give  them  an  opportunity  to  save  themselves.  And 
I  am  not  sure  but  that,  in  giving  them  an  opportunity  tn  save  themselves,  some  communities 
woulrl  save  themselves  likewise,  Ix-cause  the  relation  l)etween  the  prosixjrity  of  a  community 
and  the  prosperity  of  its  street  car  system  is  very,  very  vital." 

Mr.  Babson  admitted  that  the  Cleveland  system  must  be  a  good  system  if  it 
produced  the  results  claimed  for  it.  Mr.  Warren  brought  out  the  fact  that  what 
Mr.  Babson  objected  to  in  the  Boston  plan  was  the  public  guaranty  of  the  divi- 
dends.    .\t  page  1062  of  the  Proceedings,  we  find  the  following: 

"Mr.  Warren:  In  Cleveland,  as  I  understand  the  situation  there,  the  only  guaranty  is 
that  the  company  may  charge  up  to  a  certain  limit  a  sufficient  fare  to  meet  that  cost  of  ser- 
vice: but  it  has  to  got  it  out  of  the  operation  of  the  projiorty? 

"Mr.  Babson  :     That  is  more  in  line  with  what  I  have  suggested.     That  is  all  right." 


Service  at  Cost  471 

A  little  further  on,  Mr.  Babson  said  that  the  plan  he  liked  best  was  the  New 
Brunswick  plan,  introduced  by  Professor  Richey.  That  was  a  sliding  scale  plan 
giving  the  stockholders  a  higher  rate  of  return  as  fares  are  reduced.  Mr.  Bab- 
son also  refers  to  the  sliding  scale  plan  adopted  twelve  or  fifteen  years  ago  in 
connection  with  the  gas  service  of  Boston,  and  adds,  at  page  1063  of  the  Pro- 
ceedings : 

"The  effect  of  it  is  that  everybody  is  right  on  his  toes,  and  we  have  a  very  efficient 
organization  there.  We  have  the  best  gas  engineers  in  the  countr>',  and  we  have  very  low 
priced  gas.    I  think  it  has  been  successful." 

Mr.  Ralph  S.  Bauer,  of  Lynn,  did  not  mince  words  in  expressing  his  opinion 
of  the  service-at-cost  plan  as  it  has  worked  out  in  practice  in  Boston,  as  indicated 
by  the  following  statement  by  him  at  page  1625  of  the  Proceedings: 

"This  service-at-cost  plan,  so-called,  is  a  plan  that  is  only  a  temporary  expedient, 
because  of  the  fact  that  there  are  no  measuring  standards  of  efficient,  economic  and  careful 
operation  by  which  the  public  who  ride  on  the  cars  can  determine  whether  or  not  those  costs 
have  been  proper  ones. 

"The  public  trustee  plan  as  worked  out  by  the  Boston  Elevated  Railroad,  in  my  judg- 
ment, is  a  colossal  blunder.  It  nullifies  every  effort  to  careful,  efficient  and  economical 
street  railroad  management.  The  trustees  as  appointed  by  the  Governor  are  most  all  of  them 
lawyers,  no  one  of  them  street  railway  operating  men;  they  have  shown  neither  courage  nor 
initiative  in  handling  the  property,  and  they  have  chased  the  rates  of  fare  up  to  a  point  now 
that  the  people  ride  on  the  street  cars  at  a  10-cent  cash  fare  about  the  same  as  they  do  on 
ambulances,  only  when  they  have  to." 

Interstate  Commerce  Commissioner  Eastman  also  has  his  doubts  of  service 
at  cost  if  applied  as  it  has  been  in  Massachusetts.  At  page  2078  of  the  Pro- 
ceedings, he  says : 

"I  think  it  is  liable  to  work  well  where  it  is  the  result  of  mutual  agreement  between  the 
local  people  and  the  owners  of  the  property,  and  is  not  forced  upon  them  by  some  agency 
like  a  state  government.  In  other  words,  where  it  is  the  result  of  a  mutual  feeling  and  a 
meeting  of  minds  of  those  most  vitally  interested,  and  it  is  also  likely  to  be  successful  where 
the  fares  vary  around  five  cents.  When  you  get  to  a  situation  where  the  cost  of  service  leads 
to  fares  higher  than  five  cents,  you  are  running  into  great  danger,  because  it  is  very  apt, 
if  you  base  it  upon  a  flexible  rule,  to  keep  fares  mounting  up  indefinitely  without  any  real 
advantage  to  anyone.  One  of  the  difficulties  in  raising  fares  is  that  once  you  have  them 
raised  it  is  almost  impossible  to  reduce  them,  if  they  do  not  produce  the  results  desired." 

The  Boston  Elevated  service-at-cost  act  did  not  restore  the  company's  credit 
sufficiently  to  meet  its  pressing  needs  for  new  capital.  The  problem  has  been 
solved  temporarily  by  the  state's  purchasing  of  the  Cambridge  subway  from  the 
company  for  $7,868,000,  thus  placing  this  amount  of  new  capital  at  the  disposal 
of  the  public  trustees  for  construction  purposes. 

The  Bay  State  service-at-cost  act  differs  from  the  Boston  Elevated  act  in 
several  particulars.  It  provided  for  the  reorganization  of  the  old  Bay  State 
Street  Railway  Company  which  was  in  receivers'  hands  when  the  act  was  passed. 
Upon  the  organization  of  the  new  company  the  Governor  was  to  appoint,  with  the 
advice  and  consent  of  the  council,  five  trustees  to  operate  the  road,  but,  in  this 
case,  the  term  of  those  first  appointed  was  to  be  five  years,  although  the  period 
of  public  operation  was  to  be  ten  years,  the  same  as  in  the  case  of  the  Boston 
Elevated.  The  new  company  was  organized  as  the  Eastern  Massachusetts  Street 
Railway  Company,  and  public  operation  went  into  effect  on  June  1,  1919.  By  the 
terms  of  the  Bay  State  act  the  capitalization  of  the  new  company,  including  stock, 
bonds  and  other  evidences  of  indebtedness,  representing  the  property  whose  in- 


472  Electric  Railway  Problem 

vestment  value  was  fixed  by  the  Public  Service  Commission  as  of  August  31,  1916, 
was  limited  to  the  equivalent  ol  $40,282,340  on  a  six  per  cent  basis,  plus  subsequent 
additions  and  improvements.  Certain  adjustments  of  the  sum  just  described  as 
representing  the  recognized  capital  value  were  to  be  made  by  the  Public  Service 
Commission. 

The  new  company  was  authorized  to  issue  serial  bonds,  with  not  more  than 
$5,000,000  outstanding  at  any  one  time,  and  these  bonds  were  to  be  payable  in 
installments  within  a  period  of  not  more  than  ten  years  from  the  dates  of  issue. 
In  addition  to  the  security  of  a  new  mortgage,  the  annual  installments  of  these 
serial  bonds  were  given  a  first  lien  upon  all  the  earnings  of  the  new  company 
applicable  to  dividends  in  the  years  when  such  installments  of  serial  bonds  ma- 
ture, but  the  moneys  used  to  pay  oflf  the  serial  bonds  in  lieu  of  the  payment  of 
dividends  are  to  be  capitalized  in  the  form  of  additional  capital  stock  to  be  dis- 
tributed to  the  stockholders  in  place  of  dividends.  For  the  purpose  of  refunding 
serial  bonds  or  any  maturing  obligations  of  the  new  company  or  of  the  leased 
lines  within  the  state,  or  for  the  purpose  of  making  additions  or  improvements, 
the  public  trustees  are  given  authority  to  cause  the  new  company  to  issue  secur- 
ities under  the  laws  of  the  state,  and  it  is  stipulated  that  serial  bonds  and  C(|uip- 
ment  notes  may  he  issued  without  reference  to  the  amount  of  capital  stock  out- 
standing; also  that  bonds  may  be  sold  at  a  discount,  with  provision  for  the  amor- 
tization of  the  amount  of  the  discount  during  the  life  of  the  bonds. 

Tlie  act  forbade  the  new  company  to  aci|uirc  the  property  of  the  defunct 
Bay  State  company  until  the  trustees  were  satisfied  that  provision  had  been  made 
by  the  security  holders  of  the  old  company  for  paying  in  $1,000,000  in  cash  for 
securities  of  the  new  company  to  be  used  in  the  rehabilitation  of  the  lines  and 
for  other  purposes,  and  also  that  provision  had  l)cen  matle  for  the  immediate  sale 
of  at  least  $2,500,000  of  serial  bonds.  Out  of  the  proceeds  from  this  sale,  the 
sum  of  S500.000  was  to  be  used  to  set  uj)  a  reserve  fund,  and  the  sum  of  $2,000,000 
was  to  be  set  aside  to  be  spent  by  the  trustees  in  additions  and  improvements  or 
in  the  payment  of  receivers'  certificates  issued  for  such  purposes.  The  public 
trustees  were  authorized  to  enter  into  agreements  with  the  purchasers  or  holders 
of  serial  bonds  up  to  the  amount  of  $4,(K)0,000  maturing  in  not  more  than  ten 
years  from  the  date  when  the  new  company  acquired  the  property;  such  agree- 
ments to  provide  that  if  the  earnings  of  the  new  company  otherwise  applicable 
to  dividends  should  be  insulficicnt  to  jwy  the  installments  of  these  serial  bonds  as 
they  mature  the  trustees  shall  make  up  the  deficiency.  In  order  to  enable  the 
trustees  to  make  this  agreement,  it  was  provided  that  the  slate  should  purchase 
from  time  to  time  a  sufficient  amount  of  serial  bonds  to  supply  this  deficiency, 
and  it  was  also  provided  that  the  state  should  be  reimbursed  for  moneys  spent  in 
this  maimer  by  tlie  mmiicipalities  served  by  the  new  company  in  proportion  to 
the  number  of  persons  in  .such  municipalities  using  the  service. 

The  control  of  the  public  trustees  with  respect  to  the  management  and  oper- 
ation of  the  property  is  substantially  the  same  as  in  the  case  of  the  Boston  Ele- 
vated Railway,  and  similar  provisions  obtain  with  respect  to  the  cost  of  service 
and  the  semi-automatic  regulation  of  rates  to  cover  the  cost  of  service.  It  is 
provided,  however,  in  the  case  of  the  Ray  State  lines  that  those  north  of  Boston 


Service  at  Cost  473 

shall  constitute  one  fare  district  and  those  south  of  Boston,  another;  and  that 
the  items  entering  into  the  cost  of  service  shall  be  allocated  by  the  trustees  be- 
tween the  two  districts  for  the  purpose  of  estimating  the  basis  for  fares ;  but 
the  trustees  are  authorized  to  make  further  sub-divisions  of  the  territory  served 
into  fare  districts.  A  special  provision  in  this  law  gives  any  city  or  town  served 
by  the  company's  lines  the  option  to  determine  by  a  majority  vote  of  the  electors 
to  contribute  out  of  taxes  a  certain  amount  toward  the  cost  of  service  "for  the 
purpose  of  preventing  increases  in  fares,  or  of  reducing  fares,  or  of  avoiding  dis- 
continuance or  reduction  of  service."  Such  contributions  may  be  for  the  period 
of  the  war  and  for  two  years  thereafter,  and  are  limited  to  "any  part  or  all  of 
the  increase  in  the  cost  of  operation  due  to  increased  wages,  or  the  cost  of  supplies 
or  coal  in  excess  of  the  average  cost  for  the  year  ending  July  1st,  1914,  as 
determined  and  apportioned  by  the  trustees."  Moreover,  the  contribution  by 
any  city  in  any  one  year  is  limited  to  50  cents  for  each  $1000  of  assessed  valua- 
tion, and  the  contribution  of  any  town  to  $1.00  for  each  $1000  of  assessed  valua- 
tion. It  is  provided  that  if  part  only  of  the  cities  and  towns  in  any  fare  district 
contribute  to  the  cost  of  operation  in  the  manner  just  described  the  trustees 
shall  make  such  adjustments  in  fares  as  they  think  equitable  under  the  circum- 
stances. 

The  return  upon  investment  as  an  element  in  the  cost  of  service  in  the 
case  of  the  Bay  State  lines  is  defined  as  the  interest  payments,  stated  dividends 
on  the  preferred  stock  and  6  per  cent  on  the  common  capital  stock  of  the  new 
company.  In  the  case  of  the  Bay  State  lines  it  is  definitely  provided  that  public 
management  is  to  terminate  at  the  end  of  the  ten-year  period.  The  company 
will  then  come  into  the  control  of  the  property  under  the  general  laws  of  the 
state,  unless,  in  the  meantime,  the  property  has  been  acquired  by  the  state,  or 
by  some  political  sub-division  of  it,  in  accordance  with  the  option  of  purchase 
described  in  the  act.  This  option  is  similar  to  that  contained  in  the  Boston 
Elevated  act.  The  Bay  State  lines  are  relieved  during  the  continuance  of  the 
war  and  for  a  period  of  two  years  thereafter,  unless  otherwise  ordered  by  the 
Public  Service  Commission,  from  paying  "any  part  of  the  expense  of  the  con- 
struction, alteration,  maintenance  or  repair  of  any  street,  highway,  or  bridge, 
or  any  structure  maintained  or  placed  therein  or  thereon,  or  of  the  abolition  of 
any  grade  crossing  or  the  removal  of  wires  from  the  surface  of  any  street  or 
highway  to  an  underground  conduit  or  other  receptacle." 

It  is  to  be  noted  that  service  at  cost  is  defined  in  substantially  the  same  way 
in  the  Boston  Elevated  and  the  Bay  State  acts,  but  the  state  provides  no  guaranty 
in  the  case  of  the  Bay  State  lines  that  the  prescribed  return  on  capital  will  be 
paid  if  it  turns  out  that  the  system  is  unable  to  earn  the  full  cost  of  service. 
However,  as  we  have  already  seen,  the  state's  guaranty  in  the  case  of  the  serial 
bonds  enabled  the  trustees  to  dispose  of  $2,500,000  of  them  on  a  6  per  cent 
basis,  and  in  this  way,  as  Mr.  Loring  testified,  the  trustees  have  been  provided 
with  adequate  new  capital  for  additions  and  improvements  for  a  period  of  two 
or  three  years  at  least.  Under  the  Bay  State  act,  if  deficiencies  accrue,  there  is 
no  provision  for  making  them  up  out  of  taxation,  either  temporarily  or  perma- 
nently,  except   that    individual    municipalities   may,    if    they    wish,   contribute    a 


474  Electric  Railway  Problem 

limited  amount  for  the  purpose  of  keeping  the  fares  down  or  preventing  the 
suspension  of  service.  Moreover,  the  Bay  State  act  contains  no  promise  that 
the  service-at-cost  plan  will  be  continued  beyond  the  termination  of  the  ten-year 
period  of  public  management. 

It  is  apparent  from  the  testimony  of  Mr.  Homer  Loring.  Chairman  of  the 
Board  of  Public  Trustees  now  operating  the  Bay  State  lines,  that  the  deprecia- 
tion policy  now  being  pursued  with  respect  to  this  system  is  similar  to  that 
pursued  by  the  Boston  Elevated  trustees.  At  page  1655  of  the  Proceedings, 
Mr.  Loring  says : 

"We  are  setting  aside  a  depreciation  account  of  $1,041,000. 

"The  Chairman:     .\nd  that  is  much  larijer  than  has  been  heretofore  charged? 

"Mr.  Loring:  Oh.  si.x  times;  I  think  $150,000  was  about  the  largest  amount  they  had 
ever  charged. 

"The  Chairman  :  Is  it  your  view  that  the  depreciation  that  you  have  charged  off  fairly 
represents  what  should  be  charged  in  the  future  or  is  there  some  abnormal  condition? 

"Mr,  Loring:  Of  course,  that  matter  is  affected  verv  largely  by  the  prices  of  material. 
A  million  dollars  depreciation  in  the  old  days  of  the  Bay  State  would  have  been  a  very  large 
amount,  but  it  buys  now  the  same  material  and  labor  that  $500,000  would  have  bought  then. 
The  trustees  were  reluctant  about  setting  the  figure  as  high  as  $1.0(X),000.  but  after  very 
careful  figures  of  the  cost  of  everything  that  that  would  buy  which  went  into  the  tracks  and 
the  power  plant  and  cars  we  made  up  our  minds  that  since  the  law  directed  us  to  charge  an 
adequate  amount,  no  smaller  amount  would  \x  adequate." 

Mr.  Loring  states  that  the  physical  condition  of  the  system  was  bad  when 
the  public  trustees  took  control  and  that  much  deferred  maintenance  had  accu- 
mulated. The  trustees  propose  to  rehabilitate  the  property  and  put  it  into  good 
condition  just  as  rapidly  as  they  can.  At  page  1656  the  following  testimony 
appears : 

"The  Chairman :  What  will  be  done  to  repay  the  state  for  the  large  amount  of  money 
which  it  is  putting  into  this  property  to  build  it  up? 

"Mr.  Loring:  Well,  of  course,  that  is  a  consideration  that  the  state  pays  for  the  security 
owners  turning  over  control  of  the  property. 

"The  Chairman  :  So  it  is  not  expected  that  the  state  can  be  recouped  for  any  expendi- 
ture which  is  made  for  taking  care  of  deferred  maintenance  or  putting  the  property  in  good 
shape? 

"Mr.  Loring:     No,  not  so  far  as  deferred  maintenance  is  concerned. 

"The  Chairman :     That  is  to  be  a  contribution  by  the  state. 

"Mr.  Loring:  That  is  to  be  a  contribution  by  the  state.  .\t  the  same  time  we  are  not 
fixing  the  amount  of  depreciation.  Mr.  Chairman,  at  any  larger  than  a  normal  amount.  In 
other  words,  the  amount  we  are  fixing  tixlay  is  insufficient  to  take  care  of  past  deficiencies." 

But  there  is  this  important  difference  between  the  obligations  assumed  by 
the  commonwealth  toward  the  Bay  State  system  and  the  obligations  assumed 
toward  the  Boston  Elevated  system,  namely,  that  if  the  rehabilitated  Bay  State 
lines  are  turned  back  to  their  owners  in  good  condition,  the  upbuilding  of  the 
property  will  not  have  been  accomplished  through  direct  contributions  of  the 
state,  while  in  the  case  of  the  Boston  Elevated  this  may  be  just  what  will  hap- 
pen in  case  operation  at  a  high  rate  of  fare  should  not  prove  sufficiently  remu- 
nerative to  enable  the  trustees  to  reimburse  the  deficiencies  now  being  tnade  up 
through  taxation. 

All  accounts  agree  that  the  service-at-cost  plan  as  applied  to  the  Bay  State 
lines  has  not  been  an  unqualified  success  from  the  standpoint  either  of  the 
investors  or  of  the  public.  The  unit  rate  of  fare  in  effect  since  July,  1919,  has 
been  10  cents  cash,  without  reduced  rates  for  tickets  except  in  particular  com- 
munities where  the  trustees  have  been  experimenting  with  special  fare  schedules 


Service  at  Cost  475 

in  the  hope  of  getting  the  lost  traffic  back.  Mr.  Loring  testified  that  fare  in- 
creases on  the  Bay  State  lines  have  in  every  case  resulted  in  some  gain  in  gross 
revenues.  Upon  this  point  Mr.  Loring's  testimony,  at  pages  1657  and  1658  of 
the  Proceedings,  is  very  significant : 

•■Commissioner   Sweet:     You   have   gained,   say,   a   little? 

"Mr.  Loring:     Yes,  it  is  comparatively  little. 

"Commissioner  Sweet:     But  you  have  greatly  diminished  the  car  riding? 

"Mr.  Loring  :     \'ery  greatly. 

"Commissioner  Sweet:  You  have  simply  from  a  much  smaller  number  of  people  got 
double  the  amount  of  money  and  that  has  made  a  comparatively  slight  increase  in  the  total 
revenues  ? 

"Mr.  Loring :  \\e  feel  it  is  a  very  unfortunate  situation,  that  a  public  utility  as  it  ceases 
to  serve  the  public,  as  the  part  of  the  public  it  serves  is  cut  down,  its  functions  are  shrunken 
just  that  much. 

"Commissioner  Sweet:  In  order  to  increase  the  revenue  very  little  you  have  decreased 
the  value  of  the  utility  to  the  public  a  great  deal. 

"Mr.  Loring:  We  as  trustees  have  determined  on  the  cour.^e  of  trying  to  get  the  income 
we  need  from  as  many  people  as  possible. 

"Commissioner  Sweet :  That  is  it  exactly.  You  want  to  keep  up  in  value  as  a  public 
service  utility. 

"Mr.  Loring :     That  is  the  course  we  want  to  follow,  yes. 

"Commissioner  Sweet :  So  you  would  not  recommend  to  this  Commission  any  adoption 
of  a  report  or  the  formulation  of  conclusions  that  would  produce  the  revenue  necessary  for 
immediate  use  at  the  sacrifice  of  the  real  purpose  for  which  these  organizations  exist,  that  is, 
service  to  the  public,  unless  their  very  existence  depends  upon  doing  so.  You  would  deem 
that  a  very  last  resort,  would  you  not? 

"Mr.  Loring:  Yes,  I  would  say  I  would  try  other  things  first.  Of  course,  assuming 
you  have  got  to  raise  the  money  to  continue  the  company's  credit,  if  no  other  way  can  be 
found  you  have  got  to  get  your  revenue  from  a  few  people,  but  I  think  it  is  very  unfortunate 
if  that  course  has  to  be  followed. 

"Now,  that  of  course  is  what  is  happening  in  the  Boston  Elevated  situation  to  a  less 
extent  than  in  ours.  They  are  now  getting  the  money.  I  understand  they  are  getting  now 
their  cost  of  service  out  of  the  public,  but  of  course  they  are  getting  it  through  a  substantial 
loss  in  the  number  of  car  riders.  I  think  it  far  better  to  get  it  that  way  than  not  at  all, 
because  they  are  maintaining  good  service  and  serving  the  people  well,  and  if  that  is  the 
only  way,  all  right;  but  I  think  it  would  be  very  much  better  if  the  same  amount  could  be 
obtained  in  some  way  from  more  fare  earnings.  But  that  can  only  be  done  by  experimenting 
with  fares  and  trying  them  out. 

"Commissioner  Sweet :  Is  it  your  belief  that  a  great  deal  of  the  falling  ofT  of  patronage 
is  due  to  ill-will,  to  a  sort  of  resentment  on  the  part  of  the  public  against  these  corporations 
in  the  belief  they  ought  to  give  them  the  service  at  a  small  price? 

"Mr.  Loring :  There  is  no  question  about  it  in  my  mind.  I  have  seen  proof  of  it  again 
and  again  and  again.  When  we  raised  the  fare  to  10  cents  it  resulted  in  a  virtual  boycott 
in  some  cities,  and  I  understand  in  one  city  now — the  manager  of  a  factory  told  me  in  that 
city  now — the  help  that  rode  on  the  street  cars  were  jeered  by  the  other  people.  But,  of  course, 
that  is  wholly  lack  of  information." 

In  the  Electric  Railway  Journal,  issue  of  February  14,  1920,  is  an  article 
showing  the  increase  in  gross  revenues  of  the  Eastern  Massachusetts  Street 
Railway  for  the  first  seven  months  of  public  operation,  that  is,  from  Tune  to 
December,  1919,  as  compared  with  the  same  months  of  the  preceding  year  when 
the  Bay  State  lines  were  being  operated  by  a  receiver.  The  figures  show  an 
increase  of  19.3  per  cent  in  gross.  During  the  earlier  period  the  unit  cash  fare 
under  the  zone  system  was  six  cents.  During  the  later  period  the  unit  cash  fare 
was  ten  cents.  Moreover,  it  is  known  that  the  latter  part  of  1918  was  generally 
in  the  electric  railway  industry  a  low-traffic  period,  while  the  latter  part  of  1919 
was  a  high-traffic  period.  The  comparative  figures  of  gross  earnings  quoted  in 
the  Journal  article  are  as  follows : 


476  Electric  Railway  Problem 

Per  Cent 

Month  1918  1919  Increase  Increase 

June     $909,360  $988,319  $7&958  8.7 

lulv     1,029.111  1.169.775  140,664  13.7 

August    1,114.068  1,286.010  171,942  15.4 

September    %9,768  1,104.618  134,850  13.9 

October    795,616  1,073.463  277.847  34.9 

November    879,325  1.0.S5.809  176,484  20.0 

December    913,535  1.214,632  301,097  32.9 

Total $6,610,783         $7,892,626       $1,281,783  19.3 

The  figures  for  the  Union  Street  Railway  Company  operating  in  Xew 
Bedford,  where  the  five-cent  fare  was  retained,  and  no  change  in  rates  made 
except  by  the  discontinuance  of  the  3-cent  workingmen's  tickets  and  the  with- 
drawal of  certain  transfer  privileges  on  an  interurban  division,  show  an  increase 
of  37  per  cent  in  gross  passenger  earnings  for  the  same  seven  months  period,  and 
an  increase  of  24.4  per  cent  in  the  inimber  of  revenue  passengers  carried.  For 
the  month  of  December  alone,  when  the  Eastern  Massachusetts  increase  in  gross 
earnings  was  32.9  per  cent,  the  New  Bedford  company  had  an  increase  of  38 
per  cent  in  traffic  and  42  per  cent  in  gross  passenger  revenue.  According  to  the 
article  in  the  Electric  Railway  Journal,  it  was  expected  that  for  the  first  eight 
months  of  operation  under  the  public  trustees  the  entire  system  of  the  Eastern 
Massachusetts  company  would  "just  about  show  the  bond  interest  was  covered." 
There  is  nothing  in  the  record  or  in  the  supplementary  information  available 
to  me  to  show  that  the  service-at-cost  plan  in  efTect  on  the  two  big  Massachu- 
setts electric  railway  systems  has  restored  the  credit  of  either  company,  except 
to  the  extent  that  public  aid  has  been  given  or  guaranteed.  What  Mr.  Loring 
thinks  about  the  importance  of  the  reestablishment  of  credit  appears  at  page 
1653  of  the  Proceedings,  where  he  says : 

"I  feel  very  strongly  that  that  is  the  big  question  that  the  street  railroad  business  of  the 
country  has  before  it  now,  and  I  am  afraid,  the  fact  is  I  know,  that  in  many  cases,  in  many 
cities,  it  is  put  to  one  side.  It  behings  right  at  the  front  1  believe  at  all  timis.  The  com- 
panies cannot  run  and  .serve  the  public  well  without  credit.  There  is  a  constant  demand  for 
better  facilities,  and  personally  1  believe  today  the  only  way  they  can  be  bridged  over  this 
exceedingly  uncertain  period  which  confronts  them  is  through  some  form  of  public  credit. 
And  that  leads  me  to  say  that  if  the  public  is  going  to  lend  its  credit  to  them,  the  public 
mu.st  have  a  decided  hand  in  the  operation  of  the  properties  during  the  period  for  which  the 
credit  is  extended." 

The  general  service-at-cost  act,  passed  by  the  Massachusetts  legislature 
in  1918.'  has  thus  far  been  a  failure,  if  for  no  other  reason  than  that  no  com- 
pany has  accepted  it.  By  this  act  the  cost  of  service  is  defined  as  including 
"operating  expenses,  taxes,  rentals,  interest  on  all  indebtedness.  *  *  *  « 
dividends  on  preferred  stock  and  interest  return  at  the  rate  of  six  per  cent  per 
annum  upon  the  stock  investment  as  determined  by  the  commission,  ♦  *  ♦  * 
and  such  allowances  for  depreciation,  for  obsolescence  and  for  losses  in  respect 
to  property  sold,  destroyed  or  abandoned  as  may  be  fixed  from  time  to  time  in 
the  case  of  each  company  by  the  commission,  and  all  other  expenditures  and 
charges  which,  under  the  classification  of  accounts  of  the  Interstate  Commerce 
Commission  and  under  the  laws  of  the  commonwealth,  are  properly  chargeable 
against  income  or  surplus."  The  term  "stock  investment"  is  defined  to  mean 
the  "capital  investment"  le.ss  the  amount  paid  in  for  outstanding  preferred  stock, 


Service  at  Cost  477 

bonds  and  other  evidences  of  funded  indebtedness.  The  term  "capital  invest- 
ment" is  defined  as  meaning  "the  amount  of  cash  or  fair  value  of  the  property 
paid  in"  for  stock,  bonds  and  other  securities  and  "properly  expended  for  capi- 
tal purposes,"  all  as  to  be  determined  by  the  Public  Service  Commission. 

Any  company  accepting  this  general  act  is  required  to  provide  a  reserve 
fund  of  not  less  than  6  per  cent  nor  more  than  12  per  cent  of  the  gross  earnings 
of  the  preceding  year.  This  reserve  fund  may  be  provided  by  the  issuance  of 
either  bonds  or  common  stock,  or  preferred  stock,  issued  under  provisions  of 
law.  The  company  is  also  required  to  provide  an  improvement  fund  to  be 
raised  by  the  issuance  of  securities  in  an  amount  to  be  determined  by  the  com- 
mission, but  not  exceeding  5  per  cent  of  the  capital  investment.  This  fund 
must  be  fully  subscribed  within  sixty  days  after  the  determination  of  the  capital 
investment,  and  must  be  paid  in  from  time  to  time  as  required  by  a  plan  of 
gradual  improvement  to  be  submitted  to  and  approved  by  the  commission. 

Any  company  desiring  to  accept  this  act  is  required  to  apply  to  the  com- 
mission to  determine  the  amount  of  its  capital  investment  and  the  amount  of  its 
stock  investment ;  also,  the  status  of  its  unfunded  debt,  together  with  evidence 
satisfactory  to  the  commission  that  it  has  provided  or  will  provide  the  reserve 
and  improvement  funds  above  described. 

Upon  the  acceptance  of  the  act  a  company  is  required  to  file  a  schedule  of 
nine  different  grades  of  fare  and  of  transfer  privileges,  one  of  which  it  shall 
designate  as  the  initial  grade  which  it  desires  to  establish  and  which,  in  its  opin- 
ion, will  enable  it  to  earn  sufficient  income  to  meet  the  cost  of  service.  Four  of 
the  other  grades  shall  provide  for  progressive  increases  and  four  for  progressive 
decreases  in  revenue,  and  shall  be  based  upon  a  calculation  that  each  increase 
or  decrease  will  be  equivalent  to  30  per  cent  of  the  normal  reserve  fund.  The 
Public  Service  Commission,  after  a  hearing,  is  to  approve  the  fare  schedule  so 
filed  or  else  to  establish  a  substitute  schedule  based  on  the  same  general  prin- 
ciples. If  at  the  end  of  any  quarter  of  the  calendar  year  the  amount  in  the 
reserve  fund  is  30  per  cent  above  normal,  and  if  during  the  preceding  three 
months  the  company's  income  has  been  greater  than  the  cost  of  service,  the 
company  is  required  within  thirty  days  thereafter  to  put  into  effect  the  next 
lower  grade  of  fare,  and  conversely,  if  the  amount  in  the  reserve  fund  is  less 
than  70  per  cent  of  the  normal  amount,  and  if  during  the  preceding  three  months 
the  company's  income  has  been  less  than  the  cost  of  service,  the  next  higher 
grade  of  fare  must  be  put  into  effect. 

By  the  acceptance  of  the  act  a  company  agrees  to  sell  its  entire  property 
and  franchises  as  a  going  concern  to  the  state  or  to  any  city  or  town  at  any 
time  for  a  cash  payment  equal  to  the  stock  investment  plus  the  amount  of  cash 
paid  in  for  preferred  stock,  and  the  purchaser  of  the  property  will,  in  addition, 
assume  "all  the  outstanding  bonds,  contracts,  leases  and  other  liabilities  of  the 
company."  As  in  the  Boston  Elevated  and  Bay  State  acts,  it  is  stipulated  that 
nothing  in  this  act  shall  affect  the  right  of  the  state  or  a  municipality  to  acquire 
the  property  of  a  company  by  condenmation  proceedings. 

For  any  company  accepting  the  act  the  Governor  is  to  appoint  three  members 
of  the  board  of  directors  of  the  company.    In  order  that  the  Public  Service  Com- 


478  Electric  Railway  Problem 

mission  may  exercise  adequate  supervision  over  companies  accepting  this  ser- 
vice-at-cost  plan,  such  companies  are  required  to  furnish  the  commission  monthly 
statements  showing  the  condition  of  the  reserve  fund,  the  company's  income 
and  expenditures  and  such  other  information  as  the  commission  may  desire. 
The  state  is  to  be  divided  by  the  commission  into  street  railway  districts,  and 
for  each  district  within  which  the  service-at-cost  act  has  been  accepted  by  one 
or  more  companies  the  commission  is  to  appoint  one  or  more  resident  super- 
visors, whose  salaries  and  expense  allowances  are  to  be  fixed  by  the  commission 
and  paid  by  the  company  or  companies  under  their  supervision  as  an  operating 
expense.  It  will  be  the  duty  of  these  district  supervisors  "to  keep  in  constant 
touch  with  the  operation  of  the  companies  and  to  inform  the  commission  of  all 
complaints  and  criticism  of  the  service  rendered."  The  act  provides  that  if  any 
special  investigation  of  any  company  is  deemed  necessary  by  the  commission, 
the  investigation  may  be  ordered  and  the  company  will  have  to  pay  the  expense 
of  it.  The  act  also  provides  that  "the  commission  may  require  such  changes  in 
the  management  and  operation  of  any  company  which  has  accepted  the  pro- 
visions of  this  act  as  in  its  opinion  may  be  necessary  for  the  efficient  conduct  of 
the  business  of  the  company  in  the  interest  of  the  public."  It  is  also  provided 
that  if  a  majority  of  the  state  directors  of  a  company  operating  under  this  act 
believe  that  a  particular  order  or  decision  of  the  Public  Service  Commission 
would  impair  the  ability  of  the  company  to  pay  a  6  per  cent  interest  return  upon 
the  stock  investment,  they  shall  so  advise  the  commission  in  writing,  and  if  the 
commission  still  insists  upon  its  order  or  decision  the  company  may  apply  to 
the  supreme  judicial  court  for  a  reversal  or  modification  of  the  order  or  deci- 
sion ;  and  the  court  may  appoint  three  commissioners  to  determine  the  facts  and 
questions  at  issue,  and  their  report,  when  confirmed  by  the  court,  will  be  final. 

It  is  noteworthy  that  this  general  service-at-cost  act  differs  from  the  Boston 
Elevated  and  Bay  State  special  acts  in  the  fact  that  it  does  not  proviile  for  public 
operation  and  does  not  provide  for  a  state  or  municipal  guaranty  either  of  new 
securities  to  be  issued  or  of  the  fixed  return  upon  the  existing  investment.  It 
is  to  be  remembered  that  outside  of  the  Boston  Elevated  and  Bay  State  systems 
there  are  several  urban  street  railways  of  considerable  size  in  Massachusetts, 
notably  those  of  Worcester,  Springfield.  Holyoke  and  New  Bedford.  If  none 
of  these  systems  has  been  tempted  to  embrace  the  service-at-cost  plan  under  the 
terms  prescribed  by  the  State  of  Massachusetts  in  this  general  act,  it  may  per- 
haps be  presumed  that  service  at  cost  without  a  public  guaranty  is  not  to  be 
regarded  as  the  solution  of  the  problem  of  electric  railway  credit  in  Massachusetts. 

The  Cincinnati  service-at-cost  ])Ian.  adopted  in  August,  191S,  differs  in 
certain  respects  from  all  of  the  plans  thus  far  described.  The  occasion  for  the 
adoption  of  the  plan  was  the  fact  that  the  existing  street  railway  franchise  in 
Cincinnati,  granted  in  189(1  for  a  term  of  50  years,  contained  a  provision  that 
at  the  end  of  the  first  20  years  and  each  15  years  thereafter  its  terms  and  con- 
ditions should  be  open  to  revision  and  that  the  new  rates  of  fare  to  be  charged 
should  be  based  upon  the  cost  of  carrying  passengers  at  the  time  of  the  revision. 
In  point  of  fact  a  revision  of  the  ordinance,  coupled  with  a  lease  of  a  proposed 
rapid  transit  line,  was  negotiated  in  1917  and  ratified  by  the  voters  of  Cincinnati. 


Service  at  Cost  479 

This  particular  plan,  however,  was  defeated  by  a  decision  of  the  Ohio  Supreme 
Court,  which  held  the  new  ordinance  to  be  invalid  on  the  ground  that  it  made 
provision  for  lending  the  city's  credit  to  a  private  company.  Delays  incident  to 
the  negotiation  of  the  rapid  transit  lease,  and  the  further  delays  resulting  from 
the  litigation,  threw  the  problem  of  the  revision  of  street  railway  fares  in  Cin- 
cinnati over  into  the  period  of  high  prices  resulting  from  the  war.  Mr.  W.  C. 
Culkins,  at  that  time  Cincinnati's  Director  of  Street  Railroads,  explains  at  pages 
472  and  473  of  the  Proceedings  the  general  problem  with  which  the  city  was 
confronted  and  the  attitude  it  assumed  towards  it.     Upon  this  point  he  says : 

"Now,  in  approaching  this  question  the  city  took  the  view  in  the  experience  that  had 
already  appeared  during  the  war  times  that  there  was  a  new  viewpoint  necessary  in  the 
working  out  of  a  franchise  that  would  be  the  most  serviceable  to  all  concerned.  They  realized 
that  a  street  railway  utility  was  the  key  utility  in  any  community,  since  it  made  all  other 
industries  possible,  and  that  therefore  it  was  highly  important  to  the  development  of  the 
community  that  some  kind  of  a  franchise  be  worked  out  which  would  allow  the  community 
itself  to  expand  and  to  do  its  part  in  the  general  expansion  of  the  country.  They  took  rather 
the  new  view.  The  old  franchise  was  the  old  type  of  franchise.  It  contained  very  few 
restrictions ;  it  provided  that  cars  should  run  as  often  as  the  public  convenience  required,  and 
neglected  to  say  who  should  determine  that.  And  it  was  found  there  was  a  very  great  differ- 
ence of  opinion  between  the  stockholder  and  the  strap  hanger  as  to  how  often  cars  ought 
to  run.  The  view  taken  by  the  city  in  this  case  was  that  we  should  visualize  a  street  railway 
franchise  not  so  much  as  a  permit  given  to  permit  a  corporation  to  operate  an  industry  in 
the  city,  but  the  creation  of  an  agency  to  carry  out  a  purely  municipal  function ;  that  it  was 
the  duty  and  the  function  of  the  city,  which  it  might  exercise  of  its  own  motion  and  of  itself, 
to  provide  transportation  of  its  people,  and  if  it  did  not  do  it  that  it  should  create  an  agency 
under  its  control  that  would  carry  out  this  function  in  the  way  that  the  city  should  direct. 

"It  was  very  evident  that  most  of  the  trouble  in  street  railway  franchises  was  growing 
out  of  too  much  rigidity  all  along  the  line,  not  only  in  rates  of  fares  but  in  terms  and  con- 
ditions, and  the  city  felt  that  perhaps  the  cure  for  too  much  rigidity  was  a  great  deal  of 
elasticity.  The  question  was  opened  at  a  time  when  prices  were  very  high,  when  it  would 
be  obviously  unfair  to  the  company  to  expect  them  to  operate  on  a  rate  of  fare  based  on 
pre-war  conditions.  It  would  be  obviously  unfair  to  the  community  to  ask  them  to  allow 
the  company  a  rate  of  fare  based  upon  war  times  which  would  continue  for  a  period  until 
1931.  assuming  that  there  was  a  probability  at  least  of  there  being  some  change  in  conditions 
during  that  period.  So  that  the  thing  which  seemed  to  be  obvious  was  the  service-at-cost 
plan,  since  it  would  automatically  adjust  itself  to  these  changing  conditions.  It  would  be 
high  enough  to  allow  the  public  to  have  the  kind  of  service  that  it  wanted  and  was  willing 
to  pay  for,  and  it  would  automatically  reduce  those  rates  when  the  costs  and  market  condi- 
tions changed  in  accordance  with  that.  So  that  a  plan  was  adopted  that  follows  somewhat 
the  Cleveland  plan,  being  the  oldest  service-at-cost  plan  in  operation  then,  with  such  modifi- 
cations as  we  felt  experience  had  warranted  in  that  plan." 

The  first  striking  thing  about  the  Cincinnati  plan  is  that  the  contract  was 
not  based  upon  a  valuation,  but  rather  upon  a  recognition  of  the  existing  fixed 
charges  of  the  Cincinnati  Traction  Company,  including  its  obligation  to  pay  a 
rental  to  the  Cincinnati  Street  Railway  Company,  owner  of  the  original  lines, 
equivalent  to  6  per  cent  on  the  lessor  company's  capital  stock.  This  basis  of 
settlement  was  arrived  at  after  three  physical  valuations  of  the  property  had 
been  made,  one  by  the  company,  one  by  the  Ohio  Public  Utilities  Commission  and 
one  by  an  appraisal  engineer  employed  by  the  city.  The  capitalization  finally 
accepted  did  not  vary  much  from  the  reproduction-cost  valuation  made  by  the 
state  commission,  but  was  about  double  the  depreciated  value  fixed  by  the  city's 
own  expert. 

The  gross  receipts  are  to  be  used  for  the  payment  of  the  several  elements  of 
the  cost  of  service  in  the  following  order : 

A.  Operating  expenses,  including  the  liquidation  of  accrued  personal  injury 
claims ;  also,  all  taxes  and  other  governinental  imposts  not  properly  charsreable 


480  Electric  Railway  Problem 

to  capital  and  not  including  the  percentage  tax  on  gross  earnings  paid  to  the 
city;  also,  all  payments  and  charges  for  depreciation  which  for  the  first  period 
of  5  years  under  the  contract  are  to  be  made  in  the  manner  and  according  to  the 
practice  previously  followed  by  the  company,  unless  otherwise  ordered  by  the 
Ohio  Public  Utilities  Commission,  and  after  the  end  of  this  period  as  "ascertained, 
determined,  fixed  and  prescribed"  by  the  commission ;  such  depreciation  charges 
to  include  an  amount  sutticicnt  to  pay  the  company's  equipment  notes  as  they 
fall  due  from  year  to  year  unless  otherwise  ordered  by  the  commission;  also, 
payment  for  the  cost  incurred  by  the  cit>'  and  the  company  in  connection  with 
the  valuation  of  the  property,  and  the  cost  incurred  by  the  company  for  its  part 
of  a  traffic  survey  begun  in  August,  1916,  these  payments  to  be  charged  as  oper- 
ating expenses  and  distributed  over  a  period  of  6  years  from  April  1,  1919;  also, 
payment  to  the  city  of  certain  viaduct  rentals ;  also,  expenses  and  court  costs 
incurred  by  both  the  city  and  the  company  growing  out  of  the  enforcement  or 
resistance  to  the  enforcement  of  any  ordinance,  order  or  decision  provided  for 
in  the  contract.  Immediately  upon  the  contract  going  into  effect,  the  city  and 
company  were  to  apply  to  the  Ohio  Public  Utilities  Commission  to  establish  sys- 
tems of  accounts  to  be  kept  in  connection  with  the  operation  of  the  property 
that,  under  the  agreement,  the  city  would  have  the  right  to  purchase. 

B.  Annual  rentals  provided  for  by  the  leases  of  the  underlying  properties, 
amounting  in  the  aggregate  to  $1,234,937. 

C.  An  annual  payment  of  $215,000  for  interest  and  $82,445  for  sinking 
funds  on  $4,000,000  of  capital  expenditures  made  by  the  operating  company 
prior  to  December  31.  1916;  also,  interest  on  the  operating  company's  equipment 
notes,  such  notes  amounting  in  the  aggregate  to  $1,159,000.  The  $4,000,000 
and  the  $1,159,000.  together  aggregating  $5,159,000,  were  designated  as  the 
"reducible  debt,"  which  is  to  be  paid  off  out  of  earnings. 

D.  Interest  and  other  fixed  charges  on  securities  issued  to  reimburse  the 
company  for  capital  expenditures  and  mode  subsequent  to  January  1,  1^17.  The 
contract  provides  that  the  amount  and  character  of  the  securities  or  notes  to 
be  issued  by  the  company,  the  rate  of  interest  or  dividends  thereon,  the  sinking 
fund  or  other  method  of  retiring  them,  if  any,  and  the  price  at  which  they  may 
be  sold,  shall  be  subject  to  the  approval  of  the  director  of  street  railroads  and 
also  of  the  (J)liio  Public  Utilities  Commission.  Under  this  sub-division,  also, 
comes  interest  on  floating  debt;  also,  interest  on  equipment  notes  issued  after  the 
ordinance  took  etTect;  also,  payment  of  principal  of  equipment  notes,  if  the  Public 
Utilities  Commission  requires  the  payment  of  such  notes  through  the  deprecia- 
tion funds  to  be  suspended  without  making  other  specific  provision  for  their 
payment ;  also,  payments  to  the  city  on  account  of  the  construction  and  installa- 
tion of  tracks  and  poles  on  the  Hopple  Street  viaduct,  but  such  ixiymeiits.  though 
made  out  of  the  gross  earnings,  are  to  be  charged  as  an  arldition  or  betterment 
to  the  company's  pro|)erly.  It  is  provided  that  as  between  the  city  and  the  com- 
pany no  charge  shall  be  made  to  capital  for  imjirovements,  additions  or  better- 
ments paid  for  by  the  city  or  from  donations  to  the  company  or  from  special 
assessments  against  i)rnperty  not  owned  by  the  company,  but  the  proportion  of 
the  cost  of  viaducts  and  of  the  elimination  of  grade  crossings  and  other  special 


Service  at  Cost  481 

assessments  which  have  been  or  may  hereafter  be  paid  by  the  company  are  to  be 
charged  to  capital  as  additions  and  betterments. 

E.  An  annual  payment  of  $416,000  to  the  operating  company  as  an  earning 
upon  the  capital  invested  by  it  after  it  came  into  possession  of  the  leased  lines, 
in  addition  to  the  "reducible  debt"  provided  for  under  sub-division  C. 

F.  An  annual  payment  of  $350,000  to  the  City  of  Cincinnati  as  a  tax  on  the 
company's  gross  earnings;  also,  certain  sums  required  to  nxake  up  to  the  city 
the  company's  arrearages  in  the  percentage  tax  due  under  the  old  ordinance  prior 
to  the  date  of  the  new  contract. 

G.  An  amount  to  be  fixed  by  the  director  of  street  railroads  for  the  accu- 
mulation of  an  adequate  working  capital  fund. 

H.  A  reserve  fund  of  $250,000  is  to  be  provided  from  the  sale  of  securities 
and  all  surplus  gross  receipts  remaining  after  the  payments  provided  for  under 
sub-divisions  A  to  G  inclusive  are  to  be  added  to  this  reserve  fund  until  it  reaches 
the  nomial  sum  of  $400,000.  After  the  fund  has  been  built  up  to  this  amount, 
the  surplus  gross  receipts  are  to  be  divided  between  it  and  the  company  in  certain 
proportions,  dependent  upon  the  rate  of  fare  being  charged  from  time  to  time. 
If  the  fare  for  adult  passengers  is  more  than  6  cents,  the  reserve  fund  will 
get  all  of  the  surplus  gross  receipts ;  if  the  fare  is  6  cents,  the  fund  will  get 
80  per  cent  and  the  operating  company  20  per  cent  of  the  surplus ;  if  the  fare 
is  SjA  cents,  the  fund  will  get  70  per  cent  and  the  company  30  per  cent;  if  the 
fare  is  5  cents  or  less,  the  fund  will  get  55  per  cent  and  the  company  45  per  cent. 

The  contract  provides  that  whenever  the  reserve  fund  reaches  $650,000 
the  fares  shall  be  reduced,  and  thereafter  at  intervals  of  not  less  than  three 
months  the  fare  shall  be  further  reduced  so  long  as  the  reserve  fund  continues 
to  grow.  Conversely,  fares  are  to  be  increased  when  the  amount  in  the  reserve 
fund  gets  as  low  as  $250,000.  All  deficiencies  in  the  payments  provided  for 
under  sub-divisions  A  to  G  above  enumerated  are  to  be  charged  against  the 
reserve  fund  and  are  to  be  taken  into  consideration  in  determining  the  condition 
of  the  fund  at  any  given  time  with  respect  to  its  effect  upon  the  fare  schedules. 
Provision  is  made  for  published  notice  for  at  least  one-half  month  of  any  change 
of  fares  that  is  to  be  put  into  effect.  All  payments  and  accruals  payable  out  of 
gross  receipts  as  above  described  are  to  be  cumulative  in  the  order  named,  and 
the  company  is  authorized  to  borrow  money  temporarily  to  pay  any  deficiencies 
under  sub-divisions  A  to  F  inclusive. 

The  city  reserves  the  right  to  acquire  the  properties  under  the  power  of 
eminent  domain  conferred  upon  municipalities  by  the  constitution  of  Ohio,  and 
also  reserves  the  option  to  take  over  the  property  at  any  time  upon  payment  of 
the  sum  of  $26,238,950;  plus  any  portion  of  the  "reducible  debt"  outstanding 
at  the  time ;  plus  the  amount  necessary  to  pay  and  retire  car  trust  notes  issued 
subsequent  to  the  date  of  the  ordinance  and  outstanding  at  the  time  of  purchase; 
plus  the  amount  necessary  to  pay  and  retire  the  then  outstanding  securities 
issued  for  the  reserve  fund  or  for  capital  expenditures  subsequent  to  January  1, 
1917;  plus  "any  and  all  accrued  and  unliquidated  deficiencies  at  the  time  of 
such  purchase  in  the  payments  required  to  be  made  under  sub-divisions  A  to  F, 
both  inclusive" ;  plus  all  sums  raised  and  paid  by  the  company  prior  to  the  time 


482  Electric  Railway  Problem 

of  purchase  in  financing  deficiencies  in  the  gross  receipts  and  not  subsequently 
liquidated;  minus  the  balance  in  all  depreciation  and  insurance  funds  accrued 
after  January  1,  1917,  and  held  by  the  company;  also,  minus  all  sums  paid  into 
sinking  funds  for  securities  issued  by  the  company  after  January  1,  1917;  also, 
minus  the  sum  or  sums  at  the  time  of  purchase  in  the  working  capital  and  reserve 
funds;  also,  minus  a  sum  equal  to  the  aggregate  amount  of  payments  made  and 
judgments  satisfied  after  January  1,  1917,  for  injuries  and  damages  occasioned 
prior  to  that  date.  At  the  time  of  purchase  under  this  option,  the  company's 
cash  on  hand,  its  bills  and  accounts  receivable  from  the  operation  of  the  property 
and  its  cash  from  the  sale  of  securities  and  notes  as  provided  in  the  contract, 
will  pass  to  the  city,  and  the  city  will  have  to  assume  all  of  the  company's  out- 
standing contracts  and  obligations  and  pay  all  its  bills  and  accounts  payable  for 
obligations  incurred  under  the  terms  of  the  agreement. 

At  the  time  the  Cincinnati  service-at-cost  plan  was  put  into  effect  the  initial 
rate  of  fare  should  have  been  considerably  more  than  5  cents,  but  as  both  Mr. 
Culkins  and  Mr.  Walter  A.  Draper,  \'ice-President  of  the  Cincinnati  Traction 
Company,  testified,  the  new  scheme  was  started  off  with  the  5-cent  fare  as  a 
means  of  forestalling  a  referendum  which  was  threatened  by  interests  that  were 
opposed  to  a  higher  fare.  The  rate  schedule  put  into  effect  at  the  start  provided 
a  5-cent  cash  fare  for  adults,  and  a  fare  of  2i/2  cents  for  children  under  10 
years  of  age  other  than  infants,  the  latter  being  carried  free.  l"pon  the  pay- 
ment of  the  cash  fare  a  passenger  was  entitled  to  free  transfer  privileges.  In 
the  operation  of  the  flexible  fare  feature  of  the  contract,  based  upon  the  fluctua- 
jions  in  the  reserve  fund  as  detennincd  by  the  cost  of  service,  each  successive 
decrease  or  increase  was  to  be  of  lA  cent  per  adult  passenger  and  of  half  that 
rate  for  children.  Tickets  for  adults  were  to  be  sold  in  strips  or  packages  of  6 
and  tickets  for  children  in  strips  or  packages  of  4,  but  tickets  were  not  to  be 
sold  at  reduced  rates. 

Under  the  Cincinnati  plan  the  city  reserves  to  itself  the  control  of  the 
service  on  all  of  the  company's  routes,  including  the  right  to  fix  the  operating 
schedules,  the  type  of  cars  and  the  transfer  regulations  and  to  fix,  change  and 
extend  routes.  The  city's  right  to  rccjuire  extensions  and  changes  in  routes  is 
to  be  exercised  by  ordinance  to  the  extent  that  the  city  council  is  empowered 
under  this  contract,  the  city  charter  and  the  laws  of  the  state  to  require  such 
extensions  or  changes.  The  control  of  sei^ice,  except  with  respect  to  extensions 
and  rerouting,  is  vested  by  the  agreement  in  the  director  of  street  railroads,  an 
official  whose  office  is  created  by  the  city  charter  independent  of  the  provisions 
of  the  street  railway  contract.  The  director  is  to  exercise  control  by  written 
order,  effective  10  days  after  service  upon  the  company,  unless  within  that  time 
the  company  files  objections  to  the  order.  In  case  objections  are  filed  with  him, 
the  director  is  required  to  hold  a  public  hearing  in  the  matter  as  soon  as  prac- 
ticable and  thereafter  to  serve  upon  the  company  a  copy  of  his  decision.  All 
orders  of  the  director  against  which  no  complaint  is  filed,  and  all  of  his  decisions 
after  a  hearing,  arc  to  be  "final  and  conclusive  and  enforcible  bv  the  citv  by 
an  action  in  specific  performance."  and  the  company  may  defend  snch  an  action 
"solely  and  only  on  the  grounds  that  as  to  orders  or  decisions  involving  expen- 


Service  at  Cost  483 

ditures  for  operating  expenses  the  budget  or  supplementary  allowances  are  insuf- 
ficient to  enable  the  operating  company  to  perform  its  corporate  obligations, 
maintain  its  organization  and  perform  all  the  duties"  imposed  upon  it  under 
the  terms  of  the  ordinance,  or  that,  where  capital  expenditures  are  involved,  the 
company,  "acting  diligently  and  in  good  faith  and  using  all  usual  means  to  do 
so,"  is  unable  to  provide  the  funds  for  financing  the  expenditures  required  by 
the  order. 

The  director  of  street  railroads  acts  as  the  technical  adviser  of  the  city 
council  and  of  all  city  officials  in  all  matters  within  their  jurisdiction  involving 
the  interpretation  of  the  contract  or  concerning  its  application  or  relating  to  the 
quality,  quantity  or  cost  of  service,  and  in  all  other  matters  within  their  juris- 
diction upon  which  the  city  council  or  the  city  officials  may  request  advice  or 
information.  The  director  is  required  to  keep  himself  informed  on  all  matters 
pertaining  to  the  cost  or  quality  or  quantity  of  service  furnished  by  the  company, 
its  receipts  and  disbursements,  its  leases,  rentals  and  property,  its  transfer  regu- 
lations, its  rules,  its  vouchers  of  expenditures,  its  payments  made  to  the  city 
under  the  contract,  and  the  manner  of  its  compliance  with  the  terms  of  the 
contract.  If  he  disapproves  of  the  object  of  any  voucher  or  expenditure,  or  of 
the  company's  manner  of  complying  with  the  provisions  of  the  contract,  or  of 
the  city  ordinances,  or  of  the  rules  or  regulations  made  or  decisions  rendered 
under  the  contract,  he  is  to  notify  the  company  and  see  that  the  matter  is 
adjusted.  The  company  is  required  to  give  the  director  and  his  employes  access 
to  and  facilities  for  inspecting  and  auditing  "all  receipts,  disbursements,  vouch- 
ers, prices,  payrolls,  salaries  of  all  officers,  time-cards,  papers,  books,  documents 
and  property"  relating  to  or  used  in  the  performance  of  the  company's  duties 
and  obligations.  Proposed  contracts  for  the  purchase  of  power  and  all  new 
and  additional  leases  or  franchise  grants  and  agreements  for  the  use  of  property 
included  within  the  city's  purchase  option,  and  all  agreements  for  the  use  or 
sale  of  power  or  other  commodities  by  the  company  must  be  submitted  to  the 
director  and  will  be  effective  only  upon  being  approved  by  him  in  writing. 

One  of  the  most  distinctive  features  of  the  Cincinnati  plan  is  the  require- 
ment that  the  operating  company  shall  submit  to  the  director  45  days  prior  to 
the  end  of  each  calendar  year  "an  estimate  of  grpss  receipts  and  budget  of 
operating  expenses"  for  the  ensuing  year,  setting  forth  an  estimate  of  the 
amount  to  be  expended  under  each  of  the  general  accounts  as  provided  by  the 
uniform  system  of  accounts  for  electric  railways  prescribed  by  the  Interstate 
Commerce  Commission.  Supplementary  estimates  for  additional  expenditures 
required  in  operation  may  be  submitted  to  the  director  during  the  year.  No 
operating  expenses  may  be  incurred  except  under  these  general  accounts,  and 
the  total  amount  of  the  expenditures  in  any  one  of  the  general  accounts  may 
not  exceed  the  amount  provided  in  the  budget  and  the  supplementary  estimates ; 
but,  with  the  approval  of  the  director,  budget  allowances  in  any  particular 
account  may  be  increased  by  decreases  of  like  amounts  in  the  allowances  in 
other  accounts.  The  contract  provides  that  the  director,  within  10  days  after 
receiving  the  budget  or  any  proposed  supplementary  estimate,  shall  either  ap- 
prove or  disapprove  it  and  notify  the  company  of  his  decision.     If  he  disapproves 


484  Electric  Railwav  F'roblem 

it  he  must  give  his  reasons  therefor  in  writing,  and  in  case  the  director  and  the 
company  are  unable  to  agree  the  matter  in  controversy  is  to  be  submitted  to 
arbitration.  The  board  of  arbitration  is  to  be  constituted  by  the  appointment  of 
one  arbitrator  by  the  director  of  street  railroads,  one  by  the  operating  company, 
and  the  third  by  the  two  arbitrators  thus  selected.  If  either  party  fails  to  appoint 
an  arbitrator  within  5  days  after  notice,  the  trustees  of  the  sinking  fund  of  the 
City  of  Cincinnati  are  to  appoint  the  arbitrator  for  the  party  so  in  default.  If 
the  two  arbitrators  first  appointed  are  unable  to  agree  upon  a  third,  then  the 
appointment  is  to  be  made  by  the  arbitration  committee  of  the  Cincinnati  Cham- 
ber of  Commerce  upon  application  by  either  party.  It  is  to  be  a  rule  of  the 
arbitration  that  sutticient  funds  shall  be  allowed  to  the  company  to  enable  it  to 
perform  its  corporate  obligations,  maintain  its  organization,  and  perform  all  of 
the  duties  of  operation  and  maintenance  imposed  upon  it  under  the  terms  of  the 
contract. 

The  company  is  required  to  issue  free  transfers  to  enable  passengers  "to 
ride  continuously  from  the  point  of  boarding  cars  to  destination,"  except  that 
it  cannot  be  required  to  issue  transfers  that  will  entitle  a  passenger  to  return 
upon  a  car  substantially  to  the  point  of  hoarding  the  car  upon  which  his  fare 
was  paid  or  a  transfer  issued  to  him.  The  company's  rules  and  regulations 
governing  the  issuance  of  transfers  are  subject  to  the  ap])roval  of  the  director 
of  street  railroads,  and  in  this  matter  as  in  the  control  of  service  his  orders  and 
decisions  are  final.  As  bearing  upon  the  cost  of  service,  it  should  be  noted  that 
the  Cincinnati  contract  requires  the  company  to  carry  policemen  and  firemen 
free  when  in  uniform. 

The  salaries  and  expenses  of  the  director  of  street  railroads  and  his  assist- 
ants are  not  treated  under  the  Cincinnati  contract  as  an  operating  expense.  On 
the  contrary,  they  are  paid  by  the  city  the  same  as  other  municipal  salaries  and 
expenses.  This  is  regarded  by  Mr.  Culkins  as  a  weakness  in  the  plan.  When 
asked  by  Mr.  Warren  what  changes  he  would  make  in  the  Cincinnati  plan  if  he 
were  starting  out  to  draw  a  service-at-cost  franchise  just  as  he  would  like  to 
have  it.  a  sort  of  ideal  or  model  franchise,  Mr.  Culkins  says  at  page  479  of  the 
Proceedings : 

"I  do  not  know  that  I  would  make  any  fundamental  changes.  1  think  there  i.s  a  weakness 
in  our  ordinance  that  the  suix.Tvision  is  cliargcd  to  the  Rcneral  taxpayer  rather  than  as  a 
cost  vi  operatiiMi.  That  will  always  have  a  tendency  to  crah  the  sui)ervision,  because  cities 
are  always  hroke  I  believe  that  legitimately  ought  to  be  a  charge  against  the  car  rider, 
for  the  service  is  specilk-ally  for  the  car  rider,  and  you  can  easily  sec  it  differentiates  from 
every  other  city  department." 

In  his  comment  upon  the  provisions  of  the  Cincinnati  plan  Mr.  Culkins 
lays  particular  stress  upon  the  provisions  for  the  adjustment  of  the  company's 
share  in  the  profits  on  the  principle  of  the  sliding  scale.  At  pages  474  and  473 
of  the  Proceedings,  he  says: 

"Rased  upon  our  information  that  the  greatest  criticism  of  the  service-at-cost  ordinance 
plan  was  that  it  tended  to  produce  an  inertia  on  the  part  of  the  company,  a  sort  of  feeling 
"We  get  ours,  now  go  ahead  and  tell  us  what  to  do'— tliere  is  a  provision  bv  whicli  the  com- 
p-iny  may  participate  in  this  >urplus  at  certain  times.  •  *  *  •  .So  we  think  we  have  a 
piece  of  machinery  in  there  which  makes  it  always  against  the  interest  of  the  company  to 
have  high  rates  of  fare  but  which  enforces  from  our  point  of  view  the  necessity  of  cco- 
notnical   operation.      Now,   it    might    Ik-   said   that    the   company   might    impair   the   service    in 


Service  at  Cost  485 

order  to  get  that,  but  the  city  retains  absolute  control.  To  my  mind  that  is  a  very  vital 
feature  of  this  ordinance.  The  city  maintains  that  control  over  the  operation  of  the  company, 
over  its  finances,  over  its  service,  over  its  investments,  and  that  control,  with  the  exception 
of  three  particulars,  is  vested  in  the  director,  in  one  man,  with  a  view  of  centralizing  the 
responsibility.  He  is  not  only  made  responsible  for  that,  but  he  is  made  responsible  wherever 
any  other  department  touches  this  company,  that  the  company  need  only  to  go  to  one  man 
and  then  it  becomes  his  duty  to  take  it  to  the  proper  place.  The  matter  of  extensions,  re- 
routing and  further  franchises  is  vested  in  the  city  council,  but  they  are  required  to  refer 
the  matter  to  the  director  for  report  and  recommendation  before  they  take  any  action  on  it." 

In  a  letter  to  the  Commission,  dated  January  29,  1920,  Mr.  Culkins  says : 

"The  experience  of  Cincinnati  for  the  first  fifteen  months  of  operation  under  the  service- 
at-cost  franchise  presents  some  features  of  interest  in  connection  with  the  problems  before 
the  Commission. 

For  this  period  the  cost  of  service  per  revenue  passenger  and  the  gross  receipts  per 
revenue  passenger,  in  each  month,  was  as  follows : 

Total  Cost  of 

Mouth                                                           Income  Service         Surplus      Deficit 

October,  1918   5.11  6.56  1.45 

November    5.13  6.20  1.07 

December    5.11  6.76  1.65 

January-,  1919  5.73  6.94  1.21 

February     5.69  6.99  1.30 

March   5.63  6.89  1.26 

April    6.09  6.84  ,75 

May     6.09  6.56  .47 

June    6.10  7.22  "         1.13 

julv    6.71  7.39  .68 

August    6.76  7.09  .3,3 

September    6.74  7.05  .31 

October  7,04  6.79  .25 

November    7.03  7,02  .01 

December    7.08  7.07  .01 

"It  will  be  seen  that  the  proper  relation  between  the  variations  in  the  cost  of  service  and 
the  rates  of  fare  did  not  exist  for  a  considerable  portion  of  the  period. 

"The  experience  of  the  earlier  months  of  1918  showed  that  the  cost  of  service  per 
revenue  passenger,  readjusted  to  the  new  ordinance  conditions  at  the  time  of  passage,  would 
be  5.76  cents,  but  for  reasons  of  expediency  the  initial  fare  was  placed  at  five  cents  (5c).  In 
the  months  of  October  and  November  the  epidemic  of  influenza  reduced  the  traffic  to  a  great 
extent,  and  in  December  a  War  Labor  Board  order  became  effective,  greatly  increasing  the 
wage  scale. 

"The  automatic  provisions  of  the  ordinance  limited  the  increase  of  fares  to  one-half 
cent  (  YzC)  at  intervals  of  not  less  than  three  (3)  months. 

"Other  unforeseen  expenses  were  encountered  from  time  to  time,  including  another  in- 
crease in  wages  under  the  order  of  the  \\  ar  Labor  Board  in  May,  a  new  contract  with  the 
union  in  July,  a  coal  shortage  in  August,  and  a  large  amount  of  additional  track  recon- 
struction made  necessary  by  the  improvement  of  city  streets.  As  a  result,  each  period  showed 
additional  increases  in  the  ever  growing  deficit. 

"In  October,  1919,  the  fares  reached  seven  cents  (7c.),  which  was  sufficient  to  provide  for 
the  current  cost  of  service,  but  deficiencies  had  piled  up  amounting  to  about  appro.ximately 
S1.700.0(K),  and  under  the  provisions  of  the  ordinance,  fares  must  continue  to  increase  until 
this  deficit  was  liquidated.  This  would  have  meant  an  ultimate  fare  of  nine  and  one-half 
cents  (9^c),  or  two  and  one-half  cents  (2>^c)  more  than  the  cost  of  service  in  October. 
Fares  would  be  too  high  and  an  abnormal  condition  to  the  reserve  fund  would  ensue,  fur- 
ther disturbing  the  symmetry  of  the  plan. 

"To  avoid  this,  as  well  as  a  further  increase  in  fares,  the  company,  with  the  authority 
of  the  city  and  the  Public  L'tilities  Commission  of  Ohio,  issued  securities  in  order  to  spread 
out  the  payment  of  the  deficit  and  avoid  the  abnormal  burden  upon  the  car  riders  in  a  single 
year.  The  question  of  probable  loss  of  traffic  and  other  effects  of  the  increased  fare  were 
also  considered,  both  by  the  company  and  the  public  officials,  who  recognized  that  an  unusual 
condition  in  unusual  times  called  for  unusual  treatment. 

"Two  features  are  outstanding  in  the  Cincinnati  experience : 

"First — The  initial  rate  of  fare  should  be  sufficient  to  provide  the  cost  of  service. 

"Second — Provision  should  be  made  for  adjusting  the  rates  of  fare  to  any  abnormal  in- 
crease in  expenses  which  might  he  classed  as  an  unforeseen  contingency. 

"This   would   suggest  a   large   initial   reserve   fund,   or  some  device   for  quick   adjustment 


486  Electric  Railway  Problem 

and  readjustment  of  fares  in  cases  of  emergency.  The  difficulty  about  a  large  reserve  fund 
is  that  in  most  cases  the  companies  may  be  unable  to  provide  it  by  sale  of  securities.  In  some 
cases  the  state  or  local  laws  may  make  the  provision  difficult,  but  in  any  model  ser\'ice-at-cost 
ordinance  this  situation  should  be  provided  for. 

"In  other  respects  I  have  no  occasion  to  change  the  view  expressed  to  the  Commission 
that  the  Cincinnati  plan  offers  the  principles  upon  which  the  street  railway  problem  may  be 
solved.  The  public  has  taken  to  it  kindly  and  the  loss  of  traffic  due  to  increased  fares,  in  my 
opinion,  has  been  less  than  in  other  cities." 

Mr.  Walter  A.  Draper,  from  the  company's  side,  is  quite  solicitous  for  some 
reward  for  the  holders  of  common  stock.  The  Ohio  Traction  Company  is  the 
holding  company  for  the  Cincinnati  Traction  Company,  which,  as  the  lessee  of 
the  Cincinnati  Street  Railway  Company  and  the  Cincinnati  and  Hamilton  Trac- 
tion Company,  is  the  operating  company.  Referring,  apparently,  to  the  holding 
company,  Mr.  Draper  testified  that  the  $7,500,000  of  common  stock  outstanding, 
technically  described  by  Chairman  Elmquist  as  the  "hope"  stock,  was  issued 
practically  to  take  up  the  discount  at  which  the  preferred  stock  was  sold.  He 
said  that  under  the  Cincinnati  contract  the  common  stockholder  was  given  some 
hopes  of  participation  in  profits,  but  not  enough.  At  page  505  of  the  Proceed- 
ings, he  says: 

"This  incentive,  this  division,  that  might  remain  after  the  requirements  are  taken  care 
of,  was  one  of  the  things  that  we  discussed  more  than  any  other  one  point  with  the  city. 
\Vc  insisted  that  there  should  be  some  consideration  given,  no  matter  what  the  rate  of  fare 
was;  that  if  the  rate  of  fare  went  up.  it  was  not  our  fault,  under  this  plan,  but  it  was 
due  to  conditions,  and  that  we  were  entitled  to  consideration  with  a  high  rate  of  fare,  the 
same  as  we  were  with  a  low  rate  of  fare,  at  least  something ;  but  in  order  that  we  might  be 
given  this  spur  to  try  to  get  fares  down  by  economical  operation,  we  recognized  the  fair- 
ness of  getting  less  in  case  the  fare  was  high  than  we  would  get  in  case  the  fare  was  low." 

As  to  the  general  importance  of  incentive  and  as  to  the  deserving  character 
of  the  coinmon  stockholder — the  man  of  vision — Mr.  Draper  has  ven,-  decided 
views,  as  will  be  seen  from  the  following  testimony  found  at  pages  499  and  500 
of  the  Proceedings: 

"It  is  true  that  a  service-at-cost  franchise,  offering  an  almost  certain  return,  makes  it 
more  easy,  or  at  least  possible,  to  Inirrow  money.  But  bankers  have  always  taken  into  con- 
sideration not  the  question  whether  a  concern  can  just  live — just  manage  to  make  ends 
meet — but  rather  how  much  margin,  how  much  over  the  lore  living  it  can  make.  .\nd  this 
question  of  lianking  and  getting  new  money  is  a  vital  one.  Not  only  has  the  question  to  be 
solved  as  to  how  street  railroads  are  to  make  their  operating  expenses,  but  how  are  they  to 
pay  interest  on  borrowed  money  in  the  shape  of  permanent  investment  or  bank  loans.  Actual 
experience  under  the  Cincinnati  franchise  has  demonstrated  that  the  banker  begins  to  take 
more  interest  wlion  he  is  shown  that  in  addition  to  a  tixed  low  interest  rate  that  is  practi- 
cally assured,  the  company  can  do  even  a  little  tx^tter  by  careful  and  attentive  management. 
When  it  comes  lo  marketing  securities,  those  paying  a  fixed  return  of  six  per  cent  will  not 
sell  so  well  as  those  that  have  at  least  some  show  of  paying  a  fixed  return  of  six  per  cent 
and  then  something  more.  Mut  six  per  cent  is  not  now  a  sulTicicntly  high  return.  If  six  per 
cent  must  \ye  written  in  the  franchise  then  let  there  also  Ik.-  written  therein  that  an  additional 
one  or  two  per  cent  can  Ix-  earned  by  hard  work.  If  the  fixed  return  is  just  enough  to  meet 
the  dividend  or  intere>-t  cm  a  senior  security,  let  the  possible  additional  return  go  to  the 
common  stockholder,  who  under  a  service-at-cost  francliise  is  pretty  aiit  to  ho  left  at  the 
dock  when  the  lx«at  pulls  out  because  there  is  no  room  for  him.  .\nd  don't  forget  that  the 
common  stockholder  has  plaved  his  part,  if  not  the  important  part,  in  the  development  of 
street  railroad  enterprises.  The  senior  security  holder  is  the  lianker.  The  common  stock- 
holder is,  or  was,  the  prosiwctor,  the  pioneer,  the  builder — the  man  with  the  vision. 

"Those  who  operate  street  railroads  have  not  lost,  and  it  is  to  Ix-  hoped,  never  will  lose 
their  ambition  to  operate  as  economically  and  efficiently  as  possible ;  and  yet,  because  we  are 
all  >>till  human,  there  i^^  needed  an  addition  to  the  desire  to  make  a  showing,  the  spur  of 
real  financial  Ix-nefit.  I'nder  a  rigid  service-at-cost  franchise  the  comp.iny  really  becomes  a 
sort  of  clearing  house  for  the  money  it  takes  in.  It  pays  the  employes,  then  the  tax  gatherers 
and   then   the   senior   security    lioUlers.     This   takes   it   all.     Justice   and   goixl   business    sense 


Service  at  Cost  487 

dictate  that  there  should  be  at  least  a  small  commission  paid  for  all  this  work.  It  will  add 
zest  to  an  otherwise  flat  existence.  Operating  under  a  service-at-cost  franchise  without  some 
added  incentive  would  be  a  good  deal  like  asking  an  old  gambler  to  play  poker  for  fun  and 
not  for  money." 

The  last  sentence,  which  I  have  italicized,  almost  "lets  the  cat  out  of  the 
bag."  It  indicates  that  the  common  stockholders  in  the  electric  railway  field 
want  both  security  and  a  speculation.  Mr.  Draper  is,  perhaps,  on  safer  ground 
at  pages  500  and  501  of  the  Proceedings,  where  he  says : 

"There  is  another  potent  argument  for  providing  this  incentive  and  that  is  the  tendency 
of  the  public  to  feel  that  if  the  company  is  practically  guaranteed  a  certain  return  and  caii 
get  no  more,  it  will  be  indifferent  to  how  high  operating  costs  and  fares  may  go,  and  will 
readily  'pass  the  buck'  to  the  city  in  matters  of  higher  wages  or  any  other  element  likely  to 
affect  fares  on  the  very  comfortable  theory  of  'Why  should  we  care?  Let  the  men  get  higher 
wages,  so  long  as  the  car  rider  pays.' 

"In  a  recent  discussion  of  the  wage  question  with  our  employes,  the  main  interest  the 
public  took  in  the  matter  was  whether  we  wouldn't  give  in  without  much  pressure  because  it 
would  all  go  into  the  rate  of  fare.  In  fact,  some  people  declared  that  we  were  in  league 
with  our  men  to  get  the  rate  of  fare  up  and  hold  it  there  through  their  asking  for  higher 
wages  and  our  quickly  granting  the  demand.  When  they  were  informed  that  it  was  to  our 
interest  to  keep  fares  below  six  cents,  as  we  would  then  receive  an  additional  allowance, 
they  saw  things  differently." 

Another  point  of  criticism  of  the  Cincinnati  plan  was  the  fact  that  it  was 
inaugurated  at  a  five-cent  fare  when  the  cost  of  service  as  defined  in  the  agree- 
ment was  known  to  be  more  than  five  cents.'  Mr.  Draper  also  has  his  doubts 
about  the  budget  plan.  Upon  this  point  he  says,  at  pages  505  and  506  of  the 
Proceedings : 

"We  felt  that  the  matter  of  the  budget  is  something  that  is  a  little  more  theoretical  than 
we  would  like  to  see  it.  It  is  almost  impossible  to  anticipate  as  far  ahead  as  we  have  to 
under  this   franchise,  what  our  expenditures  are  going  to  be. 

"Commissioner  Sweet:  But  tliere  is  some  elasticity  in  that,  as  explained  by  Mr.  Cul- 
kins.  is  there  not? 

"Mr.  Draper:  There  is  some  elasticity,  but  notwithstanding  that  there  is  a  feeling 
on  the  part  of  the  director  and  city  administration,  that  by  the  very  fact  that  we  are  asking 
for  an  additional  allowance,  we  are  not  operating  quite  as  economically  and  carefully  as  we 
should,  unless  it  does  have  some  specific  thing,  take,  for  example,  the  increase  in  wages.  Of 
course,  you  can  measure  that  very  accurately." 

On  the  general  subject  of  the  need  for  incentive,  Dr.  Milo  R.  Maltbie  takes 
strong  ground.     At  pages  2093  and  2094  of  the  Proceedings,  he  says: 

"The  most  important  thing,  it  seems  to  me,  to  be  kept  in  mind  in  framing  any  new  plan 
to  be  considered  in  the  situation  as  it  now  exists  is  that  there  must  be  some  provision  made, 
in  any  plan,  which  will  furnish  an  inducement  for  efficiency.  In  other  words,  if  any  plan, 
whether  it  be  a  limited  term  franchise  or  an  indeterminate  franchise,  or  a  cost-of-service 
franchise,  or  no  franchise  at  all,  with  just  a  local  consent  to  operate,  subject  to  regulation 
in  every  instance,  unless  some  provision  is  made  whereby  inefficiency  will  be  punished  or 
suffer  some  loss  and  efficiency  will  be  rewarded  where  it  exists,  the  tendency  will  be  toward 
stagnation;  and  public  regulation  and  control  has  to  labor  with  this  problem  as  well  as  any- 
thing else;  because  the  tendency  will  be,  of  course,  to  meet  the  demands.  If  it  does  not  make 
any  difference  to  the  operators  of  a  company  whether  they  pay  high  prices  for  materials  or  not. 
the  tendency  will  be  not  to  give  that  subject  any  particular  attention.  They  will  pay  the 
high  prices.  If  there  is  no  reward  for  purchasing  materials  when  prices  are  low,  and  no 
punishment  for  purchasing  materials  when  prices  are  high,  the  inevitable  result  will  be  to 
purchase  in  more  or  less  of  a  haphazard  way  and  to  pay  high  prices. 

"In  the  same  way,  if  there  is  no  incentive  to  efficiency,  politics  is  apt  to  come  into 
the  situation,  in  not  the  way  which  is  usually  referred  to,  but  in  a  different  way,  which  is 
just  as  effective,  as  far  as  that  is  concerned,  in  bringing  bad  results  as  it  is  in  the  old- 
fashioned  way;  but  if  control  and  management  does  not  get  its  reward  or  its  punishment, 
as  the  case  niay  be,  the  political  parties  will  be  apt  to  use  a  private  corporation  as  a  means 


488  Electric  Railway  Problem 

Professor  Edward  W.  Bemis.  appraisal  engineer  and  consulting  public 
utility  expert  on  the  public  side,  finds  considerable  to  criticise  in  the  service-at- 
cost  plan,  although  he  was  associated  for  many  years  with  Tom  L.  Johnson  in 
Cleveland  and  more  recently  had  a  hand  in  the  preparation  of  the  Dallas  ser- 
vice-at-cost  franchise.  His  testimony,  at  pages  2113  and  2114  of  the  Proceed- 
ings, is  as  follows: 

"I  find  serious  difficulties  with  a  scrvice-at-cost  plan,  although  it  looks  so  good  in  theory. 

"The  Chairman  :     In  both  cases  you  mentioned,  had  you  supported  the  service-at-cost  plan? 

"Mr.  Bemis :  Yes.  The  plan,  as  I  think,  works  out  pretty  well  in  Cleveland.  1  think 
not  so  well  in  Dallas,  where  the  valuations  that  were  finally  accepted.  I  believe,  were  some- 
what higher  than  originally  planned. 

"The  great  difficulty  with  the  service-at-cost  plan  is  in  getting  a  good  valuation  to  start 
with.  The  public  are  not  yet  sufficiently  educated  on  the  subject  of  valuation  to  know  just 
what  it  means  and  there  is  a  great  danger  of  fastening  on  the  public  a  valuation  that  will 
be  too  high  and  which  will  be  very  difficult  to  get  away  from. 

"There  is  also  danger  that  a  scrvice-at-cost  plan  will  require  a  fare  higher  than  the 
social  welfare  of  the  community  may  demand  and  which  could  only  be  gotten  around  by 
subsidizing  the  road  or  by  direct  municipal  purchase  and  operation.  But  you  are  tied  almost 
to  a  higher  fare  under  a  scrvice-at-cost  plan  while  it  lasts,  as  in  Boston  today.  I  think  very 
often  we  are  in  a  situation  or  would  be  under  public  management  such  as  Director  Hines 
called  to  the  attention  of  the  Government  not  long  ago  when  he  thought  a  rise  of  freight 
and  passenger  charges,  particularly  of  freight  charges  of  the  railroad,  today.  $300.00(1.000 
would  mean  an  increase  of  charges  to  the  public  of  several  times  that,  as  the  charges  were 
passed  along.  He  thought  it  might  be  better  to  have  taxation  bear  that  burden  than  to  raise 
the  fares.     He  made  that  in  an  official  communication  to  Congress,  you  may  remember. 

"But  the  scrvice-at-cost  plan  ties  one  down  rather  closely  to  a  fare  which  might,  if 
things  keep  on  as  they  have,  become  too  high  in  some  cases,  although  maybe  not  in  all. 

"I  think,  too.  that  the  scrvice-at-cost  plan  requires,  as  in  Cleveland  it  has  secured,  a  home 
rule  different  from  regulation  by  state  commission.  I  think  it  needs  to  be  closely  in  touch 
with  the  people  and  when  it  is  it  has  its  l)est  chance  of  success,  because  it  then  tends  to 
produce  that  cooperation  which  there  has  been  in  Cleveland  between  the  city  and  the  railway 
in  effecting  many  economies  and  preventing  many  costly  attacks  on  the  road,  in  excessive 
pavement  charges  or  excessive  awards  by  juries  in  damage  cases  and  many  other  ways; 
permits  for  turnouts  and  curves  and  so  on.  which  really  are  very  beneficial  often  to  the  com- 
pany, and  which  the  city  can  give  without  much  cost  if  it  feels  in  a  friendly  attitude.  But 
there  are  these  difficulties  of  high  valuation  and  fixed  fare,  a  fare  I  mean  fixed  as  to  its  base. 

".\nd.  of  course,  our  cities  are  hesitant  for  another  reason  :  It  seems  to  them  to  forfeit 
the  benefits  of  the  franchises  which  they  are  now  enjoying.  The  moment  the  shoe  pinches 
that  is  where  the  companies  are  suffering  from  their  rigid  adherence  to  the  franchise  when 
they  wore  gaining;  when  they  were  making  a  good  deal  of  money  from  the  franchise  they 
were  enjoying,  they  would  not  listen  to  a  inodification.  and  now  they  are  suffering  the  penalty 
that  the  cities  feel  that  they  should  not  make  concessions  which  the  companies  had  refused 
to  make  years  ago.  That  may  not  be  quite  a  proper  position  to  take,  but  it  is  a  very  natural 
one. 

"Of  course,  we  still  have  to  face  the  question,  if  the  cities  adhere  to  that,  how  the 
companies  are  going  to  get  any  money  for  extensions,  which  is  after  all  the  greatest  problem 
perhaps  before  even  our  larger  and  l>ctter  companies,  which  are  earning,  it  may  be.  a  fair 
return  ott  the  actual  investment  but  have  capitalized  so  much  Iwyond  that. 

"I  do  not  know  of  any  plan  for  issuing  any  underlying  securities  that  would  precede 
the  present  bonds  and  enable  companies  to  finance  extensions  where  thcv  are.  as  is  often  the 
case.  iMindod  up  to  the  full  value  of  the  property,  and  sometimes  more.  Bonds  have  even  liecn 
issued  to  buv   st<x:k  in  consolidations. 

"That  difficulty  is  going  to  force  the  roads  cither  into  reorganizations  or  city  purchases. 
There  may  he  some  better  metho<l  found  or  some  other  mclho<l.  but  1  do  not  see  just  how 
it  can  Ixr  found  indcss  the  roads  are  so  very  prosperous  that  they  can  float  more  securities 
without   reorganization." 

Mr.  Morris  I..  Cooke's  comment  upon  the  service-at-cost  plan  is   found  at 
pages  1692  and  Ui9.^  of  the  Proceedings,  as  follows: 

"At  least  theoretically  we  are  all  for  some  kind  of  a  'cost-of-service'  plan.  But  I  am 
opposed  to  the  kind  which  has  been  principally  stressed  before  this  Commission,  first  because 
it  will  have  a  tendency  to  validate  excessive  valuations,  and  second  because  it  will  inevitably 
capitalize  inefficiency. 

"The  proposal   is  quite  comparable  to  the  profit  sharing   schemes   so   strenuously  urged 


Service  at  Cost  489 

now  as  a  cure-all  for  industrial  disorders.  Labor  is  not  a  bit  interested  in  profit  sharing, 
because  labor  has  no  confidence  that  it  understands  the  rules  of  the  game,  and  has  had  no  hand 
in  developing  those  rules.  Any  cost-of-service  plan  initiated  now  would  rest  in  most  instances 
on  a  discredited  financial  base  and  be  operated  under  accounting  methods  designed  for  an 
altogether  different  purpose  than  the  one  which  I  take  it  we  all  have  in  mind  now,  that  is, 
the  service  of  the  public." 

I  have  already  quoted  Dr.  ]\Ialtbie's  testimony  upon  the  need  for  an  incen- 
tive to  good  management  under  any  scheme  that  may  be  adopted.  He  is  quite 
critical  of  the  service-at-cost  plan  to  the  extent  that  it  is  based  upon  a  contract 
with  fixed  terms  and  is  put  forward  as  a  substitute  for  continuous  public  regu- 
lation through  the  exercise  of  the  police  power.  He  calls  particular  attention 
to  the  arbitration  of  the  rate  of  return  in  the  Cleveland  contract,  and  takes  the 
position  that  service  at  cost  has  not  been  tried  long  enough  to  prove  its  merits 
as  a  scheme  for  adoption  generally  as  a  means  of  solving  the  electric  railway 
problem.  His  testimony  on  these  points  is  found  at  pages  2102  and  2103  of 
the  Proceedings,  where  he  says : 

"Now,  there  is  one  other  feature,  as  to  the  cost-of-service  franchise,  that  I  would  like 
to  call  to  your  attention  and  that  is  this :  That  a  result  of  the  adoption  of  the  plan  is  to  make 
the  relation  between  the  city  and  the  company  one  of  contract  and  not  one  of  police  power. 
Of  course,  the  basis  for  the  regulative  power  which  exists  in  the  legislature  and  which  may 
be  delegated  to  an  administrative  body  is  the  sovereign  power  of  the  state.  And,  of  course, 
historically  it  goes  away  back  to  the  old  Inn  cases  in  England,  and  that  power  as  I  under- 
stand it  cannot  be  irretrievably  delegated  to  someone  else,  it  cannot  be  contracted  away,  but 
always  remains  in  the  state  in  some  form,  either  the  legislature  or  the  courts  or  an  adminis- 
trative body. 

"Now,  if  you  substitute  for  regulation  a  contract  or  a  paper — we  will  not  call  it  a 
contract  for  the  moment — a  paper  which  attempts  to  specify  all  of  the  things  that  are  usually 
covered  by  regulatory  orders  or  by  statutes,  you  have  substituted  a  contract  for  a  sovereign 
power  or  for  the  police  power  and  it  makes  and  establishes  a  more  or  less  ironclad,  unchange- 
able paper  which  has  practically  all  of  the  qualities  of  the  contract  or  else  what  is  attempted 
to  be  covered  in  many  cities  by  a  cost-of-service  plan. 

"Now,  the  trouble  with  a  contract  to  cover  these  points  is  in  the  first  place  that  it  becomes 
entirely  out  of  date.  We  have  seen  that  happen  again  and  again.  And  one  of  the  difficulties 
of  the  present  situation  is  that  the  contracts  that  have  been  made  in  past  years  are  not 
applicable  to  the  conditions  that  exist,  and  while  they  might  and  perhaps  did  do  very  well 
for  the  time  and  for  some  time  after  they  were  made,  they  have  become  inapplicable  to  the 
conditions  which  exist  at  the  present  time  and  consequently  break  down  in  some  provision 
or  another. 

"Mr.  Eastman  referred  to  the  fact  that  when  you  have  a  contract  as  a  statement  of  the 
relations  between  the  public  on  the  one  side  and  the  private  corporation  upon  the  other,  the 
general  result  is  that  that  contract  is  modified  when  the  company  wants  it  modified  and  not 
when  the  city  wants  it  modified.  If  it  is  a  contract,  you  have  to  get  the  assent  of  both 
parties  and  if  the  company  does  not  want  to  modify  it  there  is  no  way  under  heaven  that  you 
can  compel  it  to  modify  it,  if  it  is  a  contract.  Whereas,  under  regulation,  if  a  public  service 
commission  makes  a  mistake  *  *  *  *  because  its  orders  are  not  contracts,  it  can  be 
repealed  or  modified  or  changed  at  any  time.  But  if  you  get  a  contract  drawn  up  between 
a  private  company  and  a  municipality  that  cannot  be  modified  except  with  the  consent  of 
both  parties,  and  if  the  municipal  authority  makes  a  mistake  the  shrewdness  of  the  manage- 
ment of  most  utilities,  human  nature  being  the  same  the  world  over,  will  lead  them  to  take 
advantage  of  that,  whereas,  if  the  city  wants  that  contract  changed,  it  is  not  so  easy  to  get 
it  done.  • 

"Whether  a  cost-of-service  contract  can  be  worked  out  which  will  protect  all  of  these 
points,  I  am  not  at  present  prepared  to  say.  But  reference  has  been  made  to  the  Cleveland 
franchise  and  for  the  purposes  of  the  record.  I  think  your  attention  ought  to  he  called  to  the 
fact  that  at  the  present  time  there  is  proceeding  in  Cleveland  an  arbitration  to  determine 
whether  the  rate  of  return  shall  be  raised  to  7  per  cent  or  not.  Now,  there  probably  is  not 
any  more  important  thing  in  a  cost-of-service  franchise  than  the  rate  of  return.  .And  if  a 
company  and  a  city  make  a  contract  that  the  security  holders  that  have  put  in  their  money 
are  entitled  to  a  6  per  cent  return  on  the  monev  they  have  put  in.  and  then  in  less  than  6 
months  you  proceed  to  arbitrate  the  question  of  whether  they  shall  have  more  or  not.  you 
are  going  to  the  very  vitals  of  the  contract,  ."^nd  if  you  can  arbitrate  the  rate  of  return  in  a 
cost-of-service  franchise  I  do  not  know  what  there  is  in  the  franchise  that  cannot  be  arbitrated. 
Well,  if  you  can  arbitrate  the  whole  thing  and  every  provision  in  it,  it  simply  means  this,  that 


490  Electric  Railway  Problem 

you  make  a  contract  or  what  is  called  a  contract  and  then  you  leave  it  to  three  persons  to  be 
chosen  at  some  other  time  to  decide  every  provision  in  that  contract.  Xow,  that  is  not 
regulation,  because  those  arbitrators  are  not  regularly  elected  public  authorities.  They  are 
persons  who  are  chosen  outside.  And  if  you  are  going  to  leave  every  provision  in  a  contract 
to  be  arbitrated  in  that  way  it  is  not  a  contract  any  more,  except  as  there  may  be  sonie 
restricting  clauses  to  the  extent  ol  what  may  be  arbitrated. 

"Whether  six  per  cent  is  right  or  not,  I  do  not  undertake  to  say  at  this  time,  in  the 
Cleveland  situation ;  but  merely  to  point  out  that  the  basis  for  the  claim  that  they  should 
have  seven  per  cent  instead  of  six  per  cent,  is  that  conditions  have  caused  six  per  cent  not 
to  be  a  fair  rate  of  return,  and  that,  in  fairness,  they  ought  to  have  seven  per  cent. 

"Well,  that  is  an  illustration  of  what  I  said  a  few  moments  ago.  namely,  that  a  fixed 
contract  which  undertakes  to  provide  all  of  these  things  is  a  thing  that  may  become  very 
ill  adapted  to  the  conditions  which  exist  in  later  years.  Personally.  I  do  not  believe  the 
success  or  failure  of  these  cost-of-service  franchises  can  be  determined  by  one  year's  or  two 
years'  or  five  years'  experience.  When  we  have  been  through  these  war-time  conditions, 
and  the  conditions  that  are  going  to  obtain  in  the  next  few  years,  we  will  have  a  pretty 
definite  idea  whether  those  franchises  are  good  or  whether  they  are  not  good.  The  question 
is  going  to  come  as  to  whether  they  are  suited  to  the  conditions  that  change  from  time  to 
time  or  whether  they  are  not." 

Mr.  Carl  H.  Mote,  then  Secretary  of  the  Indiana  Public  Service  Commis- 
sion, comments  upon  the  service-at-cost  plan  at  page  1094  of  the  Proceedings, 
where  he  says : 

"The  so-called  service-at-cost  program  is  actually  the  program  we  arc  supposed  to  follow 
under  the  public  service  commission  law  of  Indiana,  and  for  that  reason  we  hear  nothing 
about  it  in  our  state.  I  am  not  familiar  with  the  origin  of  the  phrase  but  I  imagine  its 
inception  could  be  traced  to  some  municipality  where  the  electric  railways  were  overloaded 
with  fixed  charges  and  where  it  was  designed  to  produce  sufficient  revenue  to  meet  exorbitant 
fixed  charges  as  well  as  actual  operating  expenses,  including  maintenance  and  depreciation. 
Service  at  cost  involves,  first,  a  correct  valuation  of  the  property.  There  is  no  means  of 
knowing  what  the  cost  of  electric  railway  service  is,  unless  this  basis  is  known.  I  should  think 
cities,  without  facilities  for  a.scertaining  valuation,  might  be  led  into  a  position  of  agreeing  to 
provide  a  return  on  excessive  valuation,  in  which  case  there  would  not  be  service  at  cost  at 
all,  but  service  at  an  excessive  cost.  To  me,  the  phrase  represents  merely  a  straining  to 
name  a  process  or  a  theory  already  in  practice  in  Indiana." 

Since  Mr.  Mote  testified,  the  City  of  Indianapolis  has  come  forward  with 
the  suggestion  that  a  service-at-cost  plan,  with  a  flexible  fare  between  certain 
limits,  be  put  into  effect  by  the  Indiana  commission  by  an  order  relating  to  the 
Indianapolis  Traction  and  Terminal  Company  during  the  emergency  recognized 
by  the  commission — that  is  to  say,  until  conditions  return  to  normal  so  that  the 
obligations  of  the  existing  city  franchise,  temporarily  suspended,  will  come  into 
force  again." 

That  a  service-at-cost  plan  adapted  to  one  comnumity  under  one  set  of  con- 
ditions might  not  work  out  well  in  another  comnumity  under  another  set  of 
conditions  is  apparent  by  a  comparison  of  Cleveland  and  Boston,  or  for  that 
matter  Geveland  and  Cincinnati.  It  is  also  apparent  from  the  contrast  between 
the  conditions  in  Indiana,  as  described  by  Mr.  Mote,  and  those  in  at  least  ])ortions 
of  New  England,  as  described  by  many  witnesses.  For  example.  Chairman 
Richard  T.  Iliggins.  of  the  Connecticut  Public  Utilities  Commission,  at  page  1109 
of  the  Proceedings,  says: 

"Something  has  heen  said  alxiut  the  question  of  service  at  cost.  Theoretically  that  is 
."iound.  and  i>  the  policy  that  our  connniskioii  have  tried  to  follow:  but  practically  there 
are  certain  obstacles  to  its  working  out  as  an  absolute  (henry.  Street  railways  are  critically 
ill  and  they  cannot  l>c  revived  and  put  uixm  a  sound  basis  over  night.  If  the  service-at-cost 
IHilicy  were  to  Ik-  adnpted.  in  tny  opinion,  and  a  rale  established  high  enough  to  meet  the 
operating  expenses,  lixed  charges  and  overhcid  charges  and  pay  a  fair  dividend  upon  the 
capital  or  the  value  of  the  property  as  the  case  may  be.  the  rates  of  fare  would  necessarily 
be  so  high  as  to  be  iirohibilive,  where  you  have  got  unrestricted  and  unregulated  competing 
transportation  agencies." 


Service  at  Cost  491 

Mr.  William  D.  B.  Ainey,  Chairman  of  the  Pennsylvania  Public  Service 
Commission,  was  asked  whether  he  or  his  commission  had  given  any  considera- 
tion to  the  service-at-cost  plan.  He  replied  in  the  negative,  and  was  quite  un- 
willing to  express  an  opinion  about  it,  but  upon  being  pressed  made  this  indirect 
comment,  which  appears  at  page  1404  of  the  Proceedings : 

"I  have  not  gotten  to  the  point  of  where  I  believe  the  public  will  get  the  best  service 
except  that  the  initiative  for  that  service  is  in  the  hands  of  private  interests,  largely  un- 
controlled, except  to  the  extent  that  it  must  at  all  times  he  a  reasonable  service,  and  must  be 
at  a  reasonable  rate.  I  have  no  reason  to  doubt  that  the  present  methods  are  adequate,  in 
Pennsylvania." 

In  his  testimony  Chairman  Ainey  referred  with  a  certain  amount  of  admi- 
ration to  the  Mitten  management  of  the  Philadelphia  Rapid  Transit  Company, 
and  it  is  quite  possible  that  his  apparent  predisposition  against  the  service-at-cost 
plan  may  have  been  based  in  part  upon  his  observation  of  the  Philadelphia  situa- 
tion. At  any  rate,  Mr.  Thomas  E.  Mitten  speaks  out  quite  positively  against 
the  service-at-cost  plan,  as  will  appear  from  his  statement  at  page  1516  of  the 
Proceedings,  as  follows : 

"The  so-called  service-at-cost  plans  are  already  proving  a  disappointment,  for  the  reason 
that  neither  men  nor  management  are  paid  according  to  the  e.xcellence  of   their  work. 

"Boston  is  one  example  where  expenses  have  mounted  skyward  and  no  fare,  possible  of 
collection,  has  been   found  sufficient  to  meet  the  added  cost  of  production. 

"Cleveland  has  already  nullified  Tom  Johnson's  accomplishment  of  sweating  profits  from 
the  omiers  and  thus  reducing  rentals,  by  showing  an  inability  to  now  produce  its  very  short 
ride  at  5  cents  without  charging  an  extra  one  cent  for  transfer.  The  City  of  Cleveland 
paves  its  own  streets  and  in  addition  pays  its  street  railways  in  money  for  services  sometimes 
required  to  be  supplied  gratis  by  the  street  railways  in  other  cities.  The  public  of  Cleveland 
stands  for  much  latitude  in  operating  methods,  in  order  to  keep  the  fare  down,  while  the 
contest  between  the  men  and  the  management  as  to  which  should  get  added  compensation 
first,  goes  merrily  on— SURELY  THE  ANSWER  LIETH  NOT  IN  THIS  DIRECTION." 

Curiously,  Mr.  James  D.  Mortimer,  who  has  been  operating  the  Milwaukee 
street  railway  lines  for  many  years  under  practically  imrestricted  state  regula- 
tion, combines  Cleveland  and  Philadelphia  in  his  condemnation  for  rendering 
service  below  cost,  instead  of  at  cost,  evidently  sharing  with  other  electric  rail- 
way men  the  chagrin  felt  by  the  industry  as  a  whole  in  having  to  explain  away 
the  5-cent  fare  under  war  conditions  in  these  two  cities.  Mr.  Mortimer,  at  pages 
780  and  781  of  the  Proceedings,  makes  the  following  criticism  of  "some"  of  the 
service-at-cost  plans : 

"Some  of  these  service-at-cost   franchises  are  defective  in  two  important  respects. 

"First,  there  is  no  guaranty  of  the  integrity  of  the  capital.  The  franchises  on  their  faces 
provide  for  a  diminishing  capital  account.  In  other  words,  they  make  no  adequate  provision 
for  the  accumulation  of  reserves  against  the  future  replacements  of  the  physical  property. 
They  require  usually  the  creation  of  reserves  only  in  sufficient  amount  to  take  care  of  current 
replacements,  and  in  the  Cleveland  so-called  cost-of -service  franchise,  if  they  encounter  an 
extraordinary  replacement,  that  is  carried  as  a  suspended  asset  and  written  off  over  some 
agreed  period  of  time.  In  other  words,  there  has  been  a  number  of  years  in  which  the 
Cleveland  Electric  Railway  was  financially  insolvent,  and  an  examination  of  the  balance 
sheet  would  have  disclosed  that. 

"That  is  touched  on  in  considerable  length  in  Doolittle's  book  on  a  study  of  the  Cleveland 
problem.' 

"The  second  defect  in  these  cost-of-sprvice  franchises  lies  in  the  fact  that  the  cost  of 
capital  is  continually  changing,  and  there  is  no  provision  made  for  the  determination,  at  the 
time,  of  the  return  that  is  to  be  allowed  upon  additions  to  capital  account." 

Dr.  Dugald  C.  Jackson  is  of  the  opinion  that  inflexibility  in  rate  of  return 
to  capital  is  the  major  defect  of  the  service-at-cost  plan  as  now  advocated.     He 


492  Electric  Railway  Problem 

evidently  has  the  Boston  plan  particularly  in  mind.     At  pages  1418  and  1419  of 
the  Proceedings,  he  says: 

"The  introduction  of  supervision  by  public  utility  coinmissions  was  essentially  a  move 
which,  unilormlv  and  fairly  applied,  would  result  ni  providnig  good  service  at  cost,  when 
a  fair  return  oii  the  investment  is  included  as  part  oi  the  cost  in  addition  to  the  ordinary 
daily  out-of-pocket  expenses.  At  the  same  time  it  affords  opportunity  for  a  street  radway 
operated  with  particularly  able,  foresighted  management  and  giving  notably  good  service 
to  profit  through  receiving  a  larger  return  on  its  investment  than  the  average  for  the  industry, 
as  the  state  commission  has  a  certain  range  over  which  they  may  within  the  satisfaction  of 
the  public  allow  returns. 

"The  present  slogan  for  service  at  cost  adds  to  this  the  additional  feature  of  guaranty 
by  the  ta.xpayers  of  a  return  on  the  investment,  associated  with  operation  under  public 
authority.  This  addition  has  been  adopted  in  certain  instances,  but  it  is  facing  considerable 
criticism,  and  however  gocxi  it  is,  is  going  to  fail  also  from  intle.xibility  if  the  actual  return 
on  the  investment  is  fixed  at  the  upper  level  and  cannot  be  modified  as  changing  conditions 
in  the  value  of  money  progress.  There  must  be  the  .same  flexibility  from  the  standpoint  of 
return  on  the  investment  as  there  is  from  the  standpoint  of  wages  and  other  things,  in  order 
that  the  projects  can  be  maintained  and  extended  as  the  city  requirements  require. 

"Commissioner  Gad^(K■ll :  Won't  you  develop  that  thought  just  a  little,  the  necessity  for 
keeping  the  return  on  the  investment  flexible? 

"Mr.  Jackson:     Professor  Irving   I'isher,  part  of  whose  statement   I  heard,  gave  you  an 
illustration  of  the  difference  between  the  market  for  bonds  and  the  market   for  stocks  under 
different  conditions,  and   I  think  either  he  or  perhaps  one  of  the  commissioners  brought  out 
the  fact  that  where  one  has  service  at  cost  with  a  fixed  return  to  the  property  holders  one 
practically  puts  the  stockholders   in  the  aspect  of  bondholders  under  ordinary  conditions,  be- 
cause they  have  a  substantial  guaranty   from  their  communities  that  they   shall  get   so  much 
and  alter  that  they   do   not   get  anything   mure.     Now,  that    is   very   good    lor   the   time   the 
adjustment  is  made,  and  it  may  t)e  good  indefinitely,  but  with  the  very  wide  cliangcs  of  con- 
ditions which  are  occurring  in  this  country  and  also  in  the  world  the  rates  at  which  money 
may  be  obtained  vary.     We  used  to  think  that  without  peradvcnture  the  rate  at  which  money 
could  be  obtained  was  going  to  fall  in  this  country  and  would  continue  to  fall.     It  was  lower 
in  the  European  countries,  the  great  centers  of   money   capital  of   Great   Britain  and   France 
and  Germany,  and  we  thought  we  were  in  the  direction  of  coming  to  somewhat  similar  rates 
for  money  which  would  be  put   into  enterprise.     Hut  as  an  actual   fact  the   war  overset  that 
and  consequently  our  judgment  as  to   what   the   future   would  be   was  all   wrong.     Not  only 
has  the  rent  of  money  increased  in  this  country  but  it  has  tx;en  changed  entirely  in  all  the 
European   countries.      It   has   increased   greatly.     Whether   that    increase   is   going   to   remain 
it    is   very   diflicult   to   say.      It   depends   upon    some   of    these   considerations    that    Professor 
Fisher  put  liefore  you  and  which  are  so  large  that  I  have  not  very  much  confidence  in  their 
being  settled  as  promptly  as  he  seemed  to  hope.     In  other  words,  we  are  in  a  period  and  are 
going  to  remain  in  a  i>eriod  in  all  probability  of  uncertainty  in  regard  to  how  much  return 
a  man  who  has  a  dollar  and  is  willing  to  put  it  into  a  street  railway  will  receive. 
"The  Chairman;     Would  you   favor  changing  the  return  on  the  bond? 
"Mr.  Jackson  :     No,  I  would  not  favor  changing  the  return  on  the  bond  because  that  is 
an  agteemcnt  that   was  made,  and  when   a  man   makes  a  contract   he  ought  to  be  expected 
to   stand   In    it   under   such   circumstances.     *     •     •     •     When   a    return   on   a   bond   under   a 
particular  mortgage  becomes  less  than  that  at  which  people  are  willing  to  let  out  their  money, 
a  company  having  fixed  the  rate  by  means  of  its  mortgage,  a  company  sells  additional  bonds 
cither  at  a  price  materially  lower  than  par.  so  as  to  raise  the   return  and  mend  the  market 
situation  or  else  it  fails  to  sell  bonds.    If  the  return  is  larger  than  seemed  necessary  to  get  the 
money,   they  may   do   something   in   the   way  of   refinancing   so  as   to   issue  additional   bonds 
if  they  wish  to  issue  Inmds  under  a  new  mortgage  with  other  provisions  in  respect  to  return. 
"Now.  with  the  fixed  return  of  the  stockholders  one  is  in  the  situation  where  he  cannot 
sell  to  vary  the  return  as  you  can  with  a  liond.     .Mthough  the  return  on  the  par  may  be  fixed 
by  the  mortgage,  by  selling  at  different  prices  below  par  you  can  vary  the  return.     But  if  a 
slock   must   lie  put   out  at   par   for   money  and   you  have  a   fixed   return   it   is   absolutely   in- 
flexible,  and    this   priicess   therefore   puts   the    stockholder    in    a    situation    that    is    even   less 
flexible  than  the  bond  contract  of  old  as  to  the  iKmdholder." 

Dr.  lack.son  assumes  that  capital  stock  must  be  issued  at  par.     He  does  not 

even  suggest  the  possibility  of  its  being  sold  for  the  best  price  obtainable  under 

public  supervision.     He  does  not  think  that  the  issuance  of  non-par  stock  would 

solve  the  problem,     .\ftcr  referring  again  to  the  fixed  return  on  the  investment 

under  a  service-at-cost  plan,  he  says  at  page  1420  of  the  Proceedings: 

"1  think  it  is  the  only  major  disadvantage,  and  if  that  can  Ix:  corrected  so  as  to  protect 
the  public  and  at  the  same  time  play   fair  with  the  stockholders  1   believe  that  the  cost-of- 


Service  at  Cost  493 

service  plan  is  quite  a  desirable  one,  although  I  also  believe  that  for  most  instances  it  ought 
to  be  operated  under  supervision  of  state  commissions  rather  than  separate  commissions, 
because  the  average  city  is  not  large  enough  to  maintain  the  necessary  supervisory  staff." 

Mr.  Henry  G.  Bradlee,  President  of  the  Stone  and  Webster  Corporation, 
favors  some  kind  of  a  service-at-cost  plan  as  the  arrangement  most  likely  to 
satisfy  the  public,  as  will  appear  from  his  testimony  at  page  212  of  the  Pro- 
ceedings : 

"In  general,  we  believe  that  the  service-at-cost  franchise  is  working  in  the  right  direction 
and  we  believe  that  some  plan  of  this  sort,  something  which  is  a  distinct  departure  from 
former  methods,  is  an  essential  to  restore  credit.  There  must  be  something  definite  and 
something  radical  done  in  order  to  change  public  sentiment,  and  the  best  solution  from  the 
standpoint  of  relations  with  the  public  that  we  have  seen  suggested  is  the  service-at-cost 
franchise  in  some  form.'' 

Mr.  Luther  R.  Nash,  also  of  Stone  and  Webster,  gave  extended  testimony 
in  analysis  and  criticism  of  various  service-at-cost  plans  that  have  come  into 
eftect  or  been  proposed.  He  is  quite  in  favor  of  the  exercise  of  the  public  super- 
visory powers  by  the  state  commissions,  even  under  service-at-cost  contracts, 
and  incidentally  approves  of  that  feature  of  the  Massachusetts  general  service-at- 
cost  act.     At  pages  664  and  665  of  the  Proceedings,  the  following  appears : 

"I  have  said  in  this  paper  that  I  thought  it  would  be  desirable  that  the  supervisor  should 
be  a  man  preferably  of  technical  education,  or  else  a  man  of  broad  business  experience,  who 
should  be  appointed  by  the  state  public  service  commission,  and  perhaps  act  as  the  agent  of  the 
commission,  instead  of  supervision  under  the  service-at-cost  franchise  being  independent 
of  the  state  commission.  This  plan  of  state  commission  appointment  would  have  this 
advantage,  if  the  service-at-cost  plan  becomes  widely  extended 

"Mr.  Warren :  That  is  the  Massachusetts  general  statute  plan,  is  it  not,  which  was 
adopted  last  year? 

"Mr.  Nash:     I  so  understand. 

"While  that  plan  has  not  come  into  general  use  at  all  as  yet.  because  of  the  unfavorable 
financial  conditions,  this  general  Massachusetts  plan  provides  that  for  each  service-at-cost 
company,  or  at  least  a  group  of  nearby  companies,  the  state  board  shall  appoint  a  supervisor, 
who  has  special  charge  as  the  agent  of  the  commission  of  these  companies. 

"Mr.  '\\'arren :  Those  unfavorable  financial  conditions  are  due  to  the  fact  that  the 
Massachusetts  act  requires  the  barometer  fund,  and  also  a  rehabilitation  fund,  I  think. 

"Mr.  Nash  :     To  be  set  up  in  cash  in  advance. 

"Mr.  Warren:     And  raised  through  the  issues  of  securities? 

"Mr.  Nash :     Yes ;  that  is  the  real  trouble. 

"Mr.  Warren :  The  companies  have  not  found  themselves  able  to  secure  the  credit 
necessary  to  issue  securities ;   is  not  that  true  ? 

"Mr.  Nash  :     That  is  true. 

"The  effect  in  any  state  of  a  large  number  of  service-at-cost  franchises  under  such  a 
plan  of  supervision  would  be  that  the  state  commission  would  be  able  to  train  a  body  of 
supervisors,  more  or  less  in  the  way  that  our  diplomatic  corps  is  or  ought  to  be  trained^ 
taking  young  men  and  educating  them  in  the  office  of  the  commission,  sending  them  out  as 
supervisors  of  the  smaller  properties,  and  gradually  transferring  them  to  larger  and  larger 
positions  of  responsibility,  with  their  increase  in  experience ;  so  that  in  the  end  there  would 
be  developed  a  body  of  specially  trained  supervisors  to  have  charge  of  this  class  of  public 
service." 

Mr.  Nash's  suggestion  as  to  how  this  cost  of  supervision  may  be  kept  within 
reasonable  bounds  is  found  at  pages  675  and  676  of  the  Proceedings: 

"The  Chairman :  *  *  *  *  jt  appears  that  the  cost  of  public  supervision  must  be 
borne  by  the  utility. 

"Mr.  Nash :     I  think  so. 

"The  Chairman  :  Might  not  that  prove  very  burdensome  to  the  utility,  in  the  case  of 
small  plants? 

"Mr.  Nash:  It  might,  of  course,  but  I  think  that  the  supervision  might  be  so  adjusted 
by  having  a  joint  supervisor  for  a  number  of  such  small  plants,  who  would  not  spend  all  of 
his  time  on  any  one  of  them — a  supervisor,  as  I  have  suggested  before,  appointed  by  the 
state  commission  and  responsible  to  them,  dividing  his  time  over  an  appreciable   number  of 


494  Electric  Railway  Problem 

small  plants.  I  think  that  is  quite  true,  that  a  very  small  railway  would  not  need  the  atten- 
tion, the  entire  attention,  of  even  one  supervisor,  and  other  large  systems  will  require  not 
only  the  entire  attention  of  one  man,  but  of  a  subordinate  staf?  of  engineers  and  accountants." 

Mr.  Nash"s  testimony  is  interesting  from  several  points  of  view.  With 
respect  to  the  valuation  in  service-at-cost  franchises,  he  says  at  page  665  of  the 
Proceedings : 

"In  my  opinion,  the  actual  investment,  honestly  and  prudently  made,  to  use  the  words 
of  the  Massachusetts  commission,  is  the  most  logical  basis  for  determining  the  return  to 
investors.  That,  in  these  franchises,  is  also  the  basis  of  the  city  purchase,  which  is  a  feature 
of  nearly  all  of  them,  with,  in  most  cases,  the  addition  of  a  small  percentage  to  cover  costs 
of  liquidation  and  the  procuring  of  money,  where  not  otherwise  provided  for  in  the  plan. 

"In  the  majority  of  cases.  I  think  the  valuation  has  approximated  at  least  the  actual 
investment  of  the  properties,  where  it  has  been  possible  to  determine  that.  In  a  few  cases, 
a  depreciated  value  has  been  accepted,  but  these  have  been  cases  where  the  franchises  have 
expired,  or,  for  other  reasons,  the  railways  were  not  in  a  position  to  strenuously  contest  the 
values  which  they  thought  were  too  low." 

Mr.  Warren  and  Mr.  Nash  agree,  as  all  the  witnesses  do.  that  tliis  deter- 
mination of  the  investment  or  rate  base  is  essential  to  any  service-at-cost  plan, 
as  will  be  seen  from  the  following  testimony  at  page  469  of  the  Proceedings: 

"Mr.  Warren  :  But  in  every  case  there  lies  at  the  entrance  upon  this  plan  a  determina- 
tion by  agreement  or  in  some  way.  ultimately  by  agreement,  I  suppose,  as  to  what  that  rate 
base  or  so-called  value  of  the  property  shall  be. 

"Mr.  Nash:     That  is  one  of  the  essentials  of  the  service-at-cost  plan." 

Mr.  Nash  agrees  with  those  witnesses  who  regard  the  purpose  of  regula- 
tion by  state  commissions  as  essentially  the  same  as  the  purpose  of  these  service- 
at-cost  contracts,  but  points  out  that  the  essential  difference  is  one  of  procedure, 
and  here  the  primary  difference  lies  in  the  automatic  feature  of  the  service-at- 
cost  plan  by  which  rates  of  fare  go  up  or  down  according  to  the  state  of  the 
"barometer"  fund,  without  waiting  upon  the  slower  processes  of  conunission 
regulation.    On  these  points  Mr.  Nash  testifies  at  page  467  of  the  Proceedings: 

"The  purpose  or  scope  of  service-at-cost  franchises  is  not  at  all  dissimilar  to  that  of  the 
regulation  of  the  public  service  commissions.  It  involves  the  determination  of  all  the  elements 
of  cost  of  .service  and  adjusting  the  fares  to  that  cost.  The  elements  of  cost  include  the  return 
on  the  capital  invested  which  the  investors  demand  for  the  use  of  their  money,  the  ordinary 
expenses  of  operation,  the  upkeep  of  the  property  or  a  provision  for  its  depreciation,  taxes 
and  the  creation  of  such  reserve  barometer  funds,  and  in  a  few  cases  amortization,  although 
I  do  not  consider  amortization  any  i>art  of  the  proper  cost  of  service.  Those  are  the  funda- 
mental elements  which  enter  into  practically  all  of  these  service-at-cost  franchises.  Not  all 
of  them  carry  out  fully  the  service-at-cost  plan.  The  early  ones  had  a  fixed  fare  which  was 
assumed  to  tx^  higher  than  the  cost  of  service,  with  a  provision  that  the  surplus  yielded  by  this 
fixed  fare  in  excess  of  the  cost  of  service  would  be  divided  between  the  city  arid  the  railway. 
Hut  the  later  forms  have  an  automatic  adjustment  of  the  fare  to  the  cost  and  that  automatic 
feature  I  consider  the  essential  difference  between  the  operation  of  a  service-at-cost  franchise 
and  the  regulation  of   railways  as  practised   by  the   state  commissions. 

"I  think  one  reason  why  the  service-at-cost  plan  has  become  popular  is  because  of  this 
automatic  feature.  It  has  t>cen  the  experience  of  a  gofxl  many  railways  in  taking  cases 
before  public  service  commissions,  even  where  these  commissions  have  full  authority  to  act, 
which  they  have  not  in  manv  cases,  that  action  has  been  slow.  I  have  been  concerned  in 
a  number  of  rate  cases  myself  where,  with  a  comparatively  free  slate,  the  commissions  have 
held  cases  under  consideration  for  the  major  part  of  a  year  before  rendering  a  decision,  even 
when  the  condition  of  the  railway,  its  needs  of  additional  revenue,  were  perfectly  obvii>us. 

".•\s  an  alternative,  anv  plan  of  procedure  which  would  automatically  increase  or  decrease, 
so  far  as  that  is  concerned,  the  fare  as  soon  as  the  need  developed  is  and  .should  be  welcomed 
by  the  electric  railways." 

Mr.   Nash  concludes  from  the  testimony  of   Mr.  Stanley  and  Mr.  Culkins 

that  increases  in  fares  in  Cleveland.  Cincinnati  and  possiblv  other  places  where 


Service  at  Cost  495 

service-at-cost  franchises  have  been  in  effect  have  occasioned  little  reduction 
in  riding  as  compared  with  cities  where  fares  have  been  increased  by  negotia- 
tion or  commission  order.  At  pages  663  and  664  of  the  Proceedings,  referring 
to  this  traffic  loss  under  the  6-cent  fare,  he  says : 

"I  think  that  loss  arises  almost  entirely,  not  because  the  car  riders  cannot  afford  to  pay 
the  additional  cent,  but  because  of  the  agitation  and  resentment  arising  in  connection  with 
the  negotiations  for  the  increase.  City  councils,  city  officials,  where  an  appeal  is  taken  to 
a  public  service  commission  for  an  increase  of  fare,  always  feel  it  incumbent  upon  them 
to  protest  the  increase,  and  the  public  press  and  professional  politicians  take  that  opportunity 
to  very  loudly  and  at  great  length  express  their  opinion  of  the  public  utility  that  would 
impose  additional  burdens  upon  the  poor  working  people.  The  result  of  that  is  bound  to  be 
a  large  amount  of  popular  attention  to  the  subject  and  a  lot  of  misunderstanding,  and  conse- 
quent resentment,  without  which  I  feel  quite  sure — and  the  testimony  before  the  Commission 
has  borne  it  out — that  the  reduction  in  riding  would  be  comparatively  small.  In  other 
words,  the  operation  of  the  service-at-cost  franchises  tends  to  minimize  the  unfriendly  public 
relations,  and  yield  revenues  from  fare  changes  that  should,  under  normal  conditions  be 
yielded — the  kind  of  increases  in  revenue  that  actually  take  place  in  private  business,  where, 
as  a  matter  of  course,  the  charges  for  commodities  have  increased  in  these  days  as  the  cost 
of  the  commodities  increased. 

"So  that  I  think  that  that  feature  of  the  service-at-cost  franchises  is  of  very  particular 
importance." 

This  is  a  matter  of  primary  importance,  as  it  bears  upon  the  fundamental 
problems  of  public  cooperation  and  the  ultimate  earning  power  of  the  electric 
railway  business  under  increased  rates.  Fortunately,  we  have  certain  figures 
in  the  table  presented  in  Chapter  XXVIII  of  this  report  which  may  tend  to 
throw  light  upon  Mr.  Nash's  conclusion.  We  can  compare  the  first  nine  months 
of  1919  with  the  first  nine  months  of  1917  in  the  case  of  Cleveland,  Cincinnati, 
Youngstown,  Montreal  and  Boston,  where  the  rates  were  increased  under  ser- 
vice-at-cost plans  without  reaching  the  top  limit,  with  certain  other  communities 
where  the  rates  were  increased  by  other  means  than  barometer  funds  under 
service-at-cost  agreements.  The  following  figures  seem  to  indicate  that  Mr. 
Nash's  conclusion  was  a  verdict  of  hope,  not  clearly  sustained  by  the  available 
evidence : 

Per  cent  Increase  Change  in  Traffic. 

in  Average  Per  cent  Per  cent 

City  or  Svstem  Fare  Paid  Increase           Decrease 

Cleveland  1    . .' 54.12  ....                  2.53 

Detroit    (City    Lines)     31.68  1.85 

Milwaukee    17.64  9.08 

Cincinnati!    21.12  ....                  1.90 

St.   Louis    20.00  ....                0.77 

Indianapolis    17.37  10.39 

Baltimore    21.23  14.22 

Youngstown  1     17.19  ....                   3.14 

Toledo     30.65  ....                  4.00 

Montreal  1    17.11  4.61 

Boston!   70.36  ....                15.47 

Pittsburgh    29.98  ....                12.73 

29   Cities  2    17.80  6.65 

15   Cities  3    41.77  ....                 7.54 

!  Operating  under  service-at-cost  contracts. 

-  Cities  or  systems  in  Class  C  as  shown  on  Tables  IV  and  VI  in  Chapter  XXVIII  of  this 
report. 

3  Cities  or  systems  in  Class  D  as  shown  on  Tables  ly  and  VI  in  Chapter  XXVIII  of  this 
report. 

It  is  noteworthy  that  the  increase  in  traffic  during  this  same  period   was 

15.08  per  cent  on  systems  where  fares  had  not  been  materially  increased.     The 

only  service-at-cost  city  showing  an  actual  increase  in  revenue  passengers  for 


496  Electric  Railway  Problem 

this  period  is  Montreal.  In  all  of  these  service-at-cost  cities,  except  Cleveland, 
the  average  fare  paid  after  October  1,  1919.  has  been  higher,  and  in  some  cases 
a  good  deal  higher,  than  the  average  for  the  first  nine  months  of  1919.  The 
Montreal  average  fare  went  up  from  4.79  cents  to  5.84  cents;  the  Boston  fare 
went  up  from  an  average  of  S.5  cents  to  10  cents  straight;  the  Cincinnati  fare 
went  from  an  average  of  6.2  cents  to  a  little  over  7  cents;  and  the  Youngs- 
town  city  rate  went  to  8  cents  cash,  with  7  tickets  for  50  cents,  on  January  1. 
1920,  as  compared  with  an  average  of  6  cents  for  the  entire  system  of  the 
Mahoning  and  Shenango  Valley  Traction  Company  for  the  first  nine  months  of 
1919.  The  Cincinnati  fares  were  headed  for  the  skies,  as  Mr.  Culkins  explains  in 
his  letter  of  January  29.  1920,  but  the  upward  curve  is  being  flattened  down  by 
the  arbitrary  modification  of  the  service-at-cost  plan  so  as  to-  spread  out  the 
deficits  over  a  period  of  years  and  avoid  the  danger,  foreseen  by  both  the  city 
and  the  company  ofiicials,  that  the  fare  would  get  so  high  as  seriously  to  curtail 
traffic  in  spite  of  the  good  will  and  spirit  of  cooperation  supposed  to  character- 
ize the  riding  imblic  under  a  service-at-cost  arrangement.  It  is  again  unfor- 
tunate that  the  traftic  figures  for  the  Bay  State  system  under  the  service-at-cost 
act  are  not  available,  as  they  could  properly  be  compared  with  the  figures  for 
the  Connecticut  Company  lines  and  the  lines  of  the  Public  Service  Railway  Com- 
pany of  New  Jersey,  which  are  operated  uniler  somewhat  similar  conditions 
with  respect  to  the  character  and  distribution  of  the  population  served.  The 
Connecticut  and  Xew  Jersey  experiences  with  traftic  losses  have  figured  largely 
in  the  estimates  of  what  fare  increases  will  do  to  the  riding  habit.  But  there  is 
no  evidence  that  conditions  have  been  any  better  on  the  Bay  State  lines  under 
the  service-at-cost  plan  than  they  have  been  in  Connecticut  and  Xew  Jersey, 
where  all  the  fare  increases  have  been  brought  about  without  the  help  of  service- 
at-cost  plans.  The  evidence  seems  to  be  clear  that  the  service-at-cost  plan  as 
worked  out  in  Cleveland,  with  its  particular  background  of  battle  and  final  com- 
promise, has  enlisted  public  support  to  a  remarkable  degree.  It  is  not  shown, 
however,  that  a  service-at-cost  plan  \\x)rked  out  in  any  other  way  brings  the 
same  benefits  either  to  the  company  or  to  the  public. 

Mr.  Xash  docs  not  regard  the  public  guaranty  contained  in  the  Boston  act 
as  characteristic  of  the  service-at-cost  plan.  This  point  is  brought  out  at  pages 
670  and  671  of  the  Proceedings,  where  the  following  testimony  is  found: 

"Mr.  Warren:  \Vh.it  would  you  say  were  the  salient  features  of  a  service-at-cost 
franchise,  the  essential   features.  distinKuishiiiR  it   from  an   ordinary   franchise? 

"Mr.  Nash  :  The  essential  ditTerence  is  in  the  assurance  to  the  investor,  that,  as  far  as 
any  rate  of  fare  can  \k  put  into  efiict  which  the  patrons,  tlie  car  riders,  can  alTord  to  and  are 
williuR  to  pay.  the  investor  will  get  a  normal  return  upon  his  investment.  In  other  words, 
the  kind  of  a  return  that  he  would  Rct  if  he  put  his  money  in  an  alternative  commercial  or 
industrial  pro|)osition. 

"That  is  not  a  Ruaranty.  I  think  that  distinction  ouRht  to  he  very  clearly  brought  out. 
that  it  is  not  a  Ruaranty  in  the  ordinary  franchise.  In  our  Massachusetts  cases,  the  Boston 
Klcvated  act  at  least,  that  is  a  Ruaranty  that  the  stale  treasury  will  make  up  the  deficit,  and 
the  return  to  the  investor  is  ahsolutcly  Ruarantecd;  hut  it  is  expected  that  the  deficit  which 
the  state  makes  up  at  one  time  will  Ik'  paid  at  another  under  more  favorable  conditions  by  the 
car  riders ;  so  that  in  the  end  the  state  will  not  lo.se  anythiuR,  but  there  is  no  definite  provision 
for  that   in   the   act. 

"Mr.  Warren:  So  that  one  essential  feature  and  difference  is  the  assurance  to  the  in- 
vestors, that  so  louR  as  the  business  is  cajwhle  of  producing  it,  they  will  get  a  fixed  normal 
return   on  their   investment? 


Service  at  Cost  497 

''Mr.  Nash :     That  is  the  real  vital  advantage  of  it. 

"Mr.  Warren:  Is  there  any  assurance  to  the  car  rider  that  he  does  not  always  enjoy 
under  present  franchises? 

"Mr.  Nash  :  There  is  an  assurance  to  the  car  rider  that  he  can  have  any  kind  of  service 
that  he  is  willing  to  pay   for. 

******** 

"Mr.  Warren :  So  that  really  tho.se  two  features  are  very  important,  the  determination 
of  the  value  of  the  property  used,  and  then  permission  to  the  company  automatically  to  have 
its  rates  go  up  and  down,  to  furnish  a  return  upon  that  value? 

"Mr.  Nash:     Those  are  the  fundamentally  necessary   features. 

"Mr.  Warren :     Those  are  the  two  reciprocal  benefits  ? 

"Mr.  Nash  :     Yes. 

"Mr.  Warren  :  The  investor  says,  T  won't  require  you  to  pay  on  money  that  is  never 
invested,'  and  the  car  rider  says,  'You  may  get  a  proper  return  on  whatever  is  invested.' 

"Mr.  Nash :     Exactly." 

On  the  subject  of  depreciation  as  a  factor  in  the  cost  of  service,  Mr.  Nash 
differs  quite  radically  from  Mr.  Mortiiner,  who,  it  will  be  remembered,  insists 
that  a  full  reserve  should  be  accumulated  equivalent  to  the  difference  between 
the  cost  new  of  the  property  and  its  present  value  as  measured  by  its  per  cent 
condition  of  cost  new.  Mr.  Nash  takes  the  position  that  the  depreciation  reserve 
should  be  sufficient  to  provide  for  actual  replacements  of  worn-out  property  as 
they  become  necessary  from  time  to  time,  but  that  obsolescence  and  supersessions 
not  definitely  foreseen  should  be  taken  care  of  by  the  generation  of  car  riders 
who  benefit  from  them.  In  view  of  the  effect  upon  fares  of  the  depreciation 
policies  established  by  the  State  of  Massachusetts  under  the  Boston  and  Bay 
State  service-at-cost  acts,  this  point  is  one  of  great  importance.  At  pages  667 
and  668,  Mr.  Nash  says: 

"The  effect  of  the  method  of  accruing  for  replacements,  depreciation,  so-called,  which  I 
have  referred  to  as  being  produced  by  the  Interstate  Commerce  Commission  and  some  of  the 
state  commissions  in  their  accounting  requirements,  leads  to  the  accumulation  of  a  large 
reserve — in  some  cases,  a  very  large  reserve — which  is  never  used.  This  reserve — the  accumu- 
lation of  it — comes  from  the  car  rider  in  the  case  of  the  railway  company.  It  is  money  taken 
from  the  car  riders,  and  usually  this  reserve  is  invested  in  the  property.  That  is  not  in  these 
days  a  very  profitable  investment  for  the  car  rider,  and  if  he  had  his  option,  he  would  prefer 
to  invest  his  money  somewhere  else.  Of  course,  normally  and  theoretically,  this  investment 
reserve  earns  a  return.  It  is  unnecessary  to  go  out  and  borrow  as  much  outside  capital ;  so 
that  the  fi.xed  charges  against  our  operation  are  less  than  otherwise  would  be  the  case ;  but 
so  long  as  this  reserve  is  in  excess  of  any  possible  actual  requirements — and  I  am  familiar 
with  calculations  which  show  that  even  on  a  sinking  fund  basis,  this  reserve  might  amount  to 
as  much  as  40'-r  of  the  investment  in  the  property — to  the  extent  that  that  is  excessive,  the 
car  riders  pay  a  liigher  rate  of  fare  than  otherwise  would  be  neces.sar>-,  and  I  think  in  any 
service-at-cost  program  any  excess  accumulation  of  that  kind  should  be  avoided. 

"I  am  heartily  in  favor  of  full  provision  for  any  actual  requirements,  but  I  doubt  very 
much  whether  provision  should  be  made  for  so-called  obsolescence  and  supersession;  in  other 
words,  whether  the  car  riders  of  today,  using  a  certain  type  of  equipment,  should  furnish 
the  means  of  retiring  that  equipment,  so  that  subsequent  car  riders  may  have  the  advantages 
of  more  efficient,  safer  and  otherwise  more  attractive  service.  For  example,  we  are  now 
introducing  in  very  large  numbers  about  the  countr>- — quite  large  numbers— the  one-man  car. 
It  is  a  more  efficient  piece  of  equipment  than  the  older  style  of  car.  The  cost  of  operation 
is  less.  The  older  and  heavier  equipment  is,  in  effect,  abandoned.  It  probably  will  be  for 
some  time  used  for  extra  heavy  service,  but  in  the  end  it  is  a  supersession,  and  there  is  a 
reduction  in  future  costs.  There  is  a  more  frequent  service  for  the  car  rider,  and  I  think 
the  user  of  the  one-man  car  is  tlie  man  who  ought  to,  in  part,  at  least,  pay  for  the  amortiza- 
tion of  the  remaining  life  of  the  equipment  which  is  superseded. 

•'In  short,  in  the  service-at-cost  franchise,  the  car  rider  should  pay  as  a  part  of  the  cost 
enough  to  accumulate  reserves  for  existing  renewals,  but  not  for  theoretical  depreciation  or 
for  unforeseen  obsolescence  of  equipment." 

After  a  good  deal  of  further  discussion  as  to  the  proper  method  of  provid- 
ing for  depreciation  on  account  of  obsolescence,  Mr.  Nash,  in  answer  to  a  ques- 


498  Electric  Railway  Problem 

tion  by  Commissioner  Beall,  makes  the  following  statement  at  page  677  of  the 
Proceedings : 

"The  thought  I  liave  in  mind  is  that  every  railway  should  set  up  a  reserve.  I  do  not 
know  that  I  would  attempt  to  define  what  that  would  be,  because  it  involves  so  many  different 
questions,  as  to  probable  useful  life  and  the  extent  of  the  effect  of  changes  in  the  art,  and  all 
that;  but  if  I  were  guessing  at  a  suitable  reserve,  which  would  take  care  of  any  actual  retire- 
ments and  replacements  on  a  normal  charge,  I  would  say  sometliing  like  lO'f  of  the  invest- 
ment.   I  think  that  would  be  enough  to  wholly  take  care  of  any  normal  amount  of  retirements." 

I  have  already  discussed  to  some  extent  this  matter  of  depreciation  in  the 
introductory  pages  of  this  chapter.  Mr.  Xash  evidently  does  not  believe  in  the 
deduction  of  accrued  depreciation  from  the  original  investment  in  arriving  at  a 
rate  base.  I  do,  and  for  that  reason  I  believe  that  accruing  permanent  deprecia- 
tion is  a  part  of  the  cost  of  service.  So  far  as  depreciation  is  due  to  obsolescence 
and  inadequacy,  it  cannot  be  definitely  measured  in  advance,  and  of  course  to 
provide  for  it  fully  and  with  certainty  in  advance  would  put  an  unreasonable 
burden  upon  the  present  car  riders.  It  is  a  matter  for  the  use  of  judgment,  but 
the  rule  to  be  applied  is  that  the  physical  value  of  the  plant  plus  the  uninvested 
depreciation  reserve  should  be  kept  at  all  times  as  nearly  as  possible  on  a  par 
with  the  recognized  capital  value.  When  an  agreement  is  reached  as  a  basis  for 
a  service-at-cost  plan,  the  accepted  value  ought  to  be  the  depreciated  value, 
unless  it  is  proposed  to  tax  the  future  car  riders  to  make  up  deficiencies  that 
may  have  occurred  in  the  past  under  a  different  arrangement.  If  those  defi- 
ciencies are  to  be  made  up,  they  should  be  made  up,  and  not  carried  permanently 
in  an  inflated  capital  account. 

Mr.  Xash  is  in  favor  of  an  indeterminate  franchise,  but  believes  that  cer- 
tain features  of  the  franchise  should  be  subject  to  review  from  time  to  time  to 
insure  proper  flexibility.  It  will  be  remembered  that  in  his  statement  of  the 
fundamental  and  essential  characteristics  of  service  at  cost  Mr.  Xash  includes 
an  assurance  to  the  investor  of  the  right  to  earn  a  normal  return  upon  his  invest- 
ment, a  return  similar  to  what  he  would  get  if  he  put  his  money  into  an  alter- 
native commercial  or  industrial  proposition.  This  is  by  no  means  as  clear  as  it 
purports  to  be.  The  crucial  question  is:  Shall  the  investor  get  a  fixed  rate  of 
return,  or  a  flexible  rate  of  return  adjusted  from  time  to  time  to  the  normal 
rate  of  return  currently  offered  on  other  investments?  Mr.  Xash  assents  to  Mr. 
Warren's  proposition  that  "the  determination  of  value  and  the  assurance  of  a 
return" — these  essential  features  of  a  .scrvice-at-cost  franchise — ought  not  to 
need  review.     At  page  (u2  of  the  Proceedings,  he  says: 

"Tliosc  should  l)c  fundamentally  unchanged.     They  should  be  fi.xed." 

But  he  goes  on  directly  to  say : 

"Now,  take  the  question  of  the  rate  of  return,  for  instance.  I  do  not  think  we  can 
foresee  indefinitely  what  rate  of  return  the  investor  is  able  to  earn  in  any  other  business,  and 
what  he  is  intillid  to  under  a  scrvicrat-cnst  franchise:  so  that  there  might  well  be  a  provision 
for  arbitration  (>r  readjustment  of  things  of  that  kind  that  are  subject  to  change  with  chani;ing 
general  conditions. 

"("ommisvinner  Meeker :  Would  you  make  these  changing  features  subject  to  review  at 
peril Klical  intervals,  say.  every  ten  years,  or  whenever  the  emergency  arises? 

"Mr.  Nash:  Preferably  when  a  real  enKrgcncy  arises,  if  it  is  possible  to  define  what 
one  means  by  a  'real  emergency."    That  is  always  difficult." 


Service  at  Cost  499 

Here  Mr.  Nash  gets  into  deep  water.  He  has  to  agree  that  if  the  rate  of 
return  is  to  be  left  open  to  adjustment  by  arbitration  from  time  to  time,  it  will 
have  to  be  subject  to  decrease  as  well  as  to  increase.  It  appears,  however,  that 
the  only  kind  of  fluctuation  attractive  to  the  investor  would  be  fluctuation  up. 
The  matter  is  discussed  at  pages  672  and  673  of  the  Proceedings,  as  follows : 

"Commissioner  Gadsden :  Mr.  Nash,  don't  you  think  that  that  will,  in  some  measure, 
affect  the  securities  of  the  investor;  if  an  investor  buys  a  security  under  any  consideration 
of  that  kind,  with  the  provision  that  the  rate  on  these  securities  is  subject  to  revision,  don't 
you  think  that  that  is  going  to  make  money  more  expensive  to  get,  under  this  plan? 

"Mr.  Nash :     There  would  be  a  tendency  both  ways. 

"Commissioner  Beall  :     You  think  normally  it   would  go  up,  and  not  down? 

"Mr.  Nash:  If  the  investor  foresaw  that  prices  were  going  to  continually  rise,  and  that 
the  rate  of  return  that  he  could  command  in  the  future  ought  to  be  revised,  he  would  look 
for  a  revision  to  give  him  an  opportunity  to  get  more  than  he  started  with. 

"Commissioner  Beall:     Well,  are  not  the  chances  all  the  other   way? 

"Mr.  Xash :  It  is  pretty  hard  to  tell  how  the  average  investor  would  look  at  the  future, 
whethei  he  thinks  prices  are  going  up  or  going  down. 

"Commissioner  Beall :  A  banker  would  not  undertake  to  raise  money  under  those  con- 
ditions.    He  could  not  do  it.  absolutely. 

"Commissioner  Gadsden :     That  is  a  gamble ;  that  is  not  an  investment." 

Perhaps  Mr.  Thomas  L.  Sidlo,  of  Cleveland,  states  the  case  for  a  variable 
rate  of  return  as  well  as  any  of  the  witnesses.  In  describing  service  at  cost,  he 
says  at  page  1588  of  the  Proceedings: 

"This  cost  should  include  the  labor  charge,  the  operating  charge,  the  power  charge,  the 
maintenance  charge,  etc.,  all  according  to  the  market.  In  addition  it  sjiould  include  the 
'money  charges,'  that  is,  the  return  to  the  company's  security  holders  on  their  investment. 
This  return  should  not  be  "fair'  or  'fixed,'  but  it  should  be  certain  and  in  accord  with  the 
prevailing  cost  of  money  for  this  kind  of  capital  requirement.  In  other  words,  it  should  be 
subject  to  ascension  or  declension,  according  to  the  necessities  of  the  money  situation,  perhaps, 
however,  with  a  fixed  minimum  which  should  always  be  assured.  The  reason  for  this  is 
obvious.  The  cost  of  money  is  just  as  important  and  inevitable  an  item  entering  into  tlie  cost 
of  service  as  labor  and  material  and  is  as  susceptible  to  the  control  of  economic  influences. 
This  fact  should  be  recognized  and  accredited.  This  applies  especially  w'here  the  type  of 
security  is  to  be  common  shares,  either  exclusively  or  predominantly,  and  where  the  effort 
will  be  made  to  keep  these  shares  actively  at  par  or  in  the  region  of  par  or  in  a  price  range 
that  will  be  sufficiently  attractive  to  invite  fresh  capital.  The  rate  of  return  should  not  be 
susceptible  to  frequent  or  violent  changes.  This  might  give  a  gambling  quality  to  the  stock, 
but  the  rate  should  not  be  so  immutably  fixed  as  to  make  it  impossible  to  recognize  and  meet 
changing  money  market  conditions." 

Mr.  Nash's  theory  of  fluctuation  in  the  rate  of  return  is  based  in  part  upon 
his  acquaintance  with  our  old  friend,  the  "Mexican  dollar,"  as  will  appear  from 
his  statement  at  page  675  of  the  Proceedings : 

"If  the  costs  of  living  generally  have  gone  up  not  less  than  50"^^,  the  investor,  who, 
theoretically,  may  live  on  his  income,  ought  to  have  his  income  increased  SCT/.  The  investor 
makes  his  money  work  for  his  living,  and  he  is  just  as  much  entitled  to  a  higher  wage  on  his 
money  as  the  workingman  is  entitled  to  a  higher  wage  for  his  physical  labor." 

The  discussion  is  confused  by  a  mixture  of  ideas  and  problems.  If  service 
at  cost  is  designed  primarily  as  a  means  for  rehabilitating  credit,  its  function  is 
not  to  restore  to  old  investors  what  they  have  lost,  perhaps  temporarily,  through 
the  depreciation  of  the  dollar,  but  to  of?er  the  new  investment  security  and  a 
certainty  of  return  as  compared  with  other  investments,  and  give  it  a  rate  of 
return  which,  under  the  conditions,  is  enough  to  attract  it  into  the  electric  rail- 
way field  in  sufficient  amount  to  enable  the  electric  railways  to  "carry  on." 
What  the  old  investor  gets  under  a  service-at-cost  contract  is  a  matter  of  equity 
and  bargaining;  but  the  rate  of  return   for  the  new  investment,  except  to  the 


500  Electric  Railwav  Problem 

extent  that  the  old  investors  contract  to  supply  it.  necessarily  depends  upon 
market  conditions  from  time  to  time.  Here  again  the  necessary  flexibility  can 
be  obtained,  if  the  rate  of  return  on  new  capital  is  to  be  just  what  it  costs  to 
get  it.  The  Cleveland  Railway  Company  claimed,  and  the  Cleveland  Board  of 
Arbitration  found,  that  the  original  provision  of  the  Tayler  grant  with  respect 
to  rate  of  return  was  not  flexible  enough  to  enable  the  company  to  finance  exten- 
sions and  improvements  needed  in  the  immediate  future,  but  the  modification 
recommended  in  that  case  does  not  increase  the  flexibility  of  the  rate  of  return, 
but  merely  adopts  the  clumsy  and  expensive  expedient  of  raising  by  16"-^  per 
cent  the  contractual  rate  on  $28,000,000  of  capital  stock  already  outstanding  in 
order  to  offer  new  investors  an  attractive  rate  on  money  hereafter  to  be  put  into 
the  enterprise.  W'e  should  never  lose  sight  of  the  fact  that  the  new  investor 
in  times  like  these  puts  in  depreciated  dollars,  and  does  not  ask  a  rate  of  return 
based  upon  the  theory  that  he  is  investing  dollars  that  differ  in  any  way  from 
the  dollars  in  which  his  return  is  to  be  paid  so  long  as  present  conditions  prevail. 
On  the  subject  of  incentive  to  economical  administration.  Mr.  Nash  ap- 
proves in  theory  the  London  sliding  scale  as  applied  to  street  railways  in  the 
Cincinnati  and  Dallas  service-at-cost  franchises,  with  the  important  qualification 
that  in  neither  of  these  cases  has  it  "worked"  and  that  it  is  always  hard  to  get 
it  started  on  the  right  basis,  and  even  if  you  do  succeed  in  that  a  change  in  con- 
ditions may  make  a  change  in  the  basis  necessary.  He  also  favors  the  Montreal 
plan  for  supplying  incentive,  with  the  qualification  that  the  commissioners  who 
administer  the  plan  need  to  be  paragons  of  political  virtue  and  business  fore- 
sight. Aiter  describing  the  Montreal  "operating  profit"  plan,  whereby  the  man- 
agement receives  at  the  end  of  each  year  a  bonus  of  14  of  one  per  cent  on  capital 
value  if  it  has  kept  within  the  operating  allowance,  he  says  at  page  669  of  the 
Proceedings : 

"That  is  a  small  amount,  so  far  as  percentages  ro,  but  it  should  serve  as  an  incentive 
to  keep  the  expenses  within  all  rcasdiiable  limits;  but  the  just  working  of  an  allowance  of 
that  kind  requires  absolute  unvarying  fairness  on  the  part  of  the  commission  that  fixes  the 
allowance  in  advance,  with  a  very  clear  forecast  of  what  is  going  to  happen,  (^tlicrwise,  it  is 
difficult  to  definitely  and  successfully  apply  it.  If  the  commissioner  fixes  his  allowance  one 
year:  if  he  fixes  it  just  as  clo.sc  as  he  can.  and  the  company  comes  a  little  bit  under,  the 
tendency  in  the  succeeding  year,  if  the  commissioner  dees  not  want  the  company  to  eani  its 
operating  allowance,  is  to  crowd  the  allowance  down,  so  that  in  a  .series  of  years,  there  is  an 
attempt  to  crowd  the  allowance  down  to  the  lowest  possible  limit,  and  the  incentive  is  lost 
If.  on  the  other  hand,  the  allowance  is  made  liln-ral  so  thai  the  company  can  easily  live  within 
it.  somclxxly  gets  up  and  says  the  commission  and  the  company  are  in  collusion,  and  there  i^ 
an  operating  profit  there  that  really  does  not  lielong  to  the  company  and  was  not  really  earned. 

"That  is  the  difficulty  in  applying  that  sort  of  an  incentive,  but  the  principle  is  theoretically 
good." 

In  other  words:  "Cheer  up,  brothers;  we  know  what  the  problem  is,  but 
thus  far  we  have  been  unable  to  solve  it."  .\nd  so,  in  this  state  of  mind,  Mr. 
Nash  would  ri-commcn<l  to  Pittsburgh  "the  same  general  plan  they  have  in 
Cleveland  or  Cincinnati,  '  with  "just  incidental  modifications,"  as  he  says  at 
page  691  of  the  Proceedings.    Then  he  continues: 

"I  think     •     *     •     'of  the  point  of  flexibility  that   1   mentioned,  not   having  the  thing 
so  tightly  sewed  up  that   it  cannot   be  adajited  to  varying  conditions   from  time  to  time,  and 
the  point  of  incentive  to  Ixith  the  investors  and  the  management  to  get  the  most  that  is  po-; 
sihie  out  of  the  propi'rly  :   the  investor  to  more   rcidilv   furnish  the  money,  the  management 
to  keep  itvelf  up  to  the  highest  pitch  and  to  keep  in  the  service  of  the  railway  the  cla.ss  of 


Service  at  Cost  501 

men  that  is  necessary  to  secure  tlie  best  results.  If  the  extent  of  supervision,  for  instance, 
is  so  great  that  the  officials  of  the  company  are  merely  clerks  to  carry  out  the  instructions  and 
the  plans  and  designs  of  the  supervisory  body,  that  is  not  attractive  work  for  a  real  man. 
Just  so  far  as  is  consistent  with  the  interest  of  the  public  I  think  the  management  should  be 
left  free  to  initiate  the  improvements  and  take  credit  for  improvements." 

Mr.  Nash  thinks  that  neither  a  maximum  nor  a  minimum  rate  of  fare 
should  be  contained  in  a  service-at-cost  franchise.  In  this  opinion,  at  least  so 
far  as  the  maximum  is  concerned,  Mr.  Nash  is  supported  by  the  opinion  of 
Mr.  W.  B.  Head,  Vice-President  of  the  Dallas  Railway  Company.  It  appears 
that  in  Dallas  not  only  the  street  railway  but  the  gas  and  electric  properties 
have  been  put  on  a  service-at-cost  basis.  At  page  631  of  the  Proceedings.  Mr. 
Head  says : 

"The  great  defect,  as  it  turned  out,  in  the  railway  franchise,  on  account  of  the  war 
situation,  is  the  fact  that  it  has  a  top  limit,  and,  to  that  extent,  is  not  a  service  at  cost.  You 
cannot  go  above  a  five-cent  fare,  and,  therefore,  it  is  not  a  service-at-cost  franchise,  to  that 
extent." 

The  standard  rate  of  return  allowed  in  Dallas  when  the  maximum  fare  is 
being  charged  is  7  per  cent.  Mr.  Head  states  that  the  company  has  been  earn- 
ing 4  per  cent.  It  is  apparent  that  all  is  not  well  in  Dallas.  At  page  632  of  the 
Proceedings,  Mr.  Head  says: 

"We  are  not  properly  serving  the  city.  We  are  not  making  any  extensions.  We  have 
not  the  money,  and  we  cannot  get  the  money.  We  need  new  equipment,  and  we  cannot  get 
money   with   which  to  purchase  the  equipment." 

Still,  Mr.  Head  has  hopes  that  the  company  may  be  able  to  pry  the  lid  off 
with  a  lever  which  it  retained  at  the  time  the  franchise  was  negotiated,  as  will 
appear  from  his  testimony  at  page  636  of  the  Proceedings : 

"The  Chairman:     Do  you  expect  to  be  able  to  get  the  lid  off  that  maximum  fare? 

"Mr.  Head :  I  rather  think  we  will,  for  this  reason :  One  of  the  trading  points  of  the 
city  was  that,  on  account  of  the  fact  that  they  put  this  lid  on,  we  introduced  certain  clauses 
in  the  franchise  by  which  they  cannot  force  extensions  when  we  are  not  making  the  allowed 
return,  and  we  are  hopeful  of  using  that  to  be  able  to  get  this  lid  oiT,  so  that  the  property 
can  grow.     That  was  one  of  the  offsets  to  the  limit  being  placed." 

On  behalf  of  the  public  Mayor  E.  V.  Babcock,  of  Pittsburgh,  and  Mr. 
Charles  K.  Robinson,  special  counsel  for  the  city  in  public  utility  litigation,  gave 
important  testimony  on  service  at  cost,  based  upon  their  study  of  that  plan  as 
applicable  to  the  soltition  of  Pittsburgh's  transportation  problem.  To  them  the 
problem  of  incentive  is  the  stumbling  block,  as  will  appear  from  Mayor  Bab- 
cock's  statement  and  Mr.  Robinson's  comment  on  it.  At  pages  1900  and  1901 
of  the  Proceedings,  Mr.  Babcock  says: 

"The  use  of  the  service-at-cost  plan,  which  is  now  strenuously  proposed  in  behalf  of  the 
street  railway  companies,  has  many  elements  to  commend  it  to  favorable  consideration.  It, 
however,  possesses  one  element  which  may  prove  that  it  is  not  the  final  solution  to  the  diffi- 
culties, namely,  that  it  robs  the  operating  company  of  the  incentive  to  secure  the  best  operating 
economies  and  keep  down  the  cost  of  the  service.  Various  expedients  by  way  of  adopting 
annual  budgets  and  by  giving  the  local  municipal  representatives  a  voice  in  the  fixing  of  the 
budget  have  been  suggested,  and  on  the  other  hand,  incentives  have  been  suggested  to  reward 
good  management  by  operating  bonuses  and  by  dividing  excess  profits,  but  all  of  these  plans 
are  quite  unsatisfactory  and  give  no  assurance  that  they  will  accomplish  the  desired  results. 
Yet  it  may  be  that  no  better  plan  can  be  evolved  to  carry  the  business  across  from  the  un- 
regulated age  to  the  present  regulated  age  than  that  of  service  at  cost  with  arrangements 
providing  for  possible  municipal  ownership  under  reasonable  conditions  of  purchase.  If  a 
service-at-cost  plan  could  be  developed  whereby  good  judgment  could  he  fairly  rewarded, 
then  nn  cprinus  obiection  could  be  raised  to  the  plan." 


502  Electric  Railwav  Problem 

At  page  1907  of  the  Proceedings  Mr.  Robinson,  answering  for  Mayor  Bab- 
cock  and  himself,  explains  the  difticuhies  they  found  with  respect  to  this  matter 
of  incentive.     The  record  shows  the  following: 

"The  Chairman:     How  are  you  going  to  provide  for  that  incentive? 

"Mr.  Robinson:  «  ♦  •  *  Qur  idea  is  this:  That  up  to  the  present  time,  so  far  as 
we  have  any  knowledge,  there  has  been  no  plan  evolved  which  occurs  to  us  to  lie  satisfactory 
in  the   way  of  meeting  that  particular  and   rather  serious   objection. 

"We  are  reasonably  familiar  with  the  plan  that  has  been  adopted  in  Montreal  where 
they  have  an  operating  bonus,  1  iK'lieve.  That,  however,  is  dependent  entirely,  if  it  is  analyzed, 
to  a  point  where  it  becomes  a  question  of  individual  judgment  as  to  whether  or  not  the 
company  has  met  a  definite  budget  or  not,  and  leaves  it  practically  in  the  control  of  an 
individual  commissioner  or  commissioners  to  decide  that  question  and  that  lays  itself  open  to 
complications  which  seem  to  us  not  to  meet  the  situation. 

"The  Cincinnati  arrangement,  while  in  a  sense  fairly  meeting  the  problem  in  the  sense 
that  it  divides  certain  excess  profits,  nevertheless  in  a  situation  where  there  is  a  very  rapid 
change  in  the  general  economic  and  financial  conditions,  entirely  fails  to  meet  the  situation, 
because,  being  predicated  upon  certain  assumptions  that  a  certain  rate  of  fare,  a  certain 
amount  of  return,  certain  costs,  and  so  forth,  are  the  bases  of  judgment,  if  those  bases  are 
violently  changed  by  war  conditions,  or  by  any  economic  or  other  conditions,  or  by  mechanical 
art  developments  which  might  be  incident  to  the  one-man  car,  or  otherwise,  then  the  whole 
arrangement  is  immediately  distorted,  and  the  thing  you  were  trying  to  do.  which  was  to 
reward  good  management,  may.  after  all.  prove  a  punishment  for  an  economic  condition  over 
which  they  have  no  control,  or  may  prove  a  gift  hccau.se  of  factors  over  which  they  have 
no  control." 

Again,  at  page  1912  of  the  Proceedings,  Mr.  Robinson  says: 

"The  trouble  with  the  cost-of-service  plan,  it  seems  to  me,  is  it  offers  no  check  against 
many  forces  which  naturally  tend  to  very  much  increase  the  cost  of  ser\-ice,  because  the  com- 
pany, having  no  direct  interest  in  those  costs,  necessarily  would  not  try  to  keep  them  down. 
Thev  might,  for  instance,  increa.sc  their  payrolls  very  materially,  because  it  would  mean 
nothing  to  the  operating  management,  and  of  course  the  pressure  to  increase  those  is  constant. 
It  is  the  inherent  danger  which  attaches  to  a  system  which  more  or  less  guarantees  the  returns 
without  providing  any  incentive  to  keep  the  costs  dowTi." 

Further  on,  at  jiages  1921  and  1922  of  the  Proceedings,  Mr.  Robinson  men- 
tions a  second  objection  to  the  Cincinnati  franchise,  namely,  this: 

"It  locks  the  whole  arrangenicnt  into  a  flat  fare  arrangement  absolutely,  and  that,  I  think 
is  unwise.  1  think  provision  should  be  made  for  such  adjustment  of  the  fare  as  experience 
and  practice  may  develop  to  be  the  best  for  the  community  and  the  best  for  the  company." 

Moreover,  in  his  opinion,  the  sliding  scale  coupled  with  the  barometer  fund 
as  worked  out  in  the  Cincinnati  franchise  would  prove  to  be  illusory  even  if  the 
plan  were  operating  under  normal  conditions.  It  will  be  remembered  that  when 
the  fare  is  at  a  certain  point  a  portion  of  the  surplus  goes  to  the  company,  but 
the  balance  goes  to  the  reserve  fund,  and  that  tends  to  build  up  the  fund  to  a 
point  where  the  fare  is  automatically  reduced,  and  the  reduction  of  the  fare 
presumably  reduces  or  cuts  off  the  surplus,  of  which  the  cotnpany  is  to  get  a 
larger  share  as  a  reward  for  operating  at  the  lower  fare.  Commissioner  Gads- 
den and  Mr.  Robinson,  between  them,  gave  this  Cincinnati  incentive  provision 
a  pretty  hard  rap,  as  will  appear  from  the  testimony  at  page  1922  of  the  Pro- 
ceedings : 

"Commissioner  Gadsden:     I  imagine  if  is  largely  illusory  anyhow? 
"Mr.  kobinson  :     1  think  it  is.  under  the  Cincimiati  plan,  largely  illusory. 
"Commissioner  tiadsden  :     It  does  not  vest  until  the   fare  goes  down? 
"Mr.  Robinson  :     .'Xnd  the  moment  it  gets  there  you  have  to  change  it. 
"Commissioner  Gadsden:     But   it   listens   well? 


Service  at  Cost  503 

"Mr.  Robinson:  That  is  it  exactly.  That  is  what  I  think  about  the  Cincinnati  plan. 
I  think,  if  you  analyze  it,  that  it  is  very  largely  illusory  and  does  not  produce  what  you 
started  out  to  do." 

One  of  the  most  illuminating  things  that  Mr.  Robinson  said  relates  to  the 
question  of  the  proper  basis  for  the  valuation  in  a  service-at-cost  franchise.  His 
argument  for  the  use  of  the  actual  investment  is  found  at  page  1914  of  the 
Proceedings : 

"I  have  personally,  of  course,  always  put  the  emphasis  upon  the  actual  investment  in  the 
properties  and  upon  those  bases  of  reproduction  which  are  based  upon  the  normal  situations 
undisturbed  by  excessive  war  prices,  subject  only  to  the  exception  that  where  money  actually 
spent  during  the  war  period  has  been  put  in  at  the  increased  costs  due  allowance,  of  course, 
should  be  made  for  the  actual  expenditures,  keeping  in  mind  all  the  time,  of  course,  the 
investment  or  cost.  Because,  after  all,  when  you  use  the  words  'Service  at  cost,'  there  seems 
to  be  no  logic  in  the  situation  unless  you  say  that  it  means  cost  to  the  investor  or  cost  to 
the  capitalist  as  well  as  cost  to  the  public.  There  is  no  more  reason  why  cost  should  be 
applied  as  against  the  public  than  it  should  be  applied  in  a  sense  against  the  investor,  and  that 
situation  appeals  to  me  personally  for  another  reason  at  the  present  time.  In  the  past,  the 
companies  have  accepted  franchises  with  many  conditions  which  attach  to  the  question  of 
fares  and  attach  to  the  condition  of  these  obligations  relating  to  paving  and  various  municipal 
charges.  They  now  appear  before  the  public  and  make  the  contention,  properly,  that  they 
are  public  servants  and  the  performance  of  those  conditions  is  no  longer  possible.  They  will 
continue  to  perform  their  public  duties,  and  they  say  in  the  name  of  the  public  that  they  are 
serving  that  they  should  be  reheved  of  those  things,  and  it  seems  to  me  in  the  situation  which 
has  arisen  that  there  is  a  moral  and  ethical  responsibility  on  the  part  of  the  companies  to  ask 
only  that  they  should  be  allowed  to  receive  a  return  upon  a  fair  estimate  of  cost." 

Mr.  Morris  L.  Cooke's  final  comment  on  service  at  cost  as  proposed  before 
the  commission  is  far  from  encouraging.  At  page  1698  of  the  Proceedings, 
he  says : 

"I  think  with  the  service-at-cost  plan  as  I  have  heard  it  described  and  as  it  has  been 
presented  here,  you  are  going  to  step  from  the  frying  pan  into  the  fire.  I  do  not  believe  that 
its  promoters  realize  the  temper  of  the  public  or  the  trouble  it  is  going  to  get  them  in. 

"The  Chairman:     What  is  the  difficulty,  if  any,  that  may  arise? 

"Mr.  Cooke:  I  think  primarily  the  difficulty  is  that  it  is  based  on  the  theory  that  such 
a  matter  as  this  can  be  arranged  by  a  fixing  of  a  new  standard  such  as  the  rate  of  return  and 
the  fare  and  a  few  things  of  that  kind,  and  the  big  questions  involved,  questions  of  efficiency  of 
management  and  cultivation  of  the  public  and  the  solution  of  the  labor  problem,  escape  them." 

The  service-at-cost  program  lacks  definiteness,  because  no  two  service-at- 
cost  contracts  are  alike  even  in  the  essential  details.  It  bristles  with  difficulties, 
because  it  requires  initially  the  determination  of  the  fundamental  question  of 
value,  with  respect  to  which  the  interests  of  the  parties  are  most  divergent  and 
the  theories  of  engineers,  accountants,  economists,  lawyers,  commissions  and 
courts  most  conflicting  and  chaotic ;  because  it  drives  a  dagger  into  the  very 
heart  of  private  initiative  while  still  depending  on  private  management  to  func- 
tion ;  because  it  takes  the  electric  railways  out  of  the  field  of  regulation  by  the 
police  power  and  cancels  their  obligation  not  to  charge  more  than  the  service 
they  render  is  reasonably  worth  to  the  public ;  because  it  recognizes  that  local 
transportation  is  a  public  function  and  proclaims  the  necessity  for  intimate  public 
control,  while  cheerfully  admitting  the  incapacity  of  the  public  to  perform  the 
function  directly.  Even  these  general  statements  require  qualification,  for  on 
the  two  principal  electric  railways  of  Massachusetts  private  management  has  been 
discarded,  and  in  Cleveland  and  Dallas  the  maximum  fare  limit  has  been  re- 
tained as  a  measure  of  the  reasonable  worth  of  the  service.  Service  at  cost  has 
not  proven   its  ability  to  secure   public  cooperation  except   in   Cleveland,   and 


504  Electric  Railway  I'rublem 

there  a  referendum  has  been  invoked  against  the  recommendations  of  the  Board 
of  Arbitration  in  the  seven-per-cent-return  proceedings.  In  the  forms  presented 
to  them  the  people  of  Chicago,  Denver  and  Minneapolis  have  voted  against 
service  at  cost,  and  indirectly  it  has  been  rejected  by  the  voters  of  Detroit.* 
Apparently,  the  public  in  many  communities  looks  upon  it  as  a  "cost-plus"  device 
— only  this  and  nothing  more.  At  best,  it  is  not  a  remedy  that  can  be  applied 
quickly,  unless  also  foolishly  or  dangerously.  It  has  not  proven  its  ability  to 
restore  credit  in  the  present  emergency  without  a  public  guaranty. 


Chapter  XLII 
THE    USE    OF    PUBLIC    CREDIT 

During  the  war  period  capital  advances  were  made  by  the  Federal  Govern- 
ment, through  the  United  States  Shipping  Board  Emergency  Fleet  Corporation 
and  the  War  Finance  Corporation,  to  a  considerable  number  of  electric  railway 
companies  which  were  unable  to  furnish  on  their  own  credit  the  capital  required 
to  enable  them  to  render  the  public  service  deemed  by  the  Government  to  be 
essential  to  the  continuity  and  success  of  its  war  activities.  In  the  case  of  the 
Shipping  Board,  advances  were  made  for  the  construction  of  extensions  or  the 
provision  of  additional  equipment  and  power  facilities,  to  enable  the  electric  rail- 
ways to  provide  transportation  for  the  war  workers.  In  the  case  of  the  War 
Finance  Corporation,  loans  were  made  to  certain  companies  in  pursuance  of  the 
Corporation's  power  to  make  advances  to  going  concerns  whose  operations  were 
deemed  necessary  or  contributory  to  the  prosecution  of  the  war.  For  example,  the 
Government  assisted  in  the  refinancing  of  the  Brooklyn  Rapid  Transit  Company's 
notes  on  the  theory  that  the  company's  operations  were  so  essential  to  the  successful 
prosecution  of  the  war  that  a  failure  or  a  crippling  of  the  service  would  seriously 
prejudice  the  Government's  war-making  functions  and  activities.  The  Govern- 
ment's policy,  however,  was  to  exact  ample  guaranties  from  the  companies  which 
received  assistance  that  its  advances  would  ultimately  be  repaid.  In  some  cases, 
at  least,  the  Shipping  Board  retained  title  to  the  equipment  and  tracks  purchased 
or  constructed  with  the  funds  advanced  by  the  Government. 

It  has  not  been  suggested,  howiever,  by  the  witnesses  before  the  Commission 
that  the  credit  of  the  Federal  Government  can  properly  be  used  to  uphold  the 
electric  railway  industry  in  times  of  peace.  It  is  recognized,  therefore,  that  pub- 
lic credit,  if  made  available  for  this  purpose,  outside  of  the  District  of  Columbia, 
must  be  the  credit  of  the  states  or  municipalities  in  which  the  local  transporta- 
tion service  is  rendered.  This  statement  needs  to  be  qualified  only  to  the  extent 
that  certain  electric  railways  might  be  regarded  as  part  of  the  national  transporta- 
tion system  of  the  country.  In  case  the  policy  of  government  aid  to  the  steam 
railroads  is  continued  or  the  policy  of  Federal  operation  resumed,  with  or  with- 
out government  ownership,  it  is  quite  possible  that  some  of  the  electric  railways, 
even  of  those  that  operate  in  the  public  highways,  may  ultimately  be  treated  by 
the  Government  as  a  part  of  the  general  transportation  system,  either  because 
they  are  interstate  carriers  or  because  they  perform  auxiliary  service,  not  strictly 
urban  or  local  in  its  nature.  It  seems,  however,  that  for  the  purposes  of  this 
discussion  any  probable  use  of  national  credit  in  support  of  the  electric  railways 
may  be  treated  as  exceptional  and  incidental  and  not  as  furnishing  a  possible 
solution  of  the  main  problem  with  which  we  are  concerned. 

505 


506  Electric  Railway  Problem 

In  the  preceding  chapter,  under  the  discussion  of  service  at  cost,  attention 
has  been  called  to  the  fact  that  the  new  capital  required  for  extensions  and 
improvements  of  the  Boston  Elevated  Railway  system  and  the  Eastern  Massa- 
chusetts Street  Railway  system  ( formerly  the  Bay  State  lines)  has  been  secured 
through  state  aid.  The  10-year  public  guaranty  enabled  the  public  trustees  for 
the  Boston  Elevated  to  dispose  of  a  certain  amount  of  bonds,  and  the  purchase  of 
the  Cambridge  subway  by  the  state  has  supplied  the  Boston  company  with  a  large 
amount  of  additional  capital ;  while  in  the  case  of  the  Bay  State  system  the  state 
guaranty  of  a  new  issue  of  serial  bonds  has  enabled  the  trustees  to  dispose  of 
them  in  sufficient  amount  to  meet  the  company's  capital  requirements  for  the 
present.  Here  we  have  instances  where  public  credit  has  been  used  to  bolster  up 
the  electric  railway  situation,  but  only  in  connection  with  the  trustee  plan  of 
public  operation. 

In  Chapter  XXIII  of  this  report  1  outlined  some  of  the  general  programs 
offered  by  the  witnesses  before  the  Commission,  including  public  ownership,  as 
means  for  restoring  electric  railway  credit ;  and  in  Chapter  XXIV  I  discussed 
briefly  the  pros  and  cons  of  public  ownership  from  the  point  of  view  of  economic 
theory  as  voiced  by  various  witnesses.  Public  ownership  got  through  the  ordeal 
with  some  burns  and  bruises,  but  still  in  condition  to  be  considered  as  a  poten- 
tial remedy  for  bankruptcy.  That  public  ownership  would  solve  the  problem 
of  credit  is  universally  and  almost  too  readily  admitted  by  the  witnesses.  In 
view  of  the  immense  and  almost  insuperable  difticulties  that  we  meet  in  trying 
to  work  out  a  solution  on  some  other  basis,  it  is  apparent  that  public  ownership 
must  be  given  serious  consideration,  not  merely  as  an  ultimate  solution  to  be 
worked  out  in  the  future  at  our  leisure,  but  in  its  bearing  upon  the  immediate 
crisis  in  the  electric  railway  field.  If  desirable — or  even  if  necessary  to  the 
public  welfare — can  public  ownership  and  operation  be  depended  on  for  quick 
results?  The  American  Electric  Railway  Association,  in  its  brief  filed  after  the 
close  of  the  iiearings,  gives  a  negative  reply,  and  for  that  reason  dismisses  the 
subject  without  extended  comment.' 

Upon  all  sides,  it  is  admitted  almost  unanimously  that  the  electric  railways 
are  an  essential  industry  and  that  local  transportation  in  urban  communities  is 
a  public  function,  for  which  the  community  through  some  of  its  governmental 
agencies  must  assume  final  responsibility.  Heretofore,  this  function  has  been 
performed  in  the  main  by  private  agencies  under  varying  degrees  of  public  con- 
trol. These  agencies  have  now  reported  back  their  inability  to  continue  to  per- 
form the  function  under  the  conditions  heretofore  prescribed.  New  conditions 
arc  demanded.  Public  policy  cannot  stand  still  in  the  matter.  It  must  either 
go  backward,  by  withdrawing  the  hand  of  regulation  and  permitting  the  electric 
railways  to  fight  out  the  battle  of  life  or  death  as  a  non-essential,  competitive, 
private  industry,  or  else  go  forward  to  the  assumption  of  a  larger  and  larger 
degree  of  public  responsibility  in  connection  with  the  performance  of  this  public 
function.  We  cannot  blink  the  fact  that  regulation  of  competitors,  relief  from 
taxation,  public  subsidies,  and  public  control  of  wages  and  hours  and  conditions 
of  work,  and  service  at  cost,  all  involve  public  encroachments  upon  private  man- 


Use  of  Public  Credit  507 

agenient,  on  behalf  of  adequate  service  at  reasonable  rates.  We  are  being  driven 
farther  and  farther  into  the  realm  of  public  control,  and  the  question  arises : 
Can  we  stop  far  enough  short  of  public  ownership  or  of  public  ownership  and 
operation  to  make  stopping  worth  while,  even  from  the  point  of  view  of  those 
who  do  not  wish  to  reach  that  goal? 

We  have  seen  that  Colonel  Kutz,  as  Chairman  of  the  District  of  Columbia 
Commission,  favors  municipal  ownership  of  track  and  roadbed  as  a  means  of 
getting  around  the  paving  problem.  In  New  York  we  find  public  ownership  of 
the  subways  as  a  means  of  solving  the  credit  problem.  Yet  the  lessees  of  the 
municipal  subways  are  in  distress  along  with  the  rest  of  the  electric  railways. 
Boston  financed  its  own  subways  and  now  the  State  of  Massachusetts  has  taken 
over  the  privately-constructed  Cambridge  subway  as  a  means  of  releasing  capital 
to  the  Boston  Elevated  Railway  Company  for  use  in  extensions  and  betterments. 
The  company's  leasehold  obligations  to  the  City  of  Boston  have  been  an  impor- 
tant cause  contributing  to  its  financial  distress  and  the  high  fares  that  have  pre- 
vailed under  public  operation.  Philadelphia  is  constructing  a  municipal  rapid 
transit  system,  and  has  long  been  negotiating  with  the  Philadelphia  Rapid  Transit 
Company  for  its  operation.  The  policy  of  public  ownership  and  private  opera- 
tion has  had  many  advocates  for  many  years.  This  is  the  plan  suggested  for 
Pittsburgh  by  Mayor  Babcock  and  Mr.  Robinson,  as  will  appear  from  the  fol- 
lowing statement  at  page  1901  of  the  Proceedings : 

"Theoretically  it  seems  that  the  best  possible  arrangement  to  meet  the  situation  would 
be  to  have  municipal  ownership  with  private  operation.  I  have  said  'theoretically,'  because  of 
numerous  practical  difficulties  which  present  themselves  in  such  a  program.  It  may  be  plainly 
demonstrated,  however,  that  such  a  plan,  if  definitely  stabilized  and  assured,  has  very  great 
advantages  over  any  other  arrangement  and  eliminates  all  of  the  controversial  atmosphere 
which  now  exists  between  private  capital  and  the  public.  It  would  permit  of  financing  on 
much  lower  interest  rates  than  financing  by  private  interests.  It  would  give  the  municipality 
complete  control  of  its  own  development  and  place  in  its  hands  the  key  to  its  own  destiny. 
Coupled  with  private  operation  it  would  produce  all  of  the  advantages  of  private,  as  contrasted 
with  municipal  or  public  operation  with  its  associated  political  entanglements,  and  if  com- 
bined with  a  plan  whereby,  at  fi.xed  periods,  say  every  ten  years,  the  operation  of  the  system 
was  let  to  the  best  bidder,  it  would  insure  good  service  at  reasonable  cost." 

It  will  be  reinembered  that  the  Massachusetts  Public  Service  Commission  in 
its  Sixth  Annual  Report,  issued  early  in  1919,  could  see  no  remedy  for  the  credit 
problem  short  of  public  ownership.  Chairman  Frederick  J.  McLeod,  of  the 
Massachusetts  commission,  and  Interstate  Commerce  Commissioner  Eastman, 
formerly  a  member  of  that  coinmission,  both  point  to  public  ownership  as  the 
way  out,  in  their  testimony  before  the  Commission. 

With  respect  to  the  reaction  of  Massachusetts  public  opinion  to  the  service- 
at-cost  plan  as  applied  to  the  Boston  Elevated  and  the  Bay  State  lines,  Mr.  Homer 
Loring  said  that  the  last  legislature  undoubtedly  would  have  passed  acts  limiting 
the  fares  to  five  cents  and  providing  for  the  payment  of  any  resulting  deficien- 
cies out  of  taxes,  if  Governor  Coolidge  had  not  "stopped  the  fire"  by  appointing 
a  street  railway  commission  to  investigate  the  matter.  The  commission  referred 
to  submitted  its  report  a  short  time  after  the  Federal  Electric  Railways  Commis- 
sion's public  hearings  were  closed,  and  recommended  with  respect  to  the  Boston 
Elevated  that  no  action  be  taken  at  the  present  tiine  looking  to  public  ownership. 


508  Electric  Railway  Problem 

At  pages  39  to  41  of  the  report,  filed  November  15,  1919,  the  special  commission 
says : 

"It  is  admitted  that  under  public  ownership  adequate  capital  could  be  provided  at  a  saving 
of  over  $900,000  per  year,  as  compared  with  the  total  of  interest  on  bonds  and  loans  and 
dividends  on  stock  now  paid  by  the  company,  the  reason,  of  course,  being  that  the  Common- 
wealth can  always  secure  capital  at  lower  rates  than  a  private  corporation.  In  the  event 
of  public  ownership  the  communities  affected  would  lose  taxes  to  the  amount  of  at  least 
$7SU,CKX). 

"It  will  be  noticed  that  the  option  provided  in  the  bill  continues  not  only  for  ten  years 
but  as  long  as  the  Commonwealth  may  elect  to  manage  the  property  under  the  terms  of  the 
act  of  1918.  All  that  this  Commission  might  properly  do  would  be  to  advise  that  the  option 
be  availed  of  now,  or  negotiations  be  opened  to  secure  a  better  price,  or  that  the  property 
be  taken  by  the  exercise  of  the  power  of  eminent  domain.  We  make  no  recommendation 
because  we  are  content  to  leave  the  matter  as  it  is — to  be  acted  upon  if  and  when  the  Legis- 
lature feels  moved  to  act. 

"We  reach  this  conclusion  for  various  reasons.  In  the  first  place  we  are  disposed  to 
think  that  it  will  be  wise  to  give  the  present  experiment  in  the  management  of  the  Elevated 
longer  trial.  It  has  been  in  operation  a  little  over  a  year,  under  most  unsettled  general 
business  conditions.  Already  the  revenues  derived  from  the  10-cent  fare  are  deemed  by  the 
trustees  adequate  to  meet  the  obligations  of  the  road.  Further  experience  inay  make  it  clear 
that  a  readjustment  of  fares,  through  the  creation  of  a  zone  system,  will  make  possible  a 
materially  lower  basic  fare.  The  cfTcct  of  removing  some  of  the  burdens  now  imposed 
through  taxation  and  otherwise,  if  our  recommendations  be  adopted,  is  yet  to  be  determined, 
while  a  reduction  of  the  cost  of  labor  and  materials  if  and  when  it  occurs  would,  as  a  matter 
of  course,  be  followed  by  a  reduction  in  fares.  We  now  have  public  control  which  could  not 
bo  made  more  effective  by  public  ownership.  On  the  contrary,  the  board  of  directors  of  the 
Elevated  must  he  in  at  least  a  mildly  critical  attitude  towards  the  management,  and_  because 
of  the  public  and  private  interests  involved,  sometimes  conflicting,  all  of  the  operating  con- 
ditions of  the  road  are  likely  to  challenge  rigid  public  scrutiny.  Is  it  e(iually  certain  that 
under  public  ownership  the  management  would  be  held  to  as  high  a  standard  of  efficiency? 
All  these  considerations,  and  some  to  follow,  suggest  that  the  option  to  buy  should  not  be 
exercised  now  or  at  any  time  hereafter  without  most  deliberate  consideration. 

"We  believe  that  this  is  an  inopportune  time  to  increase  the  bonded  indebtedness  of  the 
State,  direct  or  contingent,  nor  can  anyone  assert  with  knowledge  that  street  cars  propelled 
by  electricity  will  be  our  most  efficient  means  of  transportation  ten  or  twenty  years  hence. 
Macaulay  foretold  a  time  when  some  traveler  from  New  Zealand  might,  in  the  midst  of  a 
vast  solitude,  take  his  stand  on  a  broken  arch  of  London  Rridge  to  sketch  the  ruins  of  St. 
Paul's.  So  our  children  or  our  children's  children  may  live  to  gaze  curiously  upon  the  sub- 
ways, then  converted  into  catacombs  where  may  peacefully  slumber  the  illustrious  dead,  and 
where  the  bones  of  the  projectors  and  security  holders  of  the  Elevated  Road  might  well  be 
laid.  The  elevate<l  structure  converted  into  a  promenade  would  aflford  a  convenient  sanctuary 
for  those  who  might  desire  to  escape  from  the  motor  traffic  of  the  congested  streets  below, 
where  one  must  needs  be  quick  if  one  would  not  Ix-  dead. 

"Private  capital  is  already  engaged  in  this  enterprise.  Why  he  in  haste  to  release  it? 
Why  be  impatient  to  remit  all  of  the  taxes  we  are  now  collecting?  Stockholders  and  bond- 
holders would  perhaps  Ik^  willing  to  exchange  their  securities  for  cash  or  for  bonds  of  or 
guaranteed  by  the  Commonwealth.  While  the  condition  of  the  security  holders  of  the  Boston 
Elevated  prior  to  the  act  of  1918  aroused  and  in  many  cases  deserved  sympathy,  it  was  not 
their  condition  but  the  absolute  necessity  for  insuring  transportation  facilities  to  the  metro- 
politan district  that  justified  some  measure  of  relief." 

It  can  hardly  be  said  that  the  recommendation  of  this  latest  Massachusetts 
street  railway  commission  carries  with  if  much  solace  to  the  hard-pressed  electric 
railways  of  the  country.  The  report,  in  eflfect,  says:  "The  private  investors 
are  already  in  this  enterprise.  It  is  a  shaky  one.  The  state  has  already  done 
too  much  for  ihcm.  T.et  them  sweat."  Immediate  public  ownership  is  not  re- 
commended, but  the  commission's  failure  to  recommend  it  is  not.  a]>parently,  the 
result  of  a  desire  to  come  to  the  rescue  of  the  companies. 

Four  members  of  this  Massachusetts  sjiecial  connnission,  inchidins;  State 
Senator  John  J.  Walsh,  who  gave  testimony  before  the  Federal  Electric  Railways 
Commission,  filed  a  minority  statement  recommending  the  immediate  purchase, 
by  the  state,  of  the  Boston  Elevated  Railway  property,  and  supported  their  posi- 


Use  of  Public  Credit  509 

tion  vigorously,  as  will  be  seen  by  the  following  quotation  from  pages  57  to  59 
of  the  report: 

"The  street  railway  situation  in  Massachusetts  calls  for  clear,  positive  and  radical  action. 
No  longer  are  we  justified  in  experimenting  with  weak  palliatives  administered  here  and 
there.  Investigation  and  discussion  have  been  exhausted.  It  is  time  to  do  something.  Some 
lailways  hereabouts  may  doubtless  continue  for  some  time  under  private  ownership  and 
operation,  if  relieved  of  certain  unnecessary  burdens.  Other  privately  owned  street  railways 
in  certain  areas  may  possibly  be  operated  through  public  officers  and  supported  through  public 
subsidy.  To  provide  such  an  opportunity  for  such  action  may  be  wise.  Existing  facts,  how- 
ever, justify  the  conclusion  that  if  the  public  regards  reasonable  service  at  low  rates  of  fare 
as  a  public  necessity,  the  public  must  sooner  or  later  take  over  the  service.  Indeed,  a  majority 
of  the  responsible  witnesses  who  appeared  before  the  commission  to  a  greater  or  less  degree 
regarded  public  ownership  as  inevitable. 

"Adequate  street  railway  service  is  essential  to  the  social  and  economic  life  of  our  com- 
munities. It  must  be  maintained,  improved  and  extended.  For  these  purposes  large  amounts 
of  capital  are  required.  It  is  evident  that  privately  owned  street  raihvays  have  exhausted 
their  borrowing  powers,  while  at  the  same  time  the  public  is  disgruntled  at  lending  its  credit 
to  a  publicly  controlled  but  privately  owned  railway  for  the  purpose  of  guaranteeing,  either 
primarily  or  incidentally,  a  high  rate  of  dividends  on  stock  values  largely  in  excess  of  market 
quotations,  besides  suffering  an  intolerably  high  and  restrictive  fare  collected  from  the  car 
riders  alone.  The  public  can  own  the  Boston  Elevated  Railway  at  a  cost  lower  than  it  is 
now-  obliged  to  pay  in  the  form  of  guaranteed  rental  to  stockholders.  Our  present  plan 
affecting  the  Boston  Elevated  Railway,  while  perhaps  defensible  as  an  emergency  measure  in 
view  of  the  condition  of  the  Boston  Elevated  Railway  in  1918,  has  worked  out  in  an  une.x- 
pected  manner.  It  has  neither  the  full  character  of  a  privately  conducted  business  enterprise 
nor  of  a  publicly  owned  and  managed  public  utility.  The  fact  that  the  legislative  contract  of 
1918  affecting  the  Boston  Elevated  Railway  was  deemed  by  honorable  legislators  of  ordi- 
narily soimd  judgment  as  necessary  to  save  transportation  in  the  metropolitan  area  from 
cessation  is  a  strong  indication  of  the  immense  public  necessity  of  transportation  facilities. 
These  facts,  taken  together,  point  unerringly  to  just  one  thing,  namely,  full  public  ownership, 
however  we  may  oppose  the  idea  in  theory.  The  man  who  after  long  experience,  serious 
investigation  and  thoughtful  consideration  'sees  no  other  way  out'  than  public  ow'nership 
certainly  is  not  justified  in  remaining  in  a  cave  of  despair.  The  arguments  against  public 
ownership  and  operation  of  any  undertaking  are  easy  to  state  and  easy  to  accept.  They  seem 
overwhelmingly  convincing  when  brought  against  any  new  and  specific  application  of  public 
control.  They  are  precisely  the  same  as  when  the  public  first  conceived  of  taking  over  from 
privately  owned  and  operated  schools  the  education  of  children.  They  are  precisely  similar  to 
the  arguments  used  when  public  convenience  began  to  seek  public  owership  of  privately  owned 
turnpikes  and  bridges.  They  are  not  different  from  those  used  when  the  public  went  into  the 
business  of  delivering  and  selling  water  for  the  use  of  communities  instead  of  leaving  tlie 
business  to  private  operation.  When  from  experience  the  public  becomes  convinced  that  private 
ownership  of  any  service  essentially  public  in  character  has  failed  to  function  satisfactorily, 
the  public  invariably  has  adopted  and  always  will  adopt  the  extreme  method  of  satisfying  its 
wants  and  needs  through  public  operation  and  ownersliip  of  such  service.  .\n  arguments, 
however  plausible,  however  sound,  however  convincing  to  the  mind,  that  deal  with  theories 
and  not  conditions,  have  been  and  will  continue  to  be  disregarded  when  the  public  is  convinced 
that  private  ownersliip  and  control  of  a  necessary  public  utility  is  a  failure.  Such  is  the 
temper  of  the  public  mind  at  the  present  time,  at  any  rate,  as  to  the  Boston  Elevated  Railway. 

"Public  confidence  in  the  present  arrangement  is  shaken  beyond  restoration.  Nothing  can 
restore  the  good-will  necessary  to  the  efficient  conduct  of  a  transportation  system  like  the 
Boston  Elevated  Railway  except  the  elimination  of  the  idea  on  the  part  of  the  car  riders 
that  any  group  of  people  is  getting  an  undue  advantage  from  the  operation  of  a  public  utility. 
There  can  be  no  question  that  to  tlie  average  man  in  the  metropolitan  district  it  is  an  in- 
tolerable thing  that  the  Boston  Elevated  Railway  stockholders  should  be  guaranteed  a  rate 
of  dividend  snd  a  security  of  principal  which  appertain  only  to  a  well-conducted,  successful 
enternri.se.  No  theoretical  arguments  against  public  ownership  will  suffice  to  change  the 
public  mind.  Public  ownership  and  public  control  should  be  made  possible  for  every  com- 
mnnit''  wh-ch.  after  patient  experience  and  deliberate  consideration,  desires  to  elect  such 
altcrrative  " 

Ex-Governor  Foss,  who  testified  before  the  Commission  in  niidsumnTer, 
was  emphatic  in  his  recommendation  of  immediate  public  ownership  and  confi- 
dent in  his  prediction  of  what  Massachusetts  was  going  to  do  about  it.  At  pages 
801  and  802  of  the  Proceedings,  he  testifies  as  follows : 

"The  Chairman  :  During  the  working  out  of  this  scheme  of  public  ownership,  what  is  to 
be  done  with  these  utilities,  assuming  that  they  are  in  a  desperate  condition? 


510  Electric  Railway  Problem 

"Mr.  Foss :     I  say.  go  to  it  immediately. 

"The  Chairman:     Well,  what? 

"Mr.  Koss :  Well,  go  to  it  right  off.  We  are  going  to  get  it  in  Massachusetts,  we  are 
going  to  take  it  up  there.     We  are  not  going  to  wait   for  the  nation  to  act. 

"The  Chairman:     Vour  solution,  then,  is  government  ownership? 

"Mr.  Foss :     Yes. 

"The  Chairman:     That  is  the  only  thing  you  have  to  offer? 

"Mr.  Foss:  That  is  the  only  thing  I  have  to  offer;  either  government  ownership  and 
government  operation  or  government  ownership  and  private  operation,  but  government 
ownership  first. 

"The  Chairman:  Then  do  you  believe  that  the  one  function  of  this  Commission  which 
has  been  appointed  by  the  President  is  to  make  a  recommendation  to  the  country  in  favor 
of  government  ownership  of  the.sc  utilities? 

"Mr.  Foss:  I  think  that  would  be  the  greatest  report  you  could  make.  It  would  mean 
more  to  the  people  of  this  country  than  any  report  that  has  been  made  in  my  memory,  because 
this  is  the  greatest  question  in  the  country." 

The  1919  election  has  passed  in  Massachusetts  and  Mr.  Foss  is  still  an  ex- 
governor,  and  the  well-hated  Boston  service-at-cost  plan  is  finishing  the  second 
year  of  its  ten-year  initial  period.  The  Massachusetts  men  have  not  yet  crossed 
the  Rubicon.  They  are  still  enjoying  their  resentment  at  the  company's  success 
in  getting  a  ten-year  guaranty,  and  apparently  are  unwilling  to  let  the  investors 
"pull  out"  entirely.  Massachusetts  could  have  undertaken  public  ownership. 
Many  of  the  cities  of  the  country  are  not  in  a  position  legally  or  financially  to 
apply  this  remedy  quickly.  The  situation  in  New  York  City  was  described,  from 
the  point  of  view  of  the  Interborough  Rapid  Transit  and  New  York  Railways 
companies,  by  Mr.  James  L.  Quackenbush.  their  general  counsel.  He  takes  issue 
with  Governor  Foss  at  pages  824  and  825  of  the  Proceedings,  as  follows : 

"The  discussion  of  Governor  Foss  this  morning  about  public  ownership,  that  we  are 
going  to  do  it  right  off,  so  far  as  the  State  of  New  York  is  concerned,  if  I  may  be  pardoned 
the  use  of  a  remark  concerning  the  distinguished  gentleman  from  Massachusetts,  is  nothing 
but  stuff  and  nonsense. 

"L'nder  the  Constitution  of  the  State  of  New  York,  the  City  of  New  York  has  absolutely 
no  power  to  lend  its  credit  to  any  coriKiration.  or  to  guarantee  anything,  or  to  become  the 
owner  of  stock  in  any  corporation;  but  before  the  measure  suggested  by  the  ex-Governor  of 
Massachusetts  can  Ik-  carried  out  in  the  State  of  New  York,  an  amendment  to  the  Constitution 
must  be  obtained.  This  may  seem  like  a  law  lecture,  and  probably  it  is  familiar  to  you,  but, 
very  briefly  stated,  under  our  Constitution,  you  can  amend  it  only  by  a  constitutional  conven- 
tion, or  by  an  amendment  passing  the  legislature ;  then  the  .same  amendment,  as  passed,  being 
submitted  to  the  next  succeeding  legislature,  made  up  of  the  Senate  which  has.  since  the  first 
enactment,  been  newly  selected  from  the  [leople ;  and  then,  after  those  two  successive  legis- 
latures have  passed  the  amendment,  it  is  submitted  to  the  people  at  the  next  annual  election ; 
and  on  the  timetable  as  of  today  of  the  Governor's  program — mind  you.  1  am  not  talking 
about  whether  public  ownership  is  the  thing  or  not ;  \  am  talking  about  whether  you  can 
do  it  now — we  could  not  get  anything  through  in  New  York  State  for  our  relief  until  the 
legislature  next  year  passed  it.  in  192(1.  ,-ind  then,  there  l)eing  an  election  in  1920  for  senators, 
the  Senate  of  1921  would  l>e  a  new  one.  and  they  could  pass  it  in  the  fall  of  1921.  If  the 
people  approved  it.  it  would  be  in  shape  fi>r  the  legislature  of  1922  to  pass  the  requisite 
legislation  through  In    constitutional  amendment.     So  that  on  the  timetable 

"Commissioner  Meeker:  Has  not  the  legislature  authority,  however,  to  amend  the 
charter  of  New  York  City,  so  that  New  York  may  do  it  ? 

"Mr.  Qu,ickenbush :  No.  sir;  it  is  absolutely  prohibited  by  the  Constitution — no  city.  It 
is  in  the  Constitution.  The  city  itself,  nor  any  city  or  other  |K>litical  sulxlivision  in  the  state, 
ran  do  it.  That  is  because,  in  the  very  early  days,  when  I  lived  up  in  the  central  part  of  the 
state,  they  came  along  and  bfinded  my  town  to  build  the  steam  railroad  out  there.  You  all 
know  the  history  of  the  early  days  of  that.  That  was  put  in  the  Constitution,  so  that  no 
misguiilcd  gentlemen  of  ibr  notions  of  the  distinguished  former  Governor  of  Massachusetts 
would  use  public  monevs  for  any  such  things,  for  you  cannot  put  his  ideas  into  effect  until 
you  have  had  the  approval  of  two  s\icressive  lecislatures  and  have  gotten  the  majority  vote 
of  the  voting  population  of  the  State  of  New  York. 

"The  Chairman :  .'Vssuming  that  public  sentiment  in  New  York  was  ready  for  public 
ownership,  what  arc  the  steps  possible  to  be  taken  bv  which  the  properties  in  New  York 
could  l)C  taken  over,  after  the  Constitution  had  been  amended  and  had  been  ratified? 


Use  of  Public  Credit  511 

"Mr.  Quackenbush :  If  the  legislature,  convening  on  the  first  Wednesday  of  January, 
1922,  passed  a  bill  and  it  v\"as  signed  by  the  Governor,  the  law  would  be  there.  Then  would 
come  the  question  of  condemnation  or  purchase.  By  no  possible  stretch  ol  my  imagination, 
can  I  conceive  of  the  carr>ing  out  of  anything  that  would  protect  my  clients  in  less  than 
three  years  from  today.  I  think  you  can  see  that  that  would  be  so.  That  is  moving  pretty 
fast,  too.     So  that  that  is  not  available." 

It  is  fair  to  say  that  the  City  of  New  York,  after  having  adopted  the  policy 
of  subway  construction  with  public  money,  found  itself  in  a  position  in  1913 
where  it  felt  compelled  to  appeal  to  private  credit  for  help  in  financing  a  much- 
needed  program  of  rapid  transit  expansion.  In  this  case  city  credit  was  so  nearly 
exhausted  under  constitutional  restrictions  and  the  enormous  existing  debt  that 
it  could  not  unaided  take  care  of  the  pressing  transportation  needs  of  the  public. 
Undoubtedly,  the  credit  of  the  State  of  New  York  would  have  been  sufficient  for 
this  purpose,  and  the  city's  credit  could  have  been  made  sufficient,  conditioned 
upon  wise  use,  by  the  removal  of  the  constitutional  limitations.  But  the  diffi- 
culties explained  by  Mr.  Quackenbush  exist,  and  for  the  moment  the  amount  of 
public  credit  that  can  be  made  available  for  the  electric  railways  is  not  by  any 
means  unlimited  in  all  communities. 

No  one  would  question  the  ultimate  ability  of  the  communities  through  their 
governmental  organization  to  finance  electric  railway  construction,  but  the  trouble 
is  that  public  credit  cannot  be  easily  mobilized  for  the  purpose  under  existing 
constitutional  and  statutory  restrictions,  and  in  many  cases  these  restrictions  can- 
not easily  be  removed.  In  many  cases,  the  Alassachusetts  plan  as  embodied  in 
the  Boston  and  Bay  State  contracts  with  public  operation,  could  be  put  into  effect 
by  legislation  without  immediately  burdening  public  credit  with  the  entire  load 
of  existing  street  railway  investments.  Undoubtedly,  in  most  cases,  either  the 
state  or  the  municipality  could  finance  the  new  extensions  and  additional  facilities 
immediately  required  except  where  great  programs  of  general  rehabilitation  or 
deferred  expansion  are  imperative.  But,  as  we  have  seen,  there  are  serious  dif- 
ficulties in  some  jurisdictions  in  the  way  of  using  public  credit  to  help  the  electric 
railways  out  except  under  public  operation  or  public  ownership.  Therefore, 
we  must  first  consider  the  problem  from  the  point  of  view  of  the  ability  of  the 
public  to  assume  the  whole  burden  of  the  investment  and  release  private  credit 
entirely.  In  this  connection,  consideration  must  be  given  to  the  disadvantages 
and  the  advantages  that  arise,  from  the  standpoint  of  public  credit,  as  a  result 
of  the  fact  that  electric  railway  systems  overrun  municipal  boundaries.  The 
disadvantages  grow  out  of  the  inherent  difficulty  of  establishing  municipal  owner- 
ship of  a  utility  that  operates  as  a  unit  in  more  than  one  municipality,  and  often 
in  a  great  many  of  them.  The  trouble  here  is  both  political  and  legal.  The 
advantages  grow  out  of  the  possibility  of  creating  transportation  districts  as  a 
new  type  of  municipality  with  unencumbered  debt-incurring  power. 

The  Proceedings  do  not  show  the  extent  of  the  existing  limitations  upon  state 
and  municipal  indebtedness,  nor  the  extent  to  which  states  and  municipalities  are 
prevented  from  loaning  their  credit  to  street  railway  companies,  or  from  taking 
over  electric  railway  properties  subject  to  their  outstanding  obligations.  Neither 
time  nor  funds  have  been  available  to  undertake  a  special  investigation  along 
these  lines,  although  it  is  a  matter  of  great  importance  in  connection  with  the 


512  Electric  Railvvav  Problem 

subject  with  wliich  the  Commission  has  to  deal.  If  we  assume  that,  in  order  to 
give  public  credit  free  play  in  sustaining  the  local  transportation  function,  it 
will  be  necessary  for  the  public  to  acquire  the  electric  railway  properties,  our 
first  task  is  to  determine  the  extent  of  the  existing  investment.  This  is  the  old 
fundamental  ditticulty  that  lies  across  the  path  of  every  possible  solution  of  the 
electric  railway  problem.  As  we  have  already  noted,  the  spokesmen  for  the 
electric  railway  industry  speak  loosely  of  an  investment  of  from  five  billion  dol- 
lars to  seven  billion  dollars,  but  when  we  tr\'  to  ascertain  just  what  this  means 
in  actual  money  invested  in  the  public  service,  or  even  in  the  present  value  of 
propertv  devoted  to  the  public  service,  we  find  ourselves  in  a  maze  of  doubts 
and  difficulties. 

Mr.  Charles  K.  Robinson,  who  for  a  number  of  years,  as  special  city  solici- 
tor, has  been  studying  the  local  transportation  problem  of  Pittsburgh,  says  that 
it  is  hard  to  tell  the  net  capitalization  of  the  21S  companies  which  together  make 
up  the  Pittsburgh  Railways  system.  He  fixes  the  total  amount  of  outstanding 
securities  as  approximately  $160,000,000,  but  a  good  deal  of  that  represents  dup- 
lication of  stock  interest  control.  "The  actual  amount  which  they  claim  is  not 
duplicated  in  any  way  is  about  $120,000,000,"  says  he  at  page  5516  of  the  rec- 
ord. We  have  already  seen  that  the  joint  board  of  engineers  appointed  to 
appraise  the  Pittsburgh  lines  found  the  actual  investment  in  physical  property 
determined  by  the  historical-cost  method  to  be  $59.069,3S2.  of  which  $11,271,458 
represents  superseded  property  and  $12,039,600  more  represents  accrued  depre- 
ciation of  existing  property.  Thus  we  see  that  in  the  Pittsburgh  case  the  actual 
cost  of  the  existing  property  less  the  depreciation  that  has  accrued  is  only 
$35,758,324.  or  less  than  one-third  of  the  net  capitalization. 

I  have  also  discussed  Mr.  Babson's  estimate  of  the  shrinkage  in  value  of 
electric  railway  securities  during  the  past  few  years,  coupled  with  the  Census 
Bureau's  statistics  of  capital  stock  and  funded  and  floating  debt  outstanding  in 
1917.  It  may  well  be  that  the  ascertainment  of  the  total  investment  in  the  exist- 
ing physical  property  of  the  electric  railways,  less  accrued  depreciation,  would 
bring  the  total  down  from  the  five  to  seven  billions  claimed  by  the  companies 
to  somewhere  between  two  and  three  billions,  but  of  course  a  settlement  on  that 
basis  could  not  in  the  nature  of  things  be  accepted  by  the  present  managements 
and  would  require  a  radical  and  well-nigh  universal  reorganization  of  the  entire 
credit  structure  of  the  companies.  If  such  a  program  were  to  be  put  through, 
those  responsible  for  it  would  have  to  abandon  definitely  the  idea  that  public 
interest  re<|uires  the  restoration  or  preservation  of  the  solvencv  of  the  existing 
companies,  and  whatever  readjustments  in  the  financial  world  might  follow  from 
the  jjcrpetuation  of  the  present  low  security  values  would  have  to  be  accepted 
and  made  the  best  of.  What  .seems  more  likely  to  happen,  if  we  are  to  judge 
from  the  settlements  that  have  been  efiectcd  in  the  past  and  from  the  valuations 
that  have  been  established  by  regulatory  bodies,  is  that  a  compromise  will  be 
eftVctcd  between  the  rock-botton  depreciated  investment  figure  and  the  sky-high 
undepreciated  war-price  value  claimed  by  the  cnmi)aiiies.  As  an  illustration, 
the  Pennsylvania  Public  Service  Commission  fixed  the  value  of  the  Pittsburgh 
properties  for  purposes  of  reorganization  at  $()2,500.000.  which  is  nearlv  twice 


Use  of  Public  Credit  513 

the  minimum  on  the  basis  of  depreciated  investment  value,  although  scarcely 
more  than  half  the  net  capitalization.  It  seems  hardly  likely  that  even  in  these 
times  of  distress  the  electric  railway  properties  of  the  country  could  be  acquired 
by  the  public  for  less  than  three  billion  dollars.  If,  for  purposes  of  discussion, 
we  assume  that  figure,  we  must  then  ask  this  question :  Are  the  states  and  the 
municipalities  of  the  country  in  a  position  to  take  over  this  investment  without 
straining  their  credit  beyond  the  point  where  a  substitution  of  public  for  private 
credit  would  be  advantageous? 

As  I  have  already  stated,  no  sufficient  study  has  been  made  to  determine 
the  amount  of  municipal  credit  available  under  existing  debt  limits.  It  is  signifi- 
cant, however,  that  the  special  bulletin  on  "Financial  Statistics  of  Cities."  issued 
by  the  Bureau  of  the  Census  in  March,  1919,  shows  the  aggregate  gross  debt 
of  the  227  cities  estimated  to  have  a  population  of  over  30,000  each  to  have  been 
$3,803,640,378.  This  includes  both  funded  and  floating  debt.  After  the  deduc- 
tion of  sinking  fund  assets,  the  aggregate  net  debt  of  these  cities  was  $2,661,- 
451.218.  It  is  noteworthy  that  the  total  net  debt  of  these  municipalities  out- 
standing in  1918  was  only  about  82  per  cent  of  the  total  funded  and  floating  debt 
of  the  electric  railways  as  reported  for  1917.  Undoubtedly,  the  cities  having  a 
population  of  less  than  30,000,  for  which  the  debt  figures  are  not  available,  would 
swell  the  total  considerably,  and  on  the  other  hand  the  indebtedness  of  inter- 
urban  electric  railways  not  within  city  boundaries  would  cut  down  considerably 
the  total  of  electric  railway  obligations.  It  seems  quite  probable,  however,  that 
with  these  adjustments  made,  the  net  existing  debt  of  the  cities  of  the  United 
States  incurred  for  all  municipal  purposes,  would  not  exceed  the  funded  and 
floating  indebtedness  of  the  electric  railways  constructed  to  serve  them.  There- 
fore, at  the  very  least,  the  acquisition  of  the  electric  railways  generally  by  the 
municipalities  would  necessitate  the  immediate  doubling  of  the  net  amount  of 
municipal  indebtedness.  Of  course,  individual  communities  would  show  ex- 
tremely wide  variation  from  this  average. 

When  we  come  to  consider  the  possible  acquisition  of  the  electric  railways 
by  the  states,  the  problem  from  the  point  of  view  of  constitutional  restrictions 
is  probably  less  difficult,  but  from  the  point  of  view  of  the  relative  magnitude 
of  the  new  as  compared  with  the  existing  indebtedness,  the  problem  is  even  more 
difificult.  A  census  report  giving  statistics  of  state  indebtedness  was  issued  in 
1914  and  shows  that  in  1913  the  gross  funded  and  floating  debt  of  the  48  com- 
monwealths aggregated  $422,796,525.  With  sinking  fund  assets  subtracted,  the 
figure  was  reduced  to  $345,942,305  of  net  indebtedness.  It  may  be  assumed, 
perhaps,  that  as  a  result  of  the  large  expenditures  in  recent  years  for  good  roads, 
the  aggregate  net  indebtedness  of  the  states  at  the  present  time  is  well  over 
$500,000,000.  It  is  clear,  however,  that  the  acquisition  of  all  the  electric  rail- 
ways of  the  countrj'  by  the  states  would  mean  an  addition  to  the  indebtedness  of 
the  states  of  at  least  five  or  six  times  the  amount  of  their  present  net  obligations. 

It  is  true,  of  course,  that  an  increase  in  public  debt  for  the  acquisition  of 
revenue-producing  property  is  not  so  serious  a  matter  and  does  not  cause  so  much 
financial  or  political  shock  as  would  be  caused  by  a  similar  increase  of  indebted- 
ness for  non-productive  property ;  yet  at  the  present  time,  when  the  future  of  the 


514  Electric  Railway  Problem 

electric  railways  has  been  brought  into  more  or  less  of  doubt  in  the  public  mind 
and  when  there  is  such  great  uncertainty  with  respect  to  the  ability  of  the  electric 
railways  to  pay  their  way  under  any  rates  of  fare  which  the  pu])lic  will  tolerate, 
the  acquisition  of  these  properties  and  the  assumption  of  their  investment  value 
as  a  public  obligation,  would  be  sure  to  strike  terror  to  the  heart  of  the  average 
taxpayer,  who  already  feels  the  burdens  of  public  obligations  to  be  well-nigh 
insupportable. 

The  net  debt  of  the  227  cities  included  in  the  census  bulletin  is  distributed 
among  five  groups,  as  follows : 

lU  cities  with  a  population  of  over    500,{XX)    $1..S84.183.419 

12  cities  with  a  population  of  300.000  to  500.000  366.737.634 

47  cities  with  a  population  of  100,000  to  300.aX)  357.112.087 

62  cities  with  a  population  of  50.000   to    100.000    198,990.777 

96  cities  with  a  population  of  30,000  to   50,000    154.427,301 

227  cities  with  a  population  of  over    30,000    $2,661,451,218 

It  is  significant  that  the  net  debt  of  New  York  City  was  $1,005,055,422,  or 
nearly  38  per  cent  of  the  total  for  all  the  227  cities  taken  together.  Also,  it 
should  be  said  that  the  book  cost  of  the  local  transportation  lines  of  New  York 
City,  exclusive  of  municipal  contributions  to  rapid  transit  construction,  is  in  the 
neighborhood  of  $1,000,000,000.  Some  years  ago,  Mr.  Bion  J.  Arnold,  of 
Chicago,  the  celebrated  transportation  engineer,  reached  the  conclusion  that  street 
railway  traffic  in  large  urban  centers  increases  about  as  the  square  of  the  popu- 
lation. It  is  perfectly  obvious  that  this  rate  of  increase  cannot  possibly  go  on 
indefinitely  in  a  growing  community,  as  at  this  rate  we  should  have  the  entire 
population  ultimately  riding  all  of  the  time.  At  the  same  time,  the  riding  habit 
tends  to  increase  as  cities  grow,  and  the  necessary  investment  in  transportation 
facilities  is  likely  to  keep  pace  on  the  average  with  the  trattic.  Of  course,  for  a 
good  many  years  after  a  complete  new  electric  railway  has  been  constructed, 
the  traffic  would  increase  in  a  much  greater  proportion  than  the  investment,  but 
ultimately  the  need  for  new  facilities  and  more  expensive  construction  is  likely 
to  compel  an  increase  in  the  investment  almost,  if  not  quite,  as  rapid  as  the 
traffic  increase.  The  investment  rate  is  likely  to  be  even  higher  than  the  traftic 
rate  when  a  community  reaches  the  rapid  transit  stage.  Indeed,  the  census 
figures  show  that  from  1902  to  1917  the  numi)cr  of  revenue  passengers  carried 
increased  about  137  per  cent  and  the  outstanding  securities  increased  about  139 
per  cent. 

Clearly,  the  assumption  by  the  public  of  the  full  burden  of  the  electric  rail- 
way investment  and  of  the  complete  obligation  to  furnish  the  credit  required  for 
electric  railway  expansion  would  be  an  operation  of  some  magnitude,  and  we 
need  to  proceed  cautiously  in  accepting  the  easy  conclusion  that  public  credit  is 
the  all-sufTicient  golden  apple  ripe  for  picking  by  the  electric  railways.  Yet,  it 
may  well  be  that  the  owner  of  the  tree  will  have  to  make  up  his  mind  to  harvest 
and  eat  the  crop  in  order  to  keep  himself  in  condition  while  another  crop  is 
growing. 

Public  credit  may  be  made  available  for  electric  railway  purposes  in  several 
ways.     The  obvious  one  is  the  issuance  of  bonds  secured  by  the  general  credit 


Use  of  Public  Credit  515 

and  the  taxing  power  of  the  connnunity.  This  is  what  people  have  in  mind 
when  they  urge  the  great  advantages  of  public  as  compared  with  private  credit 
as  a  means  of  economical  financing.  The  use  of  public  credit  in  this  way  for 
general  purposes  is  usually  held  within  rather  strict  limitations  by  constitutional 
and  statutory  provisions,  but  in  some  cases  it  is  partially  or  wholly  freed  from 
these  limitations  when  used  for  the  acquisition  of  public  utilities.  Another  way 
in  which  public  credit  may  be  applied  to  the  electric  railway  problem  under  public 
ownership  is  by  the  issuance  of  bonds  secured  solely  by  the  electric  railway  -  ' 
property  plus  a  contingent  franchise  which  will  authorize  the  bondholder  to  step 
in  and  take  possession  of  and  operate  the  property  in  case  of  default  on  the 
principal  or  interest  of  the  public  bonds  issued  against  the  property.  Such  an 
arrangement  offers  little  additional  security  as  compared  with  the  bonds  of  a 
private  company  operating  under  a  favorable  franchise.  It  is  true  that  under 
this  plan  the  city  may  be  freed  from  certain  elements  of  the  cost  of  service,  par- 
ticularly the  payment  of  taxes,  and  it  is  to  be  expected  that  the  city  would  not 
permit  itself  the  luxury  of  default  so  long  as  it  really  desired  to  continue  the 
policy  of  public  ownership.  There  would  always  be  the  danger,  however,  that 
temporary  official  incompetence  or  public  impecuniosity  might  lead  to  a  default, 
perhaps  for  the  very  purpose  of  unloading  the  responsibility  for  the  continuation 
and  development  of  service  upon  the  bondholders.  Thus  the  value  of  the  security 
offered  to  invested  capital  depends  largely  tipon  the  terms  of  the  contingent 
franchise.  At  best,  if  the  mimicipality  attempted  to  float  bonds  on  such  security 
for  the  full  amount  of  the  purchase  price  or  the  construction  cost,  we  should 
have  the  property  bonded  up  to  100  per  cent  of  its  cost,  and  there  is  little  reason 
to  suppose  that  under  these  circumstances  the  enterprise  would  benefit  materially 
from  the  quasi-public  character  of  the  credit  used.  This  plan  seems  to  have 
originated  with  the  famous  Mueller  certificate  law  of  Illinois  designed  to  open 
the  way  for  municipal  ownership  in  Chicago  in  1906.  That  particular  effort  was 
abortive,  as  the  Illinois  Supreme  Court  held  that  the  proposed  certificates  could 
not  be  issued  outside  of  the  general  debt  limit.  However,  the  plan  was  incor- 
porated a  little  later  in  the  new  "home  rule"  constitutions  of  Michigan  and 
Ohio.  This  scheme  may  work  out  well  enough  where  it  is  used  as  a  partial 
source  of  credit  coupled  with  dependence  upon  the  general  credit  of  the  com- 
munity for  a  part  of  the  capital.  This  combination  plan  seems  to  be  the  one 
contemplated  by  the  charter  and  ordinances  of  Detroit.  ^ 

A  third  method  of  utilizing  public  credit  for  the  purchase  or  construction 
of  municipal  utilities  has  been  originated  in  the  far  Northwest.  This  plan  as 
embodied  in  the  laws  of  the  State  of  \\'ashington  authorizes  the  issuance  of  muni- 
cipal bonds  secured  by  a  first  lien  on  the  gross  revenues  of  the  enterprise,  with- 
out a  security  franchise  or  the  right  of  foreclosure  in  case  of  default.  Under 
this  plan  the  city  makes  a  contract  with  the  bond-buyer  binding  itself  to  appro- 
priate from  the  gross  revenues  from  time  to  time  a  certain  amount  of  money 
calculated  to  be  sufficient  to  meet  interest  and  amortization  requirements  as  they 
arise,  and  to  maintain  rates  at  a  point  where  they  will  yield  sufficient  revenue  to 
make  these  payments  possible.  It  is  the  design  of  the  law  that  the  utility  shall 
be  kept  self-sustaining;  but  in  case  it  is  not,  then  the  bondholder  gets  his  due 


516  Electric  Railwav  Problem 

anvway,  as  he  comes  in  ahead  of  operating  expenses,  and  the  taxpayer  "holds 
the  bag.'' 

The  constitution  of  the  State  of  Washington  provides  that  no  municipality 
shall  become  indebted  for  any  purpose  to  an  amount  in  excess  of  II/2  per  cent 
of  the  taxable  property  in  such  municipality  without  the  assent  of  three-fifths 
of  the  voters,  and  that  with  such  assent  the  total  debt  shall  not  exceed  5  per  cent 
of  the  assessed  valuation,  except  that  an  additional  5  per  cent  is  allowed  for 
supplying  the  municipality  with  water,  artificial  light  and  sewers,  when  these 
utilities  are  municipally  owned  and  controlled  and  when  the  electors  have  ap- 
proved the  necessary  bond  issues.  The  Washington  constitution  also  provides 
that  no  municipality  "shall  hereafter  (jive  any  iiioncy  or  property,  or  loan  its 
money  or  credit,  to  or  in  aid  of  any  indh-idual,  association,  company,  or  corpora- 
tion, except  for  the  necessary  support  of  the  poor  and  infirm,  or  become  directly 
or  indirectly  the  ozcncr  of  any  stock  in  or  bonds  of  any  association,  company,  or 
corporation."  The  Washington  legislature  in  1909  passed  an  act  authorizing 
cities  and  towns  "to  construct,  condemn  and  purchase,  purchase,  acquire,  add  to, 
maintain,  conduct  and  operate  certain  public  utilities,"  including  electric  rail- 
ways within  the  limits  of  the  city  or  town  for  the  transportation  of  freight  and 
passengers.  After  repeating  the  constitutional  provision  limiting  municipal  in- 
debtedness, the  act  goes  on  to  provide  that  whenever  the  voters  of  the  muni- 
cipality have  adopted  a  proposition  for  a  public  utility,  but  either  no  general  in- 
debtedness has  been  authorized  or  the  public  authorities  do  not  desire  to  incur 
a  general  indebtedness,  the  following  plan  of  financing  the  utility  may  be  utilized  :- 

"The  common  council  or  other  corporate  aiilhoritii-s  shall  have  power  to  create  a  .special 
fund  or  funds  for  the  sole  pur|X)Sc  of  defraying  the  cost  of  sucli  public  utility  or  addition, 
bcllcrnicnt  or  extension  thereto,  into  which  special  fund  or  funds  the  common  council  or 
other  corporate  authorities  of  such  city  or  town  may  obligate  and  bind  the  city  or  town  to  set 
aside  and  pay  a  fixed  proportion  of  the  gross  revenues  of  such  pul)hc  utility,  or  any  fixed 
amount  out  of  and  not  exceeding  a  lixcd  proportion  of  such  revenues,  or  a  fixed  amount 
without  regard  to  any  fixed  proportion,  and  to  issue  and  .sell  Ixinds  or  warrants  bearing 
interest  not  exceeding  six  per  centum  per  annum,  payable  semi-aimually,  executed  in  such 
manner  and  payable  at  such  times  and  |>laces  as  the  conuiion  council  or  other  corporate 
authorities  of  such  city  or  town  shall  determine,  but  such  t>onds  or  warrants  and  the  interest 
thereon  shall  be  payable  only  out  of  such  special  fund  or  funds.  In  creating  any  such 
special  fund  or  funds  the  common  council  or  other  corporate  authorities  of  such  city  or  town 
shall  have  due  regard  to  the  cost  of  operation  and  maintenance  of  the  plant  or  system  as 
constructed  or  added  to.  and  to  any  proportion  or  part  <if  the  revenue  previously  pledged  as  a 
fund  for  the  payment  of  lionds.  warrants,  or  other  indebteduess,  and  shall  not  set  aside  into 
such  special  fund  a  greater  amount  or  proportion  of  the  revenue  and  proceeds  than  in  their 
judgment  will  Ik*  available  over  and  aliove  such  cost  of  maintenance  and  operation  and  the 
amount  or  proportion,  if  any.  of  the  revenue  so  previously  pledged.  .Xny  such  bonds  or  war- 
rants and  interest  thereon  issued  against  any  such  fund  as  herein  provided  shall  Iw  a  valid 
claim  of  the  holder  thereof  only  as  against  the  said  s|)ecial  fund  and  its  fixed  proportion  or 
amount  of  the  revenue  pledged  to  such  fund,  and  shall  not  constitute  an  indebtedness  of  such 
city  or  town  within  the  meaning  of  the  constitutional  provisions  and  limitations.  Each  such 
Nind  or  warrant  shall  slate  upon  its  face  that  it  is  payable  from  a  special  fund,  naming  the 
said  fund  and  the  ordinance  creating  it.  .Said  bonds  and  warrants  shall  be  sold  in  such  man- 
ner as  the  corporate  authorities  shall  deem  for  the  l)ost  interests  of  the  city  or  town,  and  the 
corporate  authorities  may  provide  in  any  contract  for  the  construction  and  acquirement  of  the 
proposed  improvement  that  payment  therefor  shall  be  made  only  in  such  bonds  and  warrants 
at  par  value  thereof. 

"When  any  such  special  fimd  shall  have  been  heretofore  or  shall  lie  hereafter  created 
and  any  such  obligation  shall  have  heen  heretofore  or  shall  hereafter  be  issued  against  the 
.same,  a  fixed  proportion,  or  a  fixed  amount  out  of  and  not  exceeding  such  fixed  proportion,  or  a 
fixed  amoimt  without  regard  to  any  fixed  proportion,  of  revenue  shall  be  set  aside  and  paid 


Use  of  Public  Credit  517 

into  said  special  fund  as  provided  in  the  ordinance  creating  such  fund,  and  in  case  any  city 
or  town  shall  fail  to  thus  set  aside  and  pay  said  fixed  proportion  or  amount  as  aforesaid, 
the  holder  of  any  bond  or  warrant  against  such  special  fund  may  bring  suit  or  action  against 
the  city  or  town  and  compel  such  setting  aside  and  payment." 

This  plan  has  been  used  to  a  considerable  extent  by  cities  in  the  State  of 
Washington,  and  in  particular  by  the  City  of  Seattle  in  achieving  municipal 
ownersliip  of  street  railways.  In  this  connection  it  is  noteworthy  that  Seattle 
is  the  only  large  American  city  that  has  actually  acquired  the  local  electric  rail- 
way system  and  assumed  the  full  burden  of  its  capital  obligations.  The  transfer 
of  the  Puget  Sound  Traction,  Light  &  Power  lines  in  Seattle  to  the  city  was 
accomplished  at  the  end  of  March,  1919,  the  purchase  price  being  $15,000,000. 
Prior  to  this  the  city  had  already  owned  and  operated  at  a  loss  for  several  years 
a  municipal  railway  in  two  disconnected  divisions,  the  construction  cost  of  which 
up  to  Deceiuber  31,  1919,  was  $1,154,950.40.  The  city  now  owns  all  the  local 
street  railways  except  the  Rainier  Valley  line,  and  negotiations  for  the  purchase 
of  this  road  have  been  under  way  for  some  time.  The  total  capital  cost  of  the 
present  municipal  railway  system  of  Seattle  up  to  the  end  of  1919,  as  indicated 
by  the  figures  just  given,  was  $16,154,950. 

Of  the  $1,154,950  invested  in  the  older  municipal  lines,  only  $100,000  was 
derived  from  the  sale  of  street  railway  bonds.  These  were  6  per  cent  bonds 
put  out  in  1918  at  par.  When  it  came  to  a  question  of  the  purchase  of  the  Puget 
Sound  lines  for  $15,000,000  the  city  made  an  arrangement  with  Stone  &  Webster, 
owners  of  the  company,  to  take  5  per  cent  municipal  railway  bonds  for  the  full 
amount  of  the  purchase  price,  and  passed  an  ordinance  providing  for  the  acquisi- 
tion of  the  properties  in  accordance  with  the  terms  of  the  agreeinent.  This  or- 
dinance was  approved  December  31,  1918,  by  the  then  mayor  of  Seattle,  Mr.  Ole 
Hanson.     Section  2  of  this  ordinance  provides : 

"The  gross  revenues  to  be  derived  from  the  operation  of  the  municipal  street  railway 
system  of  the  City  of  Seattle,  including  the  additions  and  betterments  to,  and  extensions 
thereof,  herein  provided  for,  at  the  rates  of  transportation  charged,  and  to  be  charged,  upon 
the  entire  system,  will  be  sufficient  in  the  judgment  of  the  council  and  of  the  corporate 
authorities  of  the  city  to  meet  all  expenses  of  operation  and  maintenance,  including  the 
operation  and  maintenance  of  the  proposed  additions,  betterments  and  extensions,  and  to  pro- 
vide all  proportions  or  parts  of  revenue  previously  pledged  as  a  fund  for  the  payment  of  bonds, 
warrants  and  other  indebtedness,  with  interest  thereon,  heretofore  made  payable  out  of  the  rev- 
enues of  the  existing  municipal  street  railway  system,  and  to  permit  the  setting  aside  in  a  special 
fund,  out  of  the  gross  revenues  of  the  entire  system,  amounts  sufficient  to  pay  the  interest  on 
the  bonds  hereby  authorized  to  be  issued,  as  such  interest  becomes  due  and  payable,  and  to  pay 
and  redeem  all  of  such  bonds  at  maturity.  The  amounts  which  the  city  council  and  corporate 
authorities  have  determined  and  do  hereby  determine  will  be  so  available  for  the  payment 
out  of  such  gross  revenues  into  such  special  fund,  to  be  used  for  the  payment  of  the  interest 
on  such  bonds,  will,  on  the  first  days  of  February  and  August  in  each  and  every  year,  be- 
ginning with  August  in  the  year  1919.  be  not  less  than  the  interest  at  the  rate  of  five  per 
cent  (SVc)  per  annum,  payable  semi-annually,  on  the  first  days  of  March  and  September, 
respectively,  next  succeeding  such  days,  on  all  outstanding  bonds  of  the  issue  of  Fifteen 
Million  Dollars  ($15,000,000),  to  be  issued  payable  at  the  times  and  in  the  manner  herein- 
after specified. 

"The  city  council  and  corporate  authorities  have  likewise  determined  and  do  hereby 
determine  that  the  amount  so  available  for  the  payment  out  of  such  gross  revenues  into  such 
special  fund  to  be  used  for  the  pavment  of  the  principal  of  such  bonds,  on  the  first  dav  of 
February,  1922,  will  be  not  less  than  Eight  Hundred  Thirty-three  Thousand  Dollars  ($833,000), 
and  that  there  will  be  so  available  thereafter  for  payment  out  of  such  gross  revenues  into 
such  special  fund  to  be  used  for  the  payment  of  the  principal  of  such  bonds  not  less  than 
Eight  Hundred  Thirty-three  Thousand  Dollars  ($833,000),  on  the  first  day  of  February  in 
each  and  everv  vear.  to  and  including  the  vear  1938,  and  not  less  than  Eight  Hundred  Thirty- 
nine  Thousand  Dollars    ($839,000)   on  the  first  day  of  February,   1939." 


518  Electric  Railwav  Problem 

Section  5  of  the  ordinance  provides  for  the  establishment  of  a  special  fund 
to  be  called  "Municipal  Street  Railway  Bond  Fund,  1919."  The  city's  pledges 
to  maintain  this  fund  and  not  to  dispose  of  the  municipal  railway  system  without 
providing  for  the  liquidation  of  the  indebtedness  incurred  in  connection  therewith 
are  contained  in  the  following  language : 

"The  City  ot  Seattle,  after  providing  lor  the  payment  of  the  proportions  or  parts  of 
the  revenues  of  the  municipal  street  railway  system  previously  pledged  as  a  fund  for  the 
payment  of  bonds,  warrants  or  other  indebtedness,  does  hereby  irrevocably  obligate  and  bind 
itself  to  pay  into  such  fund  out  of  the  gross  revenues  of  such  municipal  street  railway  system, 
and  all  additions,  betterments  to,  and  extensions  of,  such  system,  at  any  time  hereafter 
acquired,  before  each  semi-annual  installment  of  interest  falls  due.  a  sum  equal  to  such 
semi-annual  installment  of  interest  upon  all  such  bonds  then  outstanding  and  unpaid;  and 
annually  on  or  before  the  first  day  of  March,  beginning  with  March  1.  1922,  and  to  and  includ- 
ing March  1.  1938,  the  additional  sum  of  Eight  Hundred  Thirty-three  Thousand  Dollars 
($833.(KtO),  and  on  or  before  the  first  day  of  March.  1939,  the  additional  sum  of  Eight  Hundred 
Thirty-nine  Thousand  Dollars  ($839,000),  for  the  payment  of  the  principal  of  such  bonds 
at  which  time  all  of  such  bonds  with  interest  shall  be  fully  paid.  Such  fund  is  to  be  drawn 
upon  for  the  sole  purpose  of  l)aying  the  principal  and  interest  of  such  bonds  from  and  after 
the  date  of  such  lionds  and  so  long  as  obligations  are  outstanding  against  such  fund.  The 
City  Treasurer  of  the  City  of  Seattle  shall,  semi-annually,  one  calendar  month  prior  to  the 
date  upon  which  any  interest  or  principal  and  interest  shall  become  due.  set  aside  and  pay 
into  such  fund  from  the  gross  revenues  of  the  entire  municipal  street  railway  system  of  the 
City  <if  Seattle,  now  belonging  to  it.  including  the  additions,  betterments  and  extensions  herein 
provided  for.  and  any  street  railway  property  which  it  may  hereafter  acquire,  with  the  equip- 
ment thereof,  a  sum  equivalent  to  the  amount  of  interest  so  falling  due,  upon  all  bonds  issued 
hereunder  and  then  outstanding,  and  annually  one  calendar  month  prior  to  the  first  day  of 
March  in  each  and  every  year,  beginning  with  the  year  1922,  and  to  and  including  the  year 
19,58.  the  sum  of  Eight  Hundred  Thirty-three  Thousand  Dollars  ($833.0(K)).  and  one  calendar 
month  prior  to  the  first  day  of  March.  1939.  the  sum  of  Eight  Hundred  Thirty-nine  Thou- 
sand Dollars  ($839,000)  as  the  principal  of  such  bonds  falls  due.  and  until  all  of  such  bonds 
with  interest  thereon  be  fully  paid,  and  such  fixed  amounts  out  of  such  gross  revenues  are 
hereby  pledged  to  such  semi-annual  payments  of  interest  and  such  annual  payments  of  prin- 
cipal, iiiut  shall  eoiiititiilc  a  r/iiin/r  iif^oii  such  tiross  ri'Ti'iiucs  .tii/iivii>r  lo  nil  thnrfjes  whatso- 
ever, iiiiliidiiii)  chortles  for  niaiiitciuince  and  oferation.  save  and  except  the  charges  upon 
such  revenues  heretofore  created  for  the  payment  of  principal  and  interest  of  One  Hundred 
Thousand  Dollars  ($100.(KX)).  Seattle  Municipal  Street  Railway  Bonds.  1917.  authorized  by 
Ordinance  No.  37851.  as  amended  by  Ordinance  No.  37923;  and  save  and  except  the  charges 
upon  such  revenues  heretofore  created  for  the  pavment  of  principal  and  interest  of  Five 
Hundred  Fifty  Thousand  Dollars  ($550,000)  'Railway  Extension  Bonds,  Series  .\,  1918,' 
authorized  by  Ordinance  No  .58666.  and  save  and  except  the  charges  upon  such  revenues 
sufficient  to  pay  warrants  drawn  upon  the  City  Railway  Fund  of  the  City  of  Seattle  issued 
prior  In  the  talcing  effect  of  this  ordinance. 

"The  City  Treasurer  is  hereby  directed  to  make  paytnent  of  the  bonds  and  coupons  herein 
authorized,  as  the  same  fall  due,  from  the  moneys  in  such  'Municipal  .Street  Railway  Bond 
F-"und.  1919.'  and  from  no  other  source.  The  payment  of  such  Ixinds  and  coupons  as  they 
fall  due  is  hereby  dcclare<l  to  be  the  onlv  charge  which  has  been  made  upon  such  fund  or 
which  will  ever  lie  made  thereon  until  all  of  such  bonds  and  the  interest  thereon  shall  have 
l)ecn  fully  paid.  The  City  of  Seattle  hereby  hinds  itself  not  to  sell,  lease  or  in  any  manner 
dispose  of  the  municipal  street  railway  svstem  now  Ix-longing  to  it.  or  which  niav  hereafter 
holonc  to  it.  including  the  additions.  U'ttermcnts  and  extensions  herein  provided  for.  until 
all  obligations  outstanding  against,  or  payable  from,  the  Sfiecial  fund  hereby  created,  shall 
have  been  paid  in  full,  or  in  case  it  shall  sell  or  dispose  of  the  same  before  payment,  it  shall 
not  make  any  sale  or  disposition  without  then  or  theretofore  providing  that  from  the  pro- 
ceeds of  any  such  sale  or  disposition,  after  the  payment  of  all  prior  charges,  there  shall  he 
placed  in  said  snecial  fund  a  stnn  sufficient  in  amount  to  discharge,  and  to  be  used  for  no 
other  purpose  than  the  discharge,  of  principal  and  interest  of  all  bonds  issued  hereunder 
and  then  remaining  impaid.  and  it  shall  not.  in  any  event,  sell  or  dispo.sc  of  such  municipal 
street  railway  system  or  any  substantial  part  thereof  for  a  smn  less  than  enough  to  discharge 
and  pav  the  bonds  herein  authorized  and  the  interest  thereon.  The  City  of  Seattle  further 
binds  itself  to  estal)lish  and  maintain  rales  for  transportation  upon  such  municipal  street 
railwav  svstem  which  shall  provide  sufficient  revenues  to  nermit  such  sums  lieing  paid  into 
such  snecial  fimd  which  the  citv  has  plcflored  to  Ix-  set  n-idc  semi-annually  for  interest,  and 
nnnuallv  for  principal,  as  herein  nrovided  to  l>e  applied  to  the  pavment  of  principal  and 
interest  of  the  iMinils  herein  authorized,  until  such  hoiuN  hnve  been  paid  in  full  nnd  in  nddi- 
f!on  thereto  all  costs  of  operation  and  maintenance,  and  all  Ixinds.  warrants  and  indebtedness 
for  which  any  revenue.'!  of  .such  system  have  heretofore  been  previously  pledged." 


Use  of  Public  Credit  519 

Prior  to  this  time  tlie  cit_\-  had  not  definitely  stated  in  any  of  the  public 
utility  bonds  issued  under  the  act  of  1909  that  the  fixed  charges  upon  the  indebt- 
edness were  to  be  met  even  though  the  operation  of  the  utility  should  produce  a 
deficit ;  but  when  it  came  to  the  purchase  of  the  Puget  Sound  lines  the  city,  in 
order  to  increase  the  security  and  make  the  bonds  acceptable  to  the  owners  of 
the  property,  inserted  in  the  ordinance  and  in  the  bond  itself  the  language  itali- 
cized in  the  above  quotation.  This  provision  of  the  bond  ordinance  was  attacked 
in  the  courts  by  a  taxpayer  who  averred  that  the  proposed  bond  issue  was  con- 
trary to  the  power  of  the  city  under  its  charter  and  the  laws  of  the  state,  threat- 
ening an  indebtedness  of  the  city  in  excess  of  the  amount  permitted  by  the  con- 
stitution of  the  state.  Another  taxpayer,  intervening  in  the  proceeding,  main- 
tained that  the  plan  could  not  be  carried  out  because  it  had  not  been  submitted 
to  the  voters.  It  should  be  noted  that  in  October,  1918,  the  general  question  as 
to  whether  or  not  the  purchase  of  the  Puget  Sound  lines  should  be  consummated 
upon  the  terms  proposed  was  uniformly  submitted  to  the  voters  of  Seattle,  and 
was  approved  by  them  by  a  very  large  majority,  but  the  ordinances  as  finally 
worked  out  providing  for  the  purchase  of  the  property  and  the  issuance  of  the 
bonds  were  not  submitted  to  popular  vote. 

The  Washington  Supreme  Court  handed  down  its  decision  March  5,  1919.' 
Seven  of  the  judges  concurred  in  an  opinion  that  "the  proposed  plan  and  bonds 
will  not  create  any  indebtedness  against  the  city''  and  that  "the  city  council  has 
authority  to  consummate  the  purchase  without  the  sanction  of  the  qualified  voters." 
They  said :  "We  are  satisfied  the  power  of  the  city  has  been  exercised  in  the 
manner  provided  by  the  law."  The  chief  justice  and  one  of  the  associate  justices 
wrote  a  vigorous  dissenting  opinion  in  which  they  called  attention  to  the  vital 
importance  of  the  issues  at  stake.  The  following  paragraphs  taken  from  the 
minority  opinion  vividly  reflect  the  intense  interest  aroused  by  this  case: 

"The  legal  effect  of  the  majority  opinion  is  that  all  of  the  gross  revenues  are  pledged 
to  the  payment  of  the  purcliase  price;  that  if  the  one  who  renders  labor  or  service  as  a 
motorman.  conductor  or  about  the  tracks  and  barns  of  the  railway  system  is  to  be  paid,  he 
may  be  paid  out  of  the  general  revenues;  that,  instead  of  taking  his  j^ay  in  a  warrant  which 
is  a  first  charge  upon  the  gross  revenues  as  the  law  contemplates,  he  may  not,  if  the  gross 
revenues  are  insufficient  to  meet  the  maturing  bonds  and  interest,  have  his  pay  out  of  the 
earnings  of  the  utility  at  all.  but  tnust  take  his  chances  with  a  general  fund  warrant  which 
may  be  subject  to  discount  and  unless  sanctioned  by  subsequent  decree  of  this  court  will  be  of 
doubtful  validity. 

******** 

"If  the  council  did  not  intend  to  charge  the  general  fund  it  might  have  said  so  in  words. 
It  might  have  had  'due  regard  for  the  costs  of  maintenance  and  operation'  as  the  statute  directs 
by  reserving  an  "amount  or  proportion'  of  the  revenues  of  the  utility  or,  being  mindful  of 
a  possible  charge,  it  should  have  submitted  the  measure  to  the  people.  The  net  result  of  the 
ordinances  as  construed  by  the  court  is  that  the  cost  of  maintenance  and  operation  has  not 
been  provided  for.  By  the  employment  of  an  indirect  method,  dressed  for  the  occasion  in  a 
cloak  of  words,  the  law  is  circumvented,  and  the  people  whose  right  of  participation  and  self- 
determination  was  so  carefully  safeguarded,  have  been  denied  the  sovereign  riglit  of  the 
franchise. 

"It  was  suggested  in  consultation  that  the  council  could  raise  the  rate  charged  for  fares, 
and  thus  meet  the  cost  of  maintenance  and  operation  out  of  the  revenues  of  the  street  car 
system.  Counsel  made  no  such  suggestion,  as  of  course  they  could  not,  for  with  the  gross 
revenues  of  the  system  pledged  irrevocably  to  the  payment  of  the  purchase  price  the  seller 
or  the  bondholder,  as  the  case  may  be.  can  insist  that  the  gross  revenues  belong  to  him, 
whether  they  are  accumulated  by  a  charge  of  five,  seven,  ten  or  fifty  cents  for  a  single  fare. 

"Whether  it  is  wise  for  the  City  of  Seattle  to  purchase  the  property  of  the  traction  com- 
pany is  not  of  our  concern.     That  is  a  matter  for  those  who  live  in  that  city.     That  they  may 


520  Electric  Railway  Problem 

be  charged  for  the  upkeep  and  operation  of  the  street  car  system  is  not  denied.  Our  insist- 
ence is  that  before  \vt  make  it  possible — and  this  is  the  statute  as  we  read  it — they  should  be 
heard  either  in  affirmation  or  negation  of  the  plan. 

"To  hold  that  the  gross  revenues  of  the  system  may  be  irrevocably  pledged  to  the  pay- 
ment of  the  purchase  price  as  a  first  charge  and  then  to  say  that  in  the  judgment  of  the 
council  the  gross  revenues  will  pay  the  cost  and  the  costs  of  maintenance  and  operation  is  to 
nullify  the  statute  and  put  a  premium  on  evasion,  pretext,  subterfuge,  quibbling  and  equivo- 
cation for  the  expression  of  such  opinion  is  not  a  setting  aside  or  a  reservation  of  an  "amount 
or  proportion'  to  meet  these  charges.  In  other  words,  in  case  of  suit  the  city  would  be 
bound  by  its  irrevocable  promise  and  not  by  its  gratuitous  opinion. 

"The  law  was  designed  to  cover  not  alone  what  is,  but  what  may  be.  The  plan  as  out- 
lined by  the  ordinances  is  a  corruption  of  the  statute  providing  for  the  acquisition  of  public 
utilities  and  a  direct  assault  upon  the  law  which  provides  in  terms  that  the  owiier  of  property 
shall  not  be  called  upon  to  pay  a  ta.x  upon  his  property  unless  three-fifths,  or  a  majority,  of 
the  voters,  as  the  case  may  be,  shall  so  decree. 

"Believing  that  the  ordinance  was  drawn  with  intent  to,  or  whether  with  intent  it  does 
in  legal  effect,  charge  the  general  fund,  or  leaves  the  way  open  to  levy  a  direct  tax.  thus 
violating  the  letter  and  spirit  of  the  law,  we  are  constrained  to  dissent." 

Since  the  purchase  of  the  Puget  Sound  lines  the  city  has  put  on  the  market 
a  new  issue  of  municipal  railway  bonds  to  provide  for  extensions  and  improve- 
ments, amounting  to  $790,(XX),  and  these  have  been  disposed  of  on  a  six  per  cent 
basis.  The  five  per  cent  bonds  accepted  by  Stone  &  Webster  for  the  Puget  Sound 
lines,  it  is  understood,  are  held  in  trust  and  no  effort  has  been  made  to  dispose 
of  them. 

The  Seattle  Municipal  Railway  now  comprises  228  mile&  of  single  track 
and  is  said  to  be  the  most  extensive  municipally-operated  street  railway  svstcm  in 
the  world.  Mr.  Thomas  F.  Murphine.  Superintendent  of  the  Department  of 
Public  Utilities  during  1919,  in  his  annual  report  for  that  year  gives  the  following 
statement  of  the  reasons  why  the  Puget  Sound  lines  were  acquired  by  the  city : 

"It  may  not  be  amiss  at  this  time  to  again  set  out  some  of  the  principal  reasons  which 
prompted  the  City  Government  of  the  City  of  Seattle  to  acquire  the  railway  properties  ot 
the  I'uget  Sound  Traction.  Light  &  Power  Company.  This  company,  for  a  number  of  years 
prior,  had  failed  to  meet  its  franchise  obligations,  including  extensions  of  its  lines,  paving, 
maintenance  of  paving,  bridge  rentals  and  paynK-nf  of  a  percentage  of  its  gross  income  tax. 
and  further  stated  that  it  was  unable  to  increase  the  wages  of  its  employes  to  a  point  made 
necessary  by  an  increased  cost  of  living;  and.  moreover,  its  service  to  the  public  under  the 
frying  "war"  conditions  and  the  industries  incident  thereto,  had  completely  broken  down.  The 
company  was  not  only  asking  to  be  relieved  from  all  of  its  franchise  obligations  but  was 
demanding  an  increase  in  fare  from  a  5-ceiit  to  a  6-cent  fare,  with  one  cent  additional  for 
transfers." 

Early  in  1920  as  the  result  of  a  city  election  in  which  a  new  mayor  was 
chosen.  Superiiucndent  Murphine  resigned,  and  the  operation  of  the  municipal 
railway  lines  was  in  part  reorganized.  Considerable  coiuroversy  had  arisen  about 
the  tinancial  results  of  operation.  The  public  utilities  department  claimed  a 
surplus  of  $10.()59  from  operation  during  the  .seven  months  subsequent  to  the 
acquisition  of  the  Puget  Sound  system.  For  the  first  three  months  of  1919  the 
original  municipal  lines  were  operated  at  a  loss  of  $1,543,  exclusive  of  interest 
amounting  to  $7,947.  and  for  the  period  from  May  23,  lf)14.  when  operation 
first  started,  to  March  31,  1919,  the  operating  losses  aggregated  $o2.250.  exclu- 
sive of  $121,010  for  interest.  These  are  the  figures  given  in  Mr.  Murphine's 
report.  Mr.  Murphine  stated  that  the  gross  revenue  of  the  combined  lines  for 
the  seven  moiuhs  period  from  April  1  to  N'ovcmber  1.  1919.  was  $384.520.S5 
greater  than  the  revenue  for  the  corresponding  period  of  1918,  but  that  the 
known  operating  expenses  showed  an   increase  of  $660,154.13.     He  explained 


Use  of  Public  Credit  521 

that  this  increase  in  expense  was  due  principally  to  a  33  per  cent  increase  in 
wages,  an  increase  in  service  amounting  to  21  per  cent  as  measured  by  car  hours 
and  15  per  cent  as  measured  by  car  miles,  and  an  increase  of  $257,125.97  in 
maintenance  and  rehabilitation  expenses.  He  pointed  out  that  the  total  expense 
for  maintenance  amounted  to  about  19  per  cent  of  gross  revenues,  and  added : 
"This  expenditure  approximates  in  percentage  that  which  bonding  companies 
handling  securities  of  public  utilities  and  other  companies  consider  as  a  sufficient 
expenditure  or  appropriation  for  both  maintenance  and  depreciation."  In  fact, 
the  Puget  Sound  Traction,  Light  &  Power  Company,  prior  to  the  sale  of  its 
property,  followed  the  rule  of  estimating  annual  depreciation  at  20  per  cent  of 
gross  earnings,  less  the  amounts  actually  expended  for  maintenance. 

The  new  mayor  of  Seattle,  Mr.  Hugh  M.  Caldwell,  not  being  entirely  satis- 
tied  with  the  management  of  the  municipal  railway,  caused  the  city  comptroller 
to  prepare  a  statement  of  the  financial  results  of  municipal  railway  operation 
for  the  calendar  year  1919,  including  nine  months'  operation  of  the  combined 
system.  In  his  computation  the  city  comptroller  used  depreciation  figures  esti- 
mated by  a  representative  of  the  State  Bureau  of  Inspection  and  Supervision  of 
Public  Offices.  Apparently  the  $15,000,000  paid  for  the  Puget  Sound  lines  was 
based  upon  their  claimed  book  cost  to  the  company  without  deduction  for  accrued 
depreciation.  The  method  followed  in  making  the  estimates  for  accruing  depre- 
ciation, used  by  the  city  comptroller,  was  to  take  the  property  at  its  ledger  value 
as  shown  in  separate  accotmts,  redistribute  "engineering  and  superintendence" 
and  "track  and  roadway  labor"  among  the  base  cost  accounts  to  which  they  refer, 
deduct  "land"  and  "materials  and  supplies"  as  undepreciable,  and  then  apply 
to  the  remaining  accounts  aggregating  $14,352,281  various  percentages  for  an- 
nual depreciation  figured  on  the  straight-line  basis.  In  this  way  a  depreciation 
charge  of  $451,774.97  on  the  purchased  lines  was  figured  out  for  the  nine  months 
of  municipal  operation.  In  like  manner  the  depreciation  charge  against  the  or- 
iginal municipal  lines  for  the  full  12  months  was  fixed  at  $47,398.42.  The  per- 
centages used  and  the  assumed  useful  life  from  which  they  were  derived  in 
connection  with  the  several  classes  of  depreciable  property  were  as   follows: 

Assumed  Annual 

Class  of  Property  Useful  Life    Depreciation 

Way  and  Structures 

Cable   station   buildings    50  years  2% 

Grading    200  years  H% 

Ballast    20<1  years  }4% 

Ties  and   stringers    l+r'*:  years  7% 

Rails,    fastenings  and   joints 33\^  years  3% 

Special    work 12i/2  years  8% 

Undergronnd    construction     ii^i  years  3% 

Paving    25  years  4% 

Roadway  machinery  and  tools 12 ^  years  8% 

Bridges,  trestles  and  culverts 20  years  5% 

Crossings,   fences  and  signs 10  years  10% 

Signals   and   interlocking  apparatus 10  years  10% 

Telephone  and  telegraph  lines 20  years  5% 

Poles  and   fixtures 20  years  5% 

Distribution   system    25  years  4% 

Shops  and  car  houses 50  years  2% 

Stations,  miscellaneous  buildings  and  structures 12^  years  8% 

Park  and   resort  property    33^^  years  3% 


522  Electric  Railway  Problem 

Assumed         Annual 
Class  of  Properly  Useful  Life    Depreciation 

Equipment 

Passenger  cars    21  years  ( +  )  4^% 

Freight,  express  and  mail  cars 21  years(  +  )  4^% 

Service   equipment    21years(  +  )  4}i% 

Electric  equipment  of  cars  20  years  5% 

Shop   equipment    20  years  5% 

Cable   station   equipment 20  years  5% 

Furniture    lOyears  107<- 

Miscellaneous    equipment,   automobiles 5  years  20% 

MlSCEU-ANEOUS   AND   GENERAL 

Law  expenditures  23.8years(  +  )  4.2% 

Interest  during  construction 23.8years(  +  )  4.2% 

Injuries  and  damages 23.8years(  +  )  4.2% 

Ta.xes    23.8years(  +  )  42% 

Miscellaneous    expenditures 23.8years(  +  )  42% 

All  depreciable  property 23.8years(  +  )  4.2% 

By  charging  depreciation  on  the  basis  above  indicated  the  city  comptroller 
figured  out  a  net  loss  of  $517,173.79  resulting  from  the  municipal  railway  opera- 
tions in  1919.  This  was  without  making  any  provision  for  sinking  fund  or 
amortization.  It  will  be  remembered  that  beginning  with  1922  the  city  will 
have  to  make  an  annual  payment  of  $8.53.000  on  the  principal  of  $15,000,000 
bonds  representing  the  purchase  price.  With  respect  to  this  obligation.  Super- 
intendent Murphine  said  in  his  report : 

"In  connection  with  a  numlwr  of  criticisms,  publicly  and  privately  made,  recently,  to  the 
effect  that  we  are  at  present  not  setting  aside  a  fund  to  enable  us  to  retire  bonds  when  same 
fall  due,  would  state  that  no  one.  to  our  knowledge,  ever  expected  the  purchased  system  to 
even  pay  operating  expenses  during  the  first  year  of  operation  under  city  management.  In 
fact,  this  department  urged  the  City  Council  to  make  the  first  payment  si.x  years  after  pur- 
chase, depending  uiH)n  the  natural  increase  in  revenue  from  transportation  to  show  a  sufficient 
amount  at  the  time  the  first  payment  on  the  bonds  falls  due,  to  meet  the  same. 

"Our  increase  for  this  year  over  the  receipts  of  the  company,  combined  with  the  city 
lines  of  last  year,  will  approximate  11'..  per  cent.  If  this  increase  should  continue  for  the 
first  three  years  at  even  7  per  cent  (which  is  less  than  the  average  percentage  of  yearly 
increase  of  the  city's  population  during  the  last  ten  years),  and  if  we  are  enabled  to  obtain 
funds  to  remodel  at  least  75  per  cent  of  the  cars  now  in  operation,  known  as  two-man  cars, 
to  permit  of  their  operation  by  one  trainman,  we  shall  he  able  to  eliminate  approximately 
$750,000.00  per  year  of  expense.  This,  together  with  the  natural  increase  in  the  year  ending 
March  1.  1922.  will  show  revenue  more  than  sufficient  to  make  the  first  payment  on  the 
bonds." 

The  city  comptroller's  analysis  of  the  financial  results  of  niunici]),il  r.iilway 
operation  in  1919  is  shown  on  the  opposite  page. 

It  will  l)e  seen  that  all  but  $18,000  of  the  loss  attributed  to  tlie  year's  opera- 
tions was  due  to  the  depreciation  charge,  which  was  in  addition  to  an  expenditure 
of  19.6  per  cent  of  tiie  gross  earnings  in  maintenance.  The  city  comptroller  also 
furnished  a  memorandum  commenting  upon  the  figures  shown  above,  and  point- 
ing out  tiiat  ill  certain  respects  the  municipal  railway  was  being  favored  from 
the  accounting  stan(li)oint.     The  comptroller's  memorandum  follows: 

"The  above  statement  of  income,  profit  and  loss  of  the  city  railway  department  does  not 
include  certain  expenses,  projx-rly  chargeable  to  railway  operation,  borne  by  the  general  fund 
and  charged  by  authority  of  the  legislative  body  of  the  city  to  the  expen.se  of  the  respective 
departments  rendering  the  services. 

"Ulien  the  city  accpiired  the  traction  properties  of  the  Puget  Sound  Traction,  Light  &■ 
Power  t'ompany  on  the  first  of  .\pril.  1910.  it  iK'came  necessary  to  increase  the  number  of 
emplo)es  in  several  general  fund  departments.  In  the  corporation  counsel's  office,  two 
assistants  to  the  corixiratioii  counsel,  five  claim  agetits,  one  law  clerk  and  two  stenographers 
were  added  to  the  force.  <)wing  to  the  large  grist  of  damage  claims  and  increased  litigation, 
expense  for  office  supi)lies,  stationery  and  printing,  postage,  etc.,  was  materially  increased. 


Use  of  Public  Credit  523 

STATEMENT 

CITY  OP^  SEATTLE 

MUNICIPAL  STREET  RAILWAY  DEPARTMENT 

INCOME,  PROFIT  AND  LOSS  FOR  THE  YEAR  ENDING  DECEMBER  31,   1919. 

Expense 
Operating : 

Way  and  structures  (maintenance  of  roadway,  bldgs.  and 
grounds)    $282,992.92 

Equipment   (maint.  of  cars,  shop  equip.,  autos,  etc.) 528.506.57 

Power   (power  produced  and  purchased) 558,528.50 

Conducting  transportation  (trainmen,  car  barn  and  car 
service  expense )    1 .950,459.70 

Traffic   (advertising  park  and  resort  attractions ) Z,22S.ii 

General  and  miscl.  (gen.  ofHce  exp. ;  ind.  insu. ;  injuries  and 
damages ;  stationery  and  ptg. ;  store  exp. ;  rent  of  track 
and   facilities)    245,109.09 

Auto  buses  (exp.  of  auto  buses  connecting  outlying  terri- 
tory with  end  of  car  line) 904.16 

$3,568,729.27 
Depreciation  of  road  and  equipment 499,173.39       $4,067,902.66 

Deductions  from  Gross  Income : 

Interest  on  General   Bonds $23,281.23 

Interest  on  Revenue  Bonds 579,683.83 

.Amortization  of  discount  on  Revenue  Bonds 2,314.01 

Miscl.  Interest  (interest  on  Railway  Fund  Warrants) 2,145.26           607,424.33 


$4,675,326.99 

Revenue 
Operating  Revenue : 

Passenger  car  service $4,030,602.04 

Special   passenger  car  revenue    471.00 

.\uto   bus   service    -74  79 

Express  service    (carrying  newspapers)    3.948.00 

Freight    sjervice    32.112.18 

Mail   service 6,212.60 

Mini,  employment  passenger  service   (Police  &  Firemen)...  38.000.00 

Miscellaneous    transportation    service    3,264.53       $4,114,88j.l4 

Miscellaneous  Revenue : 

Station  and  car  privileges  (advertising  privileges  on  stations 

and  cars)    $12,946.50 

Rent   of   cars    3,523.04 

Rent   of   track   and    facilities 20,937.98 

Rent  of  real  estate    4,638  54 

Electric    current    sold    578.78 

Other  miscellaneous   revenue    643.22             43,268.06 


$4,158.15.^20 
Net  loss  for  the  year  1919 517.173.79 

$4,675,326.99 


524  Electric  Railway  Problem 

"The  total  cost  of  the  city  railway  legal  business  borne  by  the  general  fund  in  1919,  was 
about  $20,000.00;  the  purchasing  department  expenses  were  increased  approximately  $5,IKX).00; 
the  expense  of  the  comptroller's  department  for  auditing  claims,  issuing  warrants  and  keeping 
accounts  of  the  railway  department  cost  in  round  figures  $6,000.00.  In  addition,  there  was  an 
increase  in  the  city  treasurer's  office  expense  of  about  $1.000.(X)  for  handling  city  railway 
business  in  1919.  In  the  public  utilities  department,  all  the  superintendent's  salary  of 
$4,500.00  and  half  of  the  auditor's  salary  of  $3,240.00  have  been  charged  to  that  department 
and  paid  from  the  general  fund,  notwithstanding  more  than  two-thirds  of  their  time  has  been 
devoted  to  railway  operation. 

"Altogether  some  $35,000.00  of  expense  for  the  railway  department  was  paid  in  1919  out 
of  the  general  fund.  It  is  true  that  the  general  fund  receives  two  per  cent  per  annum  on  all 
railway  fund  money  on  deposit  in  city  depositories,  which  would  amount  to  perhaps  $15,000.00 
in  1919. 

"Similar  expenses  of  light  and  water  utilities,  though  relatively  small,  are  likewise  borne 
by  the  general  fund  and  are  consistently  subject  to  the  same  criticism. 

"Loans  and  advances  have  been  made  the  railway  fund,  altogether  amounting  to  5200.- 
000.00,  by  other  funds,  principally  by  the  general  fund,  without  charge  lor  interest.  This 
practice  is  not  new.  It  has  been  the  custom  of  the  legislative  body  to  make  loans  to  other 
utilities  from  various  funds  without  providing  for  interest  payment  thereon,  same  being,  in  my 
judgment,  a  questionable  policy. 

"In  the  budget  for  1920,  provision  was  made  by  the  city  council  for  reimbursement  to  the 
light  department  depreciation  reserve  fund  of  an  item  of  $25,000.00  previously  loaned  by  that 
fund  to  the  railway  department.  In  accordance  with  this  plan,  the  $25,000.00  was  included  in 
the  general  fund  tax  levy  for  1920  and  in  I'ebruary  of  this  year  was  paid  by  the  general 
fund,  thus  relieving  the  railwav  fund  of  this  liabilitv  and  reducing  the  total  loans  and  advances 
from  $200,000.(X)  to  $175,000.00.  In  other  words,  the  city  made  a  levy  of  $25,000.00  for  the 
benefit  of  the  city  railway. 

".Another  matter  that  should  now  he  presented  for  consideration  is  the  provision  for 
redemption  of  outstanding  railway  bonds.  On  the  first  day  of  February.  1922,  $833,000.00 
of  the  $15,000,000.00  of  bonds  issued  by  the  traction  company  will  be  due  and  payable.  Each 
succeeding  year  till  1929,  a  like  amount  will  fall  due.  Thereafter,  this  amount  will  be  in- 
creased by  the  addition  of  other  serial  bonds  falling  due.  yet  no  sinking  fund  provision  has 
been  made  by  the  city  to  take  care  of  these  redemptions." 

It  appears  that  under  the  Seattle  plan,  if  the  conditions  of  the  purchase 
ordinances  and  the  city  comptroller's  ideas  ahoui  depreciation  arc  fully  carried 
out,  the  car  riders  will  be  compelled  to  pay  for  the  property  within  twenty  years 
and  also  build  up  a  large  depreciation  reserve.  Depreciation  and  maintenance 
together  as  set  up  in  the  comptroller's  statement  amounted  to  31.6  per  cent  of 
gross  revenues  in  1919.  It  a  proportionate  part  of  the  annual  payment  of 
$833,000  for  amortization,  which  is  due  to  begin  in  1922.  had  been  charged  last 
year,  the  maintenance,  depreciation  and  amortization  charges  would  have  been 
nearly  47  per  cent  of  the  gross  receipts.  It  is  obvious  that  such  a  policy  as  this, 
if  carried  through,  would  do  great  things  for  street  railway  credit  whether  under 
private  ownership  or  under  the  Seattle  plan. 

Undoubtedly,  there  is  a  tendency  in  some  places  to  put  obstacles  in  the 
way  of  the  use  of  ])ublic  credit  by  setting  up  standards  of  financial  conservatism 
for  nuinicipal  operation  that  in  all   fairness  may  be  described  as  unreasonable. 

Seattle  is  making  a  laudable  effort  to  keep  the  fare  down  to  five  cents  while 
paying  a  living  wage  and  improving  the  proi)erty  and  the  service.*  San  Fran- 
cisco is  doing  likewi.se  on  its  municipal  railway,  but  during  the  past  year  has 
found  it  necessary  to  trench  somewhat  upon  its  liberal  depreciation  reserve  in 
order  to  meet  operating  exi)enses.  For  the  twelve  months  ended  June  30.  1919. 
the  San  Francisco  mtniicipal  railway  shows  a  "gross  profit"  of  $88,964.  after 
paying  operating  expenses  and  interest  and  setting  aside  IS  per  cent  of  gross 
receipts  for  depreciation  and  accident  reserve,  but  without  having  made  anv 
provision  for  taxes,  car  license  fees  and  insurance,  which  under  private  owner- 


Use  of  Public  Credit  525 

ship  would  have  amounted  to  $205,771,  according  to  the  official  estimate.  Main- 
tenance expenses  during  this  period  were  less  than  nine  per  cent  of  the  gross 
earnings.  In  the  month  of  February,  1920,  maintenance  expenses  were  about 
10.5  per  cent,  and  after  the  deduction  of  the  customary  18  per  cent  for  reserve, 
the  month  showed  a  deficit  of  $1,535  with  gross  earnings  of  $205,744.  The  de- 
preciation and  accident  reserve  on  June  30,  1919,  amounted  to  $1,809,890  or 
somewhat  more  than  26  per  cent  of  the  property  investment.  In  San  Francisco 
bonds  for  municipal  railway  purposes  are  issued  against  the  general  credit  of  the 
city  within  the  debt  limit. 

Detroit  shows  its  conservatism  by  requiring  as  a  part  of  its  municipal  owner- 
ship program  that  fares  shall  be  placed  high  enough  to  pay  not  only  operating 
expenses  and  interest  charges,  but  also  regular  taxes  and  amortization  charges 
sufficient  to  provide  for  the  retirement  of  all  the  bonds  upon  maturity.  Under 
the  terms  of  the  city  charter  bonds  for  public  utility  purposes  may  be  issued 
against  the  general  credit  of  the  city  to  the  extent  of  two  per  cent  of  the  assessed 
valuation,  but  any  additional  bonds  required  for  the  acquisition  or  construction 
of  public  utilities  will  have  to  be  issued  against  the  utility  property  with  the  pro- 
tection of  a  contingent  or  security  franchise. 

Wisconsin  was  one  of  the  pioneer  states  to  establish  a  comprehensive  public 
utility  policy,  including  the  indeterminate  franchise,  unrestricted  state  regulation, 
and  the  right  of  the  municipalities  to  acquire  public  utilities  at  a  price  to  be  fixed 
by  the  state  commission.  Nevertheless,  as  in  so  many  other  states,  the  use  of 
municipal  credit  for  the  acquisition  of  public  utilities  is  limited  by  a  provision 
of  the  constitution  which  states  that  no  municipal  corporation  "shall  be  allowed 
to  become  indebted  in  any  manner  or  for  any  purpose  to  any  amount,  including 
existing  indebtedness,  in  the  aggregate  exceeding  five  per  centum  on  the  value 
of  the  taxable  property  therein." 

At  the  1919  session  of  the  \\'isconsin  legislature  a  bill  sponsored  by  the 
League  of  W'isconsin  Municipalities  in  the  interest  of  Superior.  Green  Bay, 
Madison,  Racine  and  a  number  of  other  cities  was  passed,  by  which  a  plan  some- 
what similar  to  the  Washington  plan  was  made  available  for  the  financing  of 
municipal  utilities.  I  have  been  informed  by  the  secretary  of  the  Wisconsin 
league  that  this  bill  was  drafted  by  a  partner  of  the  late  Judge  Dillon,  the  well- 
known  authority  on  municipal  bonds  and  municipal  law.  that  its  passage  was 
opposed  by  all  the  privately  owned  utilities,  and  that  many  of  the  attorneys  for 
public  utility  corporations  appeared  before  the  legislative  committee  to  oppose 
the  bill,  not  as  representatives  of  their  corporations,  but  "in  the  interests  of  the 
taxpayers."  My  informant  says:  "Of  course  Wisconsin  cities  have  had  for 
some  time  full  powers  to  purchase  their  utilities  and,  as  the  committee  repeatedly 
pointed  out.  this  bill  was  not  designed  to  give  the  cities  any  additional  powers 
insofar  as  the  purchase  of  utilities  was  concerned,  but  merel\  to  enable  them 
to  pay  for  them.  Of  course,  the  utilities  had  difficulty  in  justifying  their  oppo- 
sition to  the  bill,  everybody  being  skeptical  about  their  great  interest  in  behalf 
of  the  taxpayer."  It  may  be  said  without  fear  of  successful  contradiction  that 
the  public  utilities  themselves  are  in  large  measure  responsible  for  the  extent  to 
which  public  credit  has  been  made  unavailable  for  use  in  the  present  emergency 


526  Electric  Railway  Problem 

of  the  electric  railway  industry.  The  Wisconsin  bill  referred  to,  as  tinally 
enacted,  provides  that  whenever  the  qualified  voters  of  any  city,  village  or  town 
shall  have  determined  by  majority  vote  to  purchase,  acquire  or  construct  any 
public  utility  the  common  council  or  other  governing  authority  of  the  munici- 
pality shall  be  authorized  to  provide  for  the  initial  payment  and  for  any  neces- 
sary extensions,  additions  and  improvements  in  the  following  manner: 

"2.  Said  common  council  or  other  governing  authority  shall  by  ordinance  set  aside  the. 
income  and  revenues  of  such  public  utility  into  a  separate  and  special  fund  to  be  used  and 
applied  in  the  maintenance  and  operation  thereof,  and  in  the  payment  of  the  cost  tliereof. 
Said  ordinance  .shall  ti.\  and  determine  (a)  the  proportion  of  the  revenues  of  such  public 
utility  which  shall  be  necessary  for  the  reasonable  and  proix;r  operation  and  maintenance 
thereof;  (b)  the  proportion  of  the  said  revenues  which  .-ihali  be  set  aside  as  a  proper  and 
adequate  depreciation  account;  and  (c)  the  fixed  proportion  of  the  said  revenues  which  shall 
be  set  aside  and  applied  to  the  payment  of  the  principal  and  interest  of  the  bonds  herein 
authorized. 

"3.  In  fixing  and  determining  the  proportion  of  the  revenues  of  such  public  utility 
required  for  operation  and  maintenance,  the  common  council  or  other  governing  authority 
shall  have  regard  to  the  cost  of  operation  and  maintenance  of  the  utility,  and  shall  not  set 
aside  into  sucli  special  fund  a  greater  amount  or  proportion  of  the  revenues  and  proceeds 
thereof  than  in  their  judgment  shall  be  properly  required  for  the  said  operation  and  main- 
tenance. The  sums  so  set  aside  for  operation  and  maintenance  shall  be  used  and  applied 
exclusively  for  that  purpose,  until  the  accumulation  of  a  surplus  of  the  amount  hereinafter 
specified. 

"4.  The  proportion  .set  aside  to  the  depreciation  fund  shall  be  expended  in  making  good 
depreciation  in  the  said  public  utility  or  in  new  constructions,  extensions  or  additions  to  the 
property  of  such  public  utility.  Any  accumulations  of  such  depreciation  fund  may  be  invested, 
and  if  invested,  the  income  from  the  investment  shall  \x  carried  in  the  depreciation  fund. 
Said  fund  and  the  proceeds  thereof  shall  not  be  used  for  any  purjKJsc,  other  than  as  herein 
provided. 

"5.  The  fixed  proportion  which  shall  be  set  aside  for  the  payment  of  the  principal  and 
interest  of  the  bonds  herein  authorized  shall  from  month  to  month  as  the  same  shall  accrue 
and  be  received,  be  set  apart  and  paid  into  a  special  account  in  the  treasurv  of  the  said  citv, 
village  or  town,  to  be  identified  as  THE BOND  .J^ND  INTEREST  RE- 
DEMPTION ACCOUNT,"  the  full  title  of  such  account  to  be  specified  by  the  said  ordinance. 
In  fixing  and  determining  the  amount  or  proportion  which  shall  be  set  aside  for  the  payment 
of  the  principal  and  interest  of  the  txmds  herein  authorized,  the  common  council  or  other 
governing  authority  may  provide  that  the  anxnnit  to  \iq  set  aside  and  paid  into  tlie  said  bonds 
and  interest  re<lemption  account  for  any  year  or  years  shall  not  exceed  a  fixed  sum  which 
sum  shall  be  at  least  sufficient  to  provide  for  the  payment  of  the  interest  and  principal  of  the 
said  bonds  maturing  and  becoming  payable  in  each  such  year,  together  with  a  surplus  or 
margin  of  ten  per  cent  in  excess  thereof. 

"6.  If  any  sun'lus  shall  Ix;  accumulated  in  the  said  operating  and  maintenance  fund, 
which  shall  be  equal  to  the  cost  of  maintaining  and  operating  the  said  plant  during  the  re- 
mainder of  the  calendar,  operating  or  fiscal  year  then  current,  and  the  cost  of  maintaining 
and  operating  the  said  utility  during  the  calendar,  operating  or  fiscal  year  then  next  ensuing, 
any  excess  over  such  surplus  may  be  by  said  common  council  or  other  governing  authority 
transferred  to  cither  the  (lepreciation  account  to  Ik'  used  for  any  improvements,  extensions  or 
additions  to  the  properties  of  such  public  utility,  or  to  the  bond  and  interest  redemption  account, 
as  said  common  council  or  other  governing  authorities  may  designate. 

"7.  If  and  when  a  surplus  shall  lie  created  in  the  said  Iwnd  and  interest  redemption 
account  which  shall  be  in  excess  of  the  interest  and  principal  of  any  bonds  becoming  payable 
during  the  calendar,  operating  or  fiscal  year  then  current,  together  with  the  amount  of  interest 
or  principal  of  any  txmds  which  shall  bi-come  due  and  pavahle  during  the  calendar,  operating 
or  fi.scal  year  then  next  ensuing,  the  .said  common  council  or  other  governing  authority  inay 
transfer  any  excess  over  .such  surplus  to  cither  the  operation  and  maintenance  account,  or  to 
the  depreciation  account,  which  .said  common  council  or  other  governing  authorities  may 
designate. 

"R.  To  provide  for  the  payment  thereof  and  to  provide  for  any  extensions,  additions 
and  improvements  thereof,  the  said  common  council  nr  other  governing  authority  shall  be 
and  is  hereby  authorized  to  issue  and  sell  Ixmds  bearing  interest  at  a  rate  not  exceeding  six 
per  centum  per  annum,  payable  amnially  or  semi-ainuially.  executed  in  such  manner  and 
payable  at  s\ich  times  not  exceeding  fortv  years  from  the  date  thereof,  and  at  such  places 
as  the  common  coimril  or  other  poverning  authority  of  such  city,  village  or  town  shall 
determine,  which  Ivrnds  shall  be  payable  only  out  of  the  said  special  ri>dcmption  fund. 
•  *  •  •  .^ny  such  Winds  and  the  interest  thereon  issued  against  any  such  redemption 
fund  shall  be  a  valid  claim  of  the  holders  thereof  only  against  the  said  special  redemption 


Use  of  Public  Credit  527 

fund  and  the  fixed  proportion  or  amount  of  the  revenues  pledged  to  such  fund,  and  shall 
not  constitute  an  indebtedness  of  such  city,  village  or  town  within  the  meaning  of  the  con- 
stitutional provisions  and  limitations.  Each  such  bond  shall  state  plainly  upon  its  face  that 
it  is  payable  only  from  the  special  fund,  naming  the  said  fund  and  the  ordinance  creating  it 
and  that  it  does  not  constitute  an  indebtedness  of  such  city,  village  or  town.  *  *  *  *  Such 
bonds  shall  be  sold  in  such  manner  and  upon  such  terms  as  the  governing  authorities  shall 
deem  for  the  best  interests  of  .said  city,  village  or  town,  provided,  however,  that  such  bonds 
shall  not  be  sold  for  less  than  par.  The  governing  authorities  may  provide  in  any  contract  for 
the  purchase,  acquisition  or  construction  of  any  utility,  that  payment  thereof  shall  be  made 
in  such  bonds  at  the  par  value  thereof. 

******** 

"10.  The  rates  for  all  services  rendered  by  such  public  utility  to  the  municipality  or  to 
citizens,  corporations  or  other  consumers,  shall  be  reasonable  and  just,  taking  into  account 
and  consideration  the  value  of  the  said  public  utility,  the  cost  of  maintaining  and  operating 
the  same,  the  proper  and  necessary  allowante  for  depreciation  thereof,  and  a  sufficient  and 
adequate  return  upon  the  capital  invested. 

"11.  All  moneys  received  from  any  bonds  issued  pursuant  hereto  shall  be  applied  solely 
for  purchasing,  acquiring  or  constructing  such  public  utility,  and  in  the  payment  of  the  cost 
of  any  necessary  e.xtensions,  additions  and  improvements,  and  there  shall  be  and  there  is 
hereby  granted  and  created  a  statutory  mortgage  lien  upon  the  public  utility  so  purchased, 
constructed  or  acquired  to  and  in  favor  of  the  holders  of  tlie  said  bonds  and  each  of  them, 
and  to  and  in  favor  of  the  holders  of  the  coupons  of  said  bonds.  The  public  utility  so  pur- 
chased, acquired  or  constructed  shall  remain  subject  to  such  statutory  mortgage  lien  until  the 
payment  in  full  of  the  principal  and  interest  of  the  bonds  issued  pursuant  thereto.  Any 
holder  of  the  said  bonds  or  of  any  of  the  coupons  attached  thereto  may  either  at  law  or  in 
equity  by  suit,  action,  mandamus  or  other  proceeding,  protect  and  enforce  the  statutory 
mortgage  lien  hereby  conferred,  and  may  by  suit,  action,  mandamus  or  other  proceedings, 
enforce  and  compel  performance  of  all  duties  required  by  this  act,  of  the  city,  village  or 
town  issuing  the  said  bonds  or  of  any  officer  thereof,  including  the  making  and  collecting  of 
reasonable  and  sufficient  rates  lawfully  established  for  service  rendered  by  such  utility,  the 
segregation  of  the  income  and  revenues  of  the  said  utility  and  the  application  of  the  respective 
funds  created  pursuant  to  the  provisions  of  this  statute.  If  there  be  any  default  in  the  pay- 
ment of  the  principal  or  interest  of  any  of  the  said  bonds,  any  court  having  jurisdiction  of 
the  action  may  appoint  an  administrator  or  receiver  to  administer  the  said  public  utility  on 
behalf  of  the  said  city,  village  or  town  and  the  said  bondholders,  with  power  to  charge  and 
collect  rates  lawfully  established  sufficient  to  provide  for  the  payment  of  the  operating  expenses 
and  also  to  pay  any  bonds  or  obligations  outstanding  against  said  utility,  and  to  apply  the 
income  and  revenues  thereof  in  conformity  with  this  statute  and  the  said  ordinance,  or  the 
said  court  may  declare  the  whole  amount  of  said  bonds  due  and  payable  and  may  order  and 
direct  the  sale  of  the  said  public  utility.  Under  any  sale  so  ordered,  the  purchaser  shall  be 
vested  with  an  indeterminate  permit  to  maintain  and  operate  the  said  public  utility.  If  any 
city,  village  or  town  shall  have  acquired  or  constructed  any  such  public  utility  and  shall  have 
paid  therefor  and  for  any  extensions  and  betterments  authorized  at  the  time  of  acquisition  in 
the  manner  herein  provided,  such  city,  village  or  town  may  provide  for  the  extension,  addi- 
tion or  improvement  of  such  public  utility  by  an  additional  issue  or  issues  of  bonds  in  the 
manner  herein  provided ;  provided,  however,  that  such  additional  issue  or  issues  of  bonds  shall 
be  subordinate  to  all  prior  issues  of  bonds  which  may  have  been  made  hereunder.  ."Kny 
city,  village  or  town  may  issue  new  hondi  in  the  manner  herein  provided  and  secured  in  the 
same  manner,  to  provide  funds  for  the  payment  of  the  principal  and  interest  of  any  bonds 
then  outstanding,  provided  that  upon  any  re-issue  of  such  bonds  the  question  shall  not  be 
required  to  be  submitted  to  the  electors  whenever  such  re-issue  shall  be  approved  by  a  vote 
of  not  less  than  two-thirds  of  the  common  council  or  other  governing  authority.     *     *     *     *" 

It  will  be  observed  that  this  Wisconsin  act  combines  the  security  of  the 
Washington  plan  with  the  security  of  the  Mueller  certificate  plan.  The  bond- 
holder will  have  a  double  remedy.  He  can  either  enforce  his  rights  by  an  action 
to  compel  the  municipality  to  charge  adequate  rates  to  make  the  utility  self- 
sustaining,  or  in  case  of  default  he  can  institute  a  proceeding  that  will  cause 
the  property  to  be  operated  by  a  receiver  or  to  be  sold  at  foreclosure.  In  the 
latter  case  the  purchaser  will  have  the  right  to  continue  the  operation  of  the 
property  under  an  indeterminate  permit  and  subject  to  the  regulatory  laws  of 
Wisconsin. 

To  the  extent  that  the  use  of  public  credit  for  electric   railway  purposes 


528  Electric  Railway  Problem 

without  the  assumption  by  the  public  of  the  existing  investment  burden  prove? 
to  be  feasible  in  particular  cases,  there  is  considerable  hope  that  some  plan  of 
special  assessments  against  the  property  benefited  may  be  devised  to  take  care  ot 
street  railway  extensions.  This  plan  was  suggested  by  Dr.  Milo  R.  Maltbie  in 
his  testimony  before  the  Commission,  who  called  particular  attention  to  a  study 
of  this  subject  made  by  the  City  Club  of  Xew  York  some  years  ago  in  coimec- 
tion  with  the  rapid  transit  problem.  At  page  2099  of  the  Proceedings,  Dr. 
Maltbie  says  that  in  his  opinion  the  justification  for  the  use  of  special  assess- 
ments in  the  case  of  a  transportation  line  is  particularly  strong  because  "there 
is  not  anything  that  will  devefop  the  value  of  property  if  the  lines  are  properly 
selected  *  *  *  *  so  much  as  the  transportation  system."  Mr.  Lawson 
Purdy,  who  for  many  years  was  president  of  the  department  of  taxes  and 
assessments  of  New  York  City,  filed  a  memorandum  on  the  subject  of  special 
assessments  wiiich  appears  in  full  in  the  Proceedings.  Mr.  Purdy  calls  attention 
to  the  fact  that  electric  railway  extensions  constructed  by  the  companies  under 
present  conditions  will  constitute  an  especially  heavy  burden  on  the  fare  payers, 
and  to  the  further  fact  that  the  building  of  a  new  railway  or  an  extension  en- 
hances the  value  of  the  land  tributary  to  it.  At  page  2124  of  the  Proceedings. 
he  says: 

"It  is  goiieralty  true  of  the  buildiiiR  of  an  electrical  railway,  as  in  the  building  of  any 
other  highway,  street,  or  road,  that  if  it  does  not  enhance  the  vaUie  of  land  by  at  least  as 
much  as  it  costs  it  should  not  tie  built."' 

A  little  further  on,  at  page  2125,  after  referring  to  the  use  of  special  assess- 
ments for  more  than  a  hundred  years  past  as  a  means  of  paying  for  street  im- 
provements, Mr.  Purdy  adds: 

"This  method  of  paying  for  certain  public  improvements  has  not  only  the  advantage  of 
obtaining  the  money  and  obtaining  it  from  those  who  receive  the  financial  benefit,  but  it  has 
an  added  advantage.  Real  estate  owners  are  prone  to  demand  public  improvements  that  they 
think  will  iH'nelit  their  property  even  though  such  improvements  are  premature.  If  such 
owners  know  that  they  must  pay  for  these  public  improvements  they  are  less  likely  to  demand 
them  in  advance  of  real  need." 

Mr.  Purdy  thinks  that  the  special  assessment  policy  would  tend  to  tnie  con- 
servatism in  the  construction  of  street  railway  extensiotis,  while  at  the  same  time 
keeping  the  way  open  for  them  where  they  are  really  needed.  At  page  2125 
of  the  Proceedings,  he  says: 

".Among  the  advantages  of  paying  for  electrical  railways  by  assessment,  whether  owned 
and  operated  by  public  authority  or  by  private  corporations,  will  be  that  extensions  will  not  be 
const ructitl  unless  they  are  actually  needed.  They  can  be  constructed,  however,  if  the 
operating  revenue  is  sufficient  to  meet  operating  expenses  and  mainten.ince,  while  the  ex- 
tensions could  not  I)c  built  if  the  revenue  had  to  be  sufficient  not  only  for  operating  expenses 
and  maintenance  but  also  to  pay  interest  and   installments  upon  the  original  cost. 

"By  pursuing  the  policy,  wherever  practicable,  <>f  building  electric  railways  by  special 
assessments  levied  upon  the  property  l)cnetiled.  capital  will  steadily  be  diminished  until 
ultimately  we  may  hope  that  the  entire  capital  will  be  amortized  and  the  railways  thereafter 
can  be  run  for  rates  sufficient  and  only  sutTicient  to  pay  operating  expenses  and  maintenance." 

Mr.  Purdy  does  not  offer  the  special  assessment  plan  as  a  solution  of  the 

difficulties  due  to  the  depreciated  dollar,  but  adds  at  the  close  of  his  statement, 

at  page  2126  of  the  Proceedings: 

"If  it  is  possible  to  continue  to  operate  electric  railways  at  all,  this  plan  if  adopted  will 
permit  of  such  extension  of  their  facilities  as  may  be  needed  and  promises  a  continual  better- 
ment of  their  financial  condition." 


Use  of  Public  Credit  529 

It  is  clear  that  the  problem  of  electric  railway  credit  could  be  solved  by 
public  ownership,  if  the  legal,  financial  and  political  difficulties  in  the  way  were 
removed,  but  in  view  of  these  difficulties  this  remedy  cannot  be  applied  on  a  large 
scale  immediately.  The  American  Electric  Railway  Association  brief  closes  with 
the  following  statement : 

"Private  ownership  and  management  must  continue  for  some  time  and,  with  provisions 
for  readily  and  equitably  changing  to  public  ownership  and  operation,  should  it  later  be 
desirable,  the  recommendations  of  the  Commission  must  necessarily  deal  with  utilities,  financed 
witli  private  capital  and  managed  by  private  enterprise." 

"Financed  with  private  capital  and  managed  by  private  enterprise!'' — this 
flat  rejection  of  the  idea  of  the  use  of  public  credit  as  a  means  for  correcting 
the  ills  of  the  present  critical  situation  makes  the  solution  more  difficult.  There 
is  grave  danger  that  continued  reliance  upon  private  credit  can  be  made  eflfective, 
if  at  all,  only  by  paying  a  "prohibitive"  price  for  new  capital  and  relaxing  public 
control  to  such  an  extent  as  to  give  the  electric  railway  companies  performing 
this  public  function  an  independence  and  freedom  from  restraint  greater  than 
they  have  ever  enjoyed  in  the  past.  It  is  to  go  forward  or  to  go  backward,  and 
in  all  likelihood  the  exigencies  of  credit  will  determine  the  length  of  journey  in 
either  direction.  It  may  be  that  we  have  now  reached  one  of  those  exceptional 
crises  in  the  development  of  community  life,  where  the  unreadiness  and  muddle- 
headedness  of  government  will  fall  into  a  panic  with  the  approach  of  respon- 
sibility and  meekly  meet  whatever  conditions  are  laid  down  by  those  who  are  in 
possession  of  existing  transportation  facilities  and  have  experience  in  rendering 
transportation  service.  There  is  no  telling  what  a  panicky  and  conscience- 
smitten  public  will  do  to  avoid  "the  intolerable  toil  of  thought."  To  relax  un- 
profitable restraints  and  to  lift  unreasonable  burdens  is  a  just  and  expedient 
policy,  but  to  take  a  single  step  backward  in  the  essential  control  of  transporta- 
tion service  by  public  agencies  would  be  unwise  and  would  doubtless  entail  the 
unhappy  ultimate  results  of  public  unwisdom. 


Chapter  XLIII 
THE    ELECTRIC    RAILWAY    LABOR    PROBLEM 

111  the  discussion  of  the  plight  of  electric  railway  capital,  and  the  failure 
of  electric  railway  credit,  we  have  been  compelled  to  travel  a  long  road.  And 
now  that  we  are  at  a  place  where  conclusions  are  due,  the  labor  problem  re- 
quires special  consideration  in  the  readjustment  of  the  public  relations  of  the 
industry.  What  suits  the  stockholder  and  the  bondholder  may  not  suit  the  man 
on  the  job.  If  we  have  exaggerated  the  importance  of  capital,  the  conductors, 
the  niotormen  and  the  shopmen  arise  to  correct  us — and  so  we  cannot  escape  the 
labor  problem  if  we  would. 

Capital  is  helpless  to  render  transportation  service  without  the  assistance  of 
labor.  The  public  cannot  have  continuity  of  transportation  service,  or  for  that 
matter  any  transportation  service  at  all,  without  the  cooperation  of  labor.  Dur- 
ing the  war  the  supply  of  labor  in  the  electric  railway  business  was  short,  just 
as  it  was  in  many  other  industries.  It  cannot  be  said,  however,  that  prior  to  the 
war  any  particular  difticulty  was  ever  experienced  over  a  prolonged  period  in 
securing  men  to  operate  street  railways.  Ordinarily  the  companies  had  men 
on  the  waiting  list.  While  the  car  crews  of  an  electric  railway  have  positions 
of  considerable  responsibility,  the  work  they  do  does  not  require  a  very  high 
degree  of  education  or  a  great  deal  of  technical  training  and  experience.  It  is 
well  known  that  the  street  railways  have  heretofore  recruited  their  labor  forces 
largely  from  the  continuous  stream  of  migration  of  farmers'  sons  from  the  coun- 
try to  the  city. 

The  condition  in  the  electric  railway  industry  at  the  present  time  is  that 
the  wages  paid  are  nominally  much  higher  than  they  were  a  few  years  ago.  As 
a  result  of  the  work  of  the  National  War  Labor  Board  the  wages  in  this  industry 
were  more  or  less  standardized  throughout  the  country,  but  since  the  War  Labor 
Board  ceased  to  operate  these  standards  have  been  more  or  less  upset  by  the  re- 
sults of  strikes  and  labor  negotiations  on  particular  systems.  At  the  present  time 
there  is  a  wide  variation  in  the  rate  of  wages  paid,  even  where  no  substantial 
variations  seem  to  be  warranted  by  differences  in  living  conditions  and  the  char- 
acter of  the  work  done.  The  last  wage  yearbook  of  the  .Amalgamated  Associa- 
tion of  Street  and  Electric  Railway  I'mployes  of  .America,  issued  Januarv  1, 
1920,  contains  the  wage  rates  paid  on  more  than  300  unionized  electric  railway 
systems  in  the  United  States  and  Canada.'  From  this  source  I  have  prepared 
the  table  shown  on  pages  532  and  .^33,  giving  the  wage  rates  for  trainmen  on 
the  principal  urban  trans])ortation  systems  of  the  two  countries  so  far  as  they 
are  imionized. 

What  has  happened  since  the  beginning  of  the  World  War  is  illustrated 

530 


The  Labor  Problem 


531 


in  a  somewhat  extreme  way  by  the  course  of  wages  on  the  Cleveland  Railway 
operating  under  what  is  recognized  as  the  most  successful  of  the  service-at-cost 
franchises.  From  June  15,  1910,  until  May  1,  1915,  which  includes  the  first  nine 
months  of  the  war,  the  wages  of  conductors  and  motormen  in  Cleveland  were 
27  cents  per  hour  for  the  first  year  and  30  cents  per  hour  thereafter.  The  new 
rate  of  wages  agreed  upon  in  May,  1920,  is  70  cents  per  hour  for  the  first  three 
months  of  service,  7Z  cents  for  the  next  nine  months,  and  75  cents  after  the  first 
year.  It  will  be  seen  that  this  represents  an  increase  of  150  per  cent  in  the  maxi- 
mum rate  of  pay  over  the  rates  that  were  in  force  when  the  World  War  broke  out. 
Doubtless,  the  increases  for  the  industry  as  a  whole  during  this  same  period  have 
not  averaged  so  much.  But  in  1919,  the  first  year  after  the  fighting  in  Europe 
ceased  and  when  the  return  of  the  soldiers  to  civil  life  had  a  tendency  greatly  to 
increase  the  available  labor  supply,  there  was  an  epidemic  of  strikes  which  re- 
sulted in  great  losses  of  revenue  to  many  of  the  principal  electric  railway  com- 
panies, in  great  inconvenience  to  the  public,  and  generally  in  radical  advances  in 
wages,  sometimes  with  a  provision  for  back  pay.  The  following  list  of  strikes, 
with  the  approximate  loss  of  revenues  resulting  therefrom,  has  been  compiled 
from  traffic  and  revenue  data  supplied  to  the  Executive  Secretary  of  the  Com- 
mission by  the  companies  concerned : 

STRIKES    OX    PRINCIPAL   ELECTRIC    R.^ILWAY    SYSTEMS    IN    THE    UNITED 

ST.\TES  DURING  1919 

Date  Durnliou     Approximate  Loss 

City   or  System  of  Strike  of  Strike  in  Revenue 

New  York 

Interborough  Rapid  Transit  Company Aug.  17  2  days  $230,000 

CHIC.'kGO 

Elevated  Lines Tnlv  29  4  days  140,000 

Surface   Lines Tulv  29  4  davs  400,000 

Boston    July  17  4  days  320,000 

New  Jersey 

Public  Service  Railway  Company Mar.  12  6  days  300,000 

Detroit  ". June  8  5  days  275,000 

CLEVEL.^ND   lulv  6  2  days  75,000 

Pittsburgh   May  15  4  davs  170,000 

Aui  15  14  days  600,000 
Eastern  Mass.achusetts 

Bay   State   Lines June  3  days  130,000 

Los  .Angeles 

Los  .'\ngeles  Railway Aug.  15  6  weeks  (partial)     175.000 

Pacific   Electric   Railway .4ug.  16  6  weeks  (partial)     380,000 

The  Kansas  Cities Jan.  to  Mar.  3  months  400,(XX) 

Milwaukee    Ian.  1  1  day  16.(K)0 

Providence    July  19  19  days  400,000 

Seattle    Feb.  6  4  davs  75.0(X) 

Columbus,   O Sept.  3  4  days  25.000 

Des    Moines Aug.  12  8  days  18.000 

Nashville  Aug.  20                      1  day  5.000 

$4,134,000 

While  the  losses  from  strikes  indicated  above  aggregate  a  considerable  sum 
of  money,  and  in  particular  cases,  no  doubt,  bore  heavily  upon  the  companies, 
still  $4,000,000  was  only  about  two-thirds  of  one  per  cent  of  the  total  revenues 
collected  during  1919  by  the  companies  from  whose  reports  these  strike  data 
were  compiled.     In  view  of   the  number  of  big  systems  involved,  the  revenue 


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534  Electric  Railway  Problem 

losses  seem  small.  The  additional  expense  to  the  companies  in  the  form  of 
wage  increases  enforced  by  the  strikes  was  undoubtedly  very  nmch  greater  than 
the  revenue  losses,  and  the  fact  that  most  of  the  strikes  were  so  quickly  and  easily 
won  proves  either  that  the  men  undeniably  had  a  just  claim  to  the  higher  pay 
awarded  them,  that  the  companies  have  been  weakened  in  their  relation  to 
wage  controversies  by  economic  forces  beyond  their  control,  or  that  the  prospect 
of  passing  the  burden  on  to  the  car  riders  in  the  shape  of  higher  fares  made 
them  less  keen  to  resist  labor's  demands.  Probably  all  these  factors  were  work- 
ing together  to  bring  about  the  results  which  inevitably  tend  to  higher  unit  costs 
in  the  production  of  local  transportation  service.  Up  to  May.  1920.  the  indica- 
tions are  that  the  present  year  will  see  another  series  of  labor  disturbances  in 
the  electric  railway  field  and  further  radical  increases  in  the  wages  paid.- 
While  the  War  Labor  Board  was  in  existence  there  was  a  national  agency  to 
which  both  parties  could  appeal  for  the  arbitration  of  wage  questions;  but  no 
such  agency  will  now  be  present  to  meet  the  problems  that  arise  as  the  contracts 
between  the  local  divisions  of  the  Amalgamated  Association  and  the  employing 
companies  expire  from  time  to  time,  or  to  meet  the  problems  that  arise  where 
the  employes  on  unorganized  systems  get  together  to  demand  larger  pay  and  the 
recognition  of  the  union. 

The  exigencies  of  the  war  period  have  undoubtedly  strengthened  the  unions. 
The  number  of  local  divisions  of  the  .Amalgamated  Association  increased  from 
about  160  in  January.  1910.  to  187  in  January.  1916.  and  to  32S  in  January, 
1920,  Thus,  it  will  be  seen  that  the  number  of  locals  has  more  than  doubled  in 
ten  years.  Moreover,  the  Amalgamated  Association  claims  an  increase  of  about 
40,000  individual  members  during  the  war  period.  It  is  clear,  therefore,  that 
the  industry  is  now  more  thoroughly  unionized  than  it  ever  was  before.^ 

Another  element  of  strength  for  organized  labor  is  the  fact  that  at  the 
present  time  a  street  railway  strike  is  relatively  not  quite  so  serious  a  matter 
from  the  public  point  of  view  as  it  was  before  the  advent  of  the  automobile. 
For  this  reason  the  operating  companies  cannot  place  so  much  dependence  upon 
the  pressure  of  public  need  to  sujjjiort  them  in  the  use  of  strikebreakers  to  keep 
the  cars  in  operation.  In  fact,  it  seems  to  have  become  almost  a  general  custom 
for  electric  railway  companies  to  submit  to  a  complete  suspension  of  service 
when  a  strike  takes  place  and  to  make  very  little  or  no  effort  to  resume  opera- 
tion until  the  strike  has  been  settled  and  the  old  employes  come  back.  An  occa- 
sional exception  may  still  be  noted,  as.  for  example,  the  policy  of  the  Kansas 
City  Railways  Com|)any  during  the  prolonged  strike  extending  from  December 
11,  1918,  to  March  31,  1919.  It  will  be  remembered  that  the  number  of  revenue 
passengers  carried  by  the  Kansas  City  Railways  Company  in  the  two  Kansas 
Cities  during  the  first  nine  months  of  1919  was  18  per  cent  less  than  the  number 
carried  during  the  first  nine  months  of  1917.  At  the  same  time  the  average 
increase  in  fare  was  20  per  cent,  and  no  doubt  accounts  in  part  for  the  loss  of 
traffic.  It  may  he  safely  assumed,  however,  that  a  large  part  of  the  loss  was 
due  to  the  strike  and  the  conditions  growing  out  of  it.  With  an  active  com- 
petitor present,  or  potentially  present,  in  the  form  of  the  jituey  and  the  auto- 
mobile bus,  it  is  an  extremely  hazardous  thing  for  a  street  railway  company  to 


The  Labor  Problem  535 

enter  upon  a  prolonged  contest  with  its  employes,  as  such  a  policy  is  pretty  sure 
to  result  in  the  diversion  of  traffic  to  competitive  means  of  transportation  and 
to  make  the  future  of  the  electric  railway  in  the  particular  community  even  more 
insecure  than  normal  conditions  at  the  present  time  warrant.  Under  the  cir- 
cumstances, street  railway  strikes  are  nowadays  attended  with  comparatively 
little  violence,  and,  therefore,  public  opinion  is  not  so  sharply  divided  between 
those  who  consider  the  maintenance  of  law  and  order  as  the  most  essential 
public  policy  and  those  who  naturally  sympathize  with  labor,  particularly  where 
it  is  believed  that  the  men  are  underpaid  or  are  compelled  to  work  under  unrea- 
sonable conditions.  As  a  result,  it  seems  to  be  clearly  true  that  it  is  increasingly 
difficult  for  electric  railway  companies  to  "break"  strikes. 

Even  after  the  cessation  of  hostilities  in  the  World  War  the  cost  of  living 
continued  to  climb,  and  unless  in  the  near  future  there  is  a  sharp  recession  in 
prices  it  is  to  be  expected  that  the  employes  of  the  electric  railways,  as  their 
yearly  contracts  expire,  will  demand  further  increases  in  wages  and  that  this 
will  drive  the  companies  which  are  not  already  in  bankruptcy  closer  to  the  verge 
of  it  if  the  men's  demands  are  granted.  This  result  may  follow  even  where  fare 
increases  are  freely  granted  to  meet  the  additional  cost  of  operation,  for  it  is 
by  no  means  certain  that  during  the  present  era  of  high  prices  the  electric  rail- 
way industry  as  a  whole  can  be  made  to  pay  the  full  cost  of  service  that  is 
involved  in  higher  wages,  along  with  the  high  prices  now  paid  for  materials  and 
money.  At  least,  this  result  may  follow  unless  there  is  a  radical  reorganization 
of  capital  obligations  of  the  industry. 

Obviously,  the  electric  railway  problem  is  not  merely  a  problem  of  credit 
or  of  the  new  capital  secured  by  credit.  It  is  also,  and  even  more  fundamentally, 
a  problem  of  labor,  because  the  solution  of  the  labor  problem  is  itself  essential 
to  the  restoration  of  credit.  Capital  that  is  already  invested  in  the  electric 
railways  will  have  to  stay  in  the  industry  whether  or  not  it  likes  the  labor  out- 
look, but  new  capital  need  not  come  in  so  long  as  the  labor  problem  remains 
unsolved  and  threatens  the  security  of  the  investment,  and,  within  certain  limits, 
the  permanency  of  the  industry.  Full  cooperation  of  labor  is,  of  course,  essen- 
tial to  the  highest  prosperity  and  usefulness  of  any  industry.  The  labor  element 
is  peculiarly  important  in  the  street  railway  business,  where  the  employes  who 
produce  the  service  come  directly  in  contact  with  the  people  who  consume  the 
service.  From  the  point  of  view  of  the  labor  problem,  therefore,  the  present 
condition  of  the  electric  railway  industry  contains  seeds  of  trouble  not  only  for 
the  people  financially  interested  in  the  industry  but  also  for  the  general  public. 
For  the  car  riders  there  is  the  double  danger  of  the  increasing  cost  of  service  on 
the  one  hand,  which  in  the  long  run  either  they  or  the  taxpayers  will  be  com- 
pelled to  pay,  and  of  the  paralysis  of  service  through  industrial  conflicts  on  the 
other  hand,  which  in  general  may  be  regarded  as  an  even  greater  calamity  than 
increased  cost. 

From  the  point  of  view  of  the  electric  railway  companies  the  labor  problem 
is  fraught  with  immense  danger.  If  wages  keep  on  going  up,  even  though  the 
increases  can  be  shown  to  be  fully  justified  by  the  living  needs  of  the  employes, 
the  companies  will  be  financially  ruined  unless  they  are  able  to  efifect  radical 


536  Electric  Railway  Problem 

economies  in  the  use  of  labor  or  radical  increases  in  the  revenues  derived  from 
the  products  of  labor.  From  the  point  of  view  of  the  public,  if  wage  increases 
are  sufficient  to  make  it  impossible  for  the  companies  to  observe  their  public 
contracts  and  live,  the  result  may  easily  be  that  the  character  of  the  electric 
railways  as  a  public  utility  will  be  entirely  changed,  and  that  rate  limitation  or 
regulation  by  public  authority  will  become  obsolete.  If,  as  a  result  of  the  increas- 
ing demands  of  labor,  it  becomes  necessary  to  adopt  a  service-at-cost  plan  with- 
out any  maximum  fare,  or  to  inaugurate  a  system  of  unrestricted  state  regula- 
tion based  upon  the  service-at-cost  idea  and  the  rule  that  the  investors  are  entitled 
to  receive  a  fair  return  upon  their  capital  devoted  to  public  use,  the  public  is 
likely  to  find  itself  in  a  position  where  it  will  have  lost  the  protection  of  the  rule 
that  public  utility  rates  shall  not  be  more  than  the  reasonable  value  of  the  ser- 
vice to  those  who  desire  to  use  it,  and  if  that  rule  is  once  abrogated  with  respect 
to  local  transportation  service,  the  electric  railways  will  cease  to  be  a  public 
utility  in  the  accepted  sense  of  that  term.  Furthermore,  if  the  cost  of  the  labor 
element  in  electric  railway  operation  should  increase  to  such  a  point  as  to  make 
the  operation  of  electric  railways  economically  impossible  in  competition  with 
other  available  means  of  transportation,  the  public  would  lose  the  great  advan- 
tages which  it  has  heretofore  enjoyed  from  the  electric  railway  as  an  instrument 
of  public  service. 

Thus  far  I  have  been  discussing  the  labor  problem  from  the  point  of  view 
of  the  investors  who  have  contributed  or  are  to  contribute  capital  to  this  indus- 
try, and  from  the  point  of  view  of  the  car  riders  or  the  taxpayers  who  must  pay, 
in  one  way  or  another,  the  full  cost  of  the  service,  if  the  service  is  to  be  con- 
tinued. Under  these  circumstances  neither  the  investors  nor  the  general  public 
can  afford  to  pursue  the  policy  of  overlooking  the  labor  problem  or  neglecting 
to  come  to  full  understanding  of  the  labor  point  of  view.  It  is  to  be  feared  that 
in  the  past  too  many  street  railway  managers  and  too  many  car  riders  have  had 
no  thoughts  about  labor  except  from  the  standpoint  of  cost  and  opportunities 
for  profit.  The  managers  have  been  annoyed  by  it,  but  have  looked  upon  the 
men  as  so  many  live  rails,  live  motors  and  live  wires,  that  cause  trouble  if  not 
handled  circumspectly. 


Chapter  XLIV 
LABOR'S    PUBLIC    RELATIONS    RECOGNIZED 

It  cannot  be  denied  that,  as  a  sheer  element  in  the  cost  of  electric  railway 
service,  labor  has  become  a  problem  of  the  first  magnitude.  It  is  certain,  how- 
ever, that  this  problem  could  be  more  readily  solved  if  the  true  relations  of 
labor  to  the  industry  had  been  properly  understood  and  recognized  in  the  past. 
It  is  also  certain  that  the  labor  problem  from  the  standpoint  of  cost  cannot  now 
or  in  the  future  be  solved  without  such  an  understanding  and  recognition.  Labor 
defiant,  labor  disloyal,  labor  discontented,  labor  indiflferent,  or  even  labor  lazy 
will,  under  existing  conditions,  inevitably  break  the  back  of  the  electric  railways. 

The  first  great  failure  in  connection  with  the  street  railway  labor  problem 
has  arisen  from  the  fact  that  until  very  recently  labor  has  been  regarded  merely 
as  an  incidental  element  of  cost  for  which  the  public  assumed  little  or  no  respon- 
sibility. Franchises  have  been  granted  everywhere  to  promoters  or  capitalists 
whose  services  were  either  sought  or  accepted  by  the  public  in  the  development 
or  continuation  of  the  much  needed  local  transportation  service.  The  mayors 
and  the  common  councils,  the  state  legislatures  and  the  public  service  commis- 
sions have  dealt  not  with  the  great  groups  of  men  who  were  personally  to  pro- 
duce and  distribute  transportation  service,  but  with  the  capitalists  who  were  to 
put  up  the  money  or  with  their  representatives  who  were  to  assume  responsi- 
bility for  the  construction  and  operation  of  street  railway  lines.  From  the  point 
of  view  of  the  street  railway  franchise,  from  the  point  of  view  of  the  laws  pro- 
viding for  the  incorporation  of  electric  railway  companies,  and  even  from  the 
point  of  view  of  public  service  commission  laws  and  orders,  the  labor  problem 
has  been  almost  universally  ignored.  This  is  generally  true  even  in  the  most 
elaborate  and  up-to-date  contracts  entered  into  upon  the  occasion  of  the  resettle- 
ment of  the  public  relations  of  the  street  railways,  such  as  the  Chicago  settle- 
ment ordinances  of  1907,  the  New  York  subway  contracts  of  1913,  the  Kansas 
City  settlement  ordinance  of  1914,  the  Tayler  grant  inaugurating  service  at  cost 
in  Cleveland  in  1910,  the  new  Montreal  Tramways  contract  of  1918,  the  Massa- 
chusetts service-at-cost  legislation  of  1918,  and  the  Cincinnati  resettlement  con- 
tract of  that  year.  In  very  rare  instances  some  provision,  more  or  less  inade- 
quate, has  been  made  in  a  street  railway  franchise  reserving  to  the  city  the  right 
to  intervene  in  labor  disputes,  or  to  insist  upon  the  submission  of  all  such  dis- 
putes to  arbitration.  The  Des  Moines  street  railway  franchise,  granted  in  1915, 
is  one  of  these  few  exceptions  that  prove  the  rule.  That  franchise  contains  the 
following  provision : 

"Whenever  *  *  *  *  any  difference  or  differences  shall  arise  between  the  company  and 
its  employes  or  any  division  of  its  employes,  who  shall  be  engaged  in  any  line  of  labor,  about 
the  rights  or  obligations  existing  between  them,  and  the  difference  or  differences  are  in  regard 

537 


538  Electric  Railway  Problem 

to  a  matter  or  matters  which  might  be  lawfully  arbitrated,  and  not  herein  excluded  from 
arbitration,  or  some  other  method  provided  herein  or  by  law  or  by  contract  between  the  com- 
pany and  its  employes  for  arbitration,  then  the  company  or  its  employes  or  any  division  or 
organization  of  its  employes  of  the  city  may  require  such  question  or  questions  or  matter  or 
matters  to  be  submitted  to  arbitration.  ILach  of  the  parties  to  said  controversy  shall  appoint 
one  arbitrator  within  tive  days  after  written  notice  so  to  do  has  been  given  by  one  party 
to  said  controversy  to  the  other  party,  which  notice  shall  specify  in  writing  the  question  or 
matter  to  be  submitted  to  and  to  be  decided  by  said  arbitrators.'' 

The  two  arbitrators  so  appointed  are  required  to  proceed  at  once  to  decide 
the  questions  submitted  to  them,  and  it  they  cannot  agree  within  a  specified 
time  the  parties  to  the  controversy  are  to  appoint  a  third  arbitrator,  or  upon 
their  failure  to  do  so  the  two  arbitrators  themselves  are  to  select  a  third  ar- 
bitrator, and  the  board  of  three  thus  constituted  must  proceed  to  decide  by 
majority  vote  the  questions  submitted  for  their  determination.  In  case  either 
party  to  the  controversy  neglects  to  appoint  an  arbitrator,  or  in  case  they  or  the 
two  arbitrators  first  selected  are  unable  to  agree  upon  a  third  arbitrator,  the 
appointment  is  to  be  made  by  the  individuals  composing  the  Supreme  Court  of 
the  State  of  Iowa  or  a  majority  of  them.  The  procedure  of  arbitration  is  fur- 
ther described  in  section  15  of  the  ordinance,  as  follows: 

"It  is  further  provided  that  the  said  Board  of  .\rbitrators  may  adopt  such  rules,  regula- 
tions and  methods  of  procedure  governing  the  hearings  l)efore  the  board  as  it  may  deem 
proper.  It  shall  give  reasonable  notice  to  each  of  the  parties  to  said  controversy  of  the  time 
and  place  of  hearings  upon  the  questions  and  matters  submitted  to  it.  and  such  parties  shall 
have  the  right  to  appear  by  counsel  before  the  board  and  to  oflFer  proofs  and  testimony  on 
behalf  of  their  claims,  and  each  of  the  parties  shall  furnish  said  board  such  information  as 
may  be  in  its  possession  and  as  is  desired  by  said  Ixxard ;  provided,  further,  that  the  board 
may  limit  tlie  e.xtcnt  and  time  of  hearings,  and  if  said  board  shall,  in  its  opinion,  not  have 
sufficient  time  within  which  fully  to  hear  and  determine  the  questions  and  matters  which 
are  for  it  to  determine  within  the  limitations  and  times  as  herein  fi.xed.  then  it  may  extend 
the  time  within  which  it  is  to  reach  an  agreement,  but  not  to  exceed  thirty  days  beyond 
the  times  herein  stipulated.  .Ml  arbitrators  shall  be  persons  competent  to  act  on  the  ques- 
tions, matters  and  things  which  are  submitted  to  them. 

"All  expenses  of  every  kind  incurred  by  any  board  of  arbitration  appointed  hereunder, 
including  a  per  diem  charge  of  not  to  exceed  $25  for  each  of  the  arbitrators,  shall  be  fixed 
by  the  Board  of  .Arbitration  as  a  part  of  their  award,  and  shall  be  paid  as  directed  by  said 
board,  except  that  in  the  arbitration  of  labor  disputes  each  party  shall  pay  the  expense  of 
their  own  arbitrator  and  the  third  arbitrator  .shall  be  paid  jointly  by  both  parties:  and  the 
amount,  if  any,  of  such  expense  which  the  company  is  required  to  pay  shall  be  charged  to 

operating  expenses. 

******** 

"The  company  by  the  acceptance  of  this  ordinance  agrees  to  continue  to  contract  with 
its  employes  and  to  insert  in  all  contracts  made  with  its  employes,  or  any  organization  or 
division  of  such  employes,  a  clause  binding  all  the  contracting  parties  to  an  observance  of 
and  compliance  with  all  of  the  provisions  of  this  ordinance,  and  especially  with  the  provisions 
of  sections  fifteen  and  sixteen  relating  to  arbitration." 

The  award  of  the  board  of  arbitration,  made  in  writing  and  served  upon  the 
company  and  tiie  employes,  is  to  be  binding  ujion  both  ])arties,  but  it  is  provided 
that  the  board  in  fixing  the  time  within  which  its  findings  are  to  be  made  effec- 
tive "shall  in  no  case  change  or  modify  any  of  the  terms  of  the  contract  existing 
between  the  company  and  its  employes." 

I  cite  tlicsc  provisions  of  the  Des  Moines  franchise  because  they  recognize 
the  existence  of  a  public  interest  in  the  relations  between  an  electric  railway 
company  and  its  employes.  It  will  be  remembered  that  in  the  list  of  strikes 
during  the  year  1919,  given  in  the  preceding  chapter  of  this  .\nalysis,  is  one  for 
Des  Moines  which  lasted  eight  days  and  entailed  a  loss  of  approximately  $18,000 
in  gross  revenues.     The  Des  Moines  franchise  is  not  a  service-at-cost  contract, 


Labor's  Public   Relations  539 

although  in  many  respects  it  was  written  along  distinctly  modern  lines.  It  has 
not  proven  to  be  an  unfailing  talisman  for  the  solution  of  the  local  street  railway 
problems  of  the  city.  This  may  be  due,  in  part,  to  the  city's  failure  to  insist 
upon  a  rock-bottom  valuation  at  the  time  the  settlement  was  made.  At  any  rate, 
Des  Moines  is  one  of  the  cities  to  which  the  Secretaries  of  Commerce  and  Labor 
referred  in  their  letter  to  the  President  under  date  of  May  15,  1919.  The  prop- 
erty is  in  the  hands  of  receivers.  That  the  arbitration  provision  of  the  franchise 
did  not  prevent  a  strike  of  the  trainmen  in  August,  1919.  is  due,  apparently,  to 
the  alleged  inability  and  refusal  of  the  receivers  to  pay  the  increase  awarded  to 
the  men.  The  story  is  told  by  Mr.  Emil  G.  Schmidt,  formerly  president  and 
now  one  of  the  receivers  for  the  company,  in  a  letter  to  the  Executive  Secretary 
of  the  Commission,  dated  December  12,  1919.     Mr.  Schmidt  says : 

"On  July  28.  1919.  a  board  of  arbitration  awarded  the  trainmen  a  wage  increase  of 
13c  an  hour,  ettective  March  1,  1919.  The  receivers,  however,  were  entirely  out  of  funds 
with  which  to  meet  this  demand,  and  after  a  strike  lasting  from  August  12  to  August  20, 
the  Federal  Court  ordered  the  receivers  to  pay  one-third  of  the  back  pay  out  of  funds  then 
set  aside  for  interest  and  taxes.  On  October  9th,  however,  Judge  Wade  set  aside  the  arbi- 
tration award  of  July  28th  on  account  of  the  provisions  of  such  award  not  having  been 
met  either  by  the  finding  of  sufficient  evidence  on  August  4th  that  the  receivers  were  deriving 
sufficient  funds  to  meet  the  increased  wages,  or  the  adoption  of  an  ordinance  by  the  vote 
of  the  people  which  would  provide  for  an  increased  revenue  sufficient  to  meet  the  increase 
in  wages  over  and  above  existing  cost  of  operation  and  fixed  charges.  This  election  was 
held  on  September  22nd,  but  the  franchise  amendment  was  defeated.  The  setting  aside  of 
the  arbitration  award  above  referred  to  therefore  put  into  operation  the  old  scale  of  wages 
in  effect  prior  to  March  1.  1919. 

"A  new  board  of  arbitration  was  then  appointed,  and  the  trainmen  were  awarded  an 
increase  of  10c  per  hour,  retroactive  to  March  1,  1919,  or  practically  3c  an  hour  less  than  the 
award  of  July  28th." 

The  threatened  strike  on  the  steam  railroads  of  the  country  in  the  summer 
of  1916,  averted  by  the  passage  of  the  Adainson  law,  and  the  actual  strikes  dur- 
ing that  same  period  on  both  the  rapid  transit  and  the  surface  car  lines  of  old 
New  York,  brought  prominently  to  public  attention  the  vital  character  of  the 
public  interest  in  labor  disputes  on  transportation  lines  and  the  serious  nature 
of  the  mistake  made  in  permitting  the  companies  and  the  men  to  fight  out  their 
differences  without  regard  to  the  paramount  interest  of  the  public  in  the  con- 
tinuity of  service.  Legislative  measures  were  proposed  in  New  York  designed 
to  enforce  the  public  interest  and  to  compel  the  would-be  belligerents  in  the 
public  utility  field  to  settle  their  disputes  without  a  suspension  of  service.  But 
America's  entrance  into  the  war  came  on,  and  no  agreement  having  been  reached 
on  this  proposed  legislation,  the  matter  was  dropped  and  the  solution  of  the 
problem  was  left  to  the  patriotism  of  the  parties  and  to  the  good  offices  of  the 
Federal  Government  with  its  "big  stick"  of  war  necessity. 

The  National  W^ar  Labor  Board  succeeded  in  preventing  or  quickly  stop- 
ping street  railway  strikes,  but  it  did  so  largely  by  giving  its  approval  to  the 
demands  of  labor  without  having  authority  to  make  any  corresponding  adjust- 
ment between  the  companies  and  the  public.  The  triangular  position  of  the 
parties  was  recognized,  but  there  was  still  a  failure  in  the  coordination  and  free 
adjustment  of  their  respective  interests.  With  the  War  Labor  Board  gone  and 
nothing  to  take  its  place,  we  are  again  in  a  condition  where  the  public  has  no 
authentic  and   direct   relations   with   labor.     The   responsibility   of    labor   to   the 


540  Electric  Railway  Problem 

public  is  getting  to  be  pretty  clearly  recognized  by  the  public,  and  the  public's 
responsibility  to  labor  is  intermittently  recognized  by  labor.  Unfortunately,  as 
yet  there  is  comparatively  little  mutual  recognition  of  responsibility.  The  defini- 
tion of  this  mutual  responsibility  and  its  clear  recognition  by  both  parties  may 
almost  be  said  to  be  the  labor  problem  in  the  electric  railway  field.  One  thing 
may  be  put  down  as  beyond  the  realm  of  controversy,  and  that  is  this,  namely, 
that  neither  the  public  nor  labor  can  longer  afford  to  put  up  with  mere  indirect 
mutual  relationships  via  the  companies.  Of  course,  much  can  be  said  for  the 
possibilities  of  improvement  in  the  relations  between  the  public  and  the  com- 
panies and  between  the  companies  and  labor,  but  the  real  problem  of  electric 
railway  service  and  the  payment  for  it  cannot  be  solved  without  the  establish- 
ment of  direct  relations  upon  a  sound  basis  between  the  public  and  labor. 
Whether  this  can  be  accomplished  short  of  public  operation  remains  to  be  seen. 
At  the  very  least,  it  means  the  assumption  by  the  public  of  ultimate  responsi- 
bility for  operating  policies  in  one  of  the  largest  and  most  important  fields  of 
management. 


Chapter  XLV 
LIMITATION    OF    "THE    RIGHT    TO    STRIKE" 

From  the  public  point  of  view  it  is  getting  to  be  as  intolerable  that  labor 
should  enjoy  the  privilege  of  suspending  a  public  utility  service  whenever  the 
employes  think  that  they  are  not  being  properly  compensated  or  are  not  being 
permitted  to  work  under  proper  conditions  as  it  would  be  for  capital  to  go  on 
strike  for  more  pay  or  greater  security  in  case  of  a  fundamental  disagreement 
with  the  public.  It  is  universally  admitted  that  labor  cannot  be  drafted  into 
public  service  except  as  a  war  measure  and  that  no  man  or  group  of  men  can 
be  prevented  from  leaving  the  public  service  upon  proper  notice  if  they  weary 
of  it  or  believe  that  they  can  better  their  condition  elsewhere.  Likewise,  it  is 
admitted  that  capital  cannot  be  commandeered  in  times  of  peace  for  use  in  the 
expansion  of  local  transportation  facilities,  and  that  individual  investors  cannot 
be  prevented  from  withdrawing  from  the  street  railway  field  if  they  can  find 
substitutes  to  take  their  place.  It  is  clear  that  in  this  respect  labor  has  the 
advantage  of  capital.  Labor  can  withdraw  without  providing  a  substitute,  while 
capital  in  most  cases  cannot  do  so,  as  it  is  restrained  both  by  the  inherent  diffi- 
culty of  transforming  its  function  without  great  loss  and  also  by  its  obligation 
not  to  leave  the  public  in  the  lurch. 

The  electric  railways  can  render  no  transportation  service,  either  good  or 
bad,  unless  the  cars  run.  Continuity  of  operation  is  of  the  essence  of  the 
service.  The  public  cannot  afford  under  any  conditions  to  have  an  essential 
public  service  cease,  whether  it  be  from  the  breakdown  of  the  investment,  from 
the  unwillingness  of  the  men  to  perform  the  service  under  the  conditions  pre- 
scribed, or  from  the  determination  of  rrlen  who  have  been  engaged  in  perform- 
ing the  service  that  nobody  else  shall  do  it  when  they  quit.  Obviously,  capital 
must  be  paid  the  wage  that  is  necessary  to  attract  a  supply  of  capital.  Here 
old  capital  is  more  or  less  at  the  mercy  of  the  public,  except  as  it  is  protected 
by  contract  or  the  community's  sense  of  equity.  Obviously,  also,  labor  must  be 
paid  the  wage  that  will  retain  the  present  employes  or  attract  new  ones  in  suffi- 
cient numbers  and  with  sufficient  qualifications  to  produce  and  distribute  the 
necessary  service. 

These  things  cannot  be  disputed  by  the  public.  But  the  public  claims  the 
right  to  get  capital  m  the  cheapest  market.  Yet  even  this  claim  is  not  always 
enforced.  Lender  some  franchises  and  under  many  regulatory  orders  an  arbi- 
trary rate  of  return  far  in  excess  of  the  necessary  cost  of  capital  has  been 
allowed.  For  example,  if  eight  per  cent  or  even  ten  per  cent  is  fixed  as  a  fair 
return  either  on  the  entire  investment  or  upon  that  portion  of  it  represented  by 
stock,  the  existing  stockholders  often  retain  to  themselves  the  privilege  of  sub- 

S41 


542  Electric  Railway  Problem 

scribing  for  additional  stock  at  par,  even  though  on  the  open  market  the  shares 
would  command  a  big  premium.  Yet,  fundamentally,  the  public  does  not  admit 
that  it  is  bound  to  pay  more  than  the  necessary  cost  of  capital,  and  all  that  is 
now  theoretically  claimed  on  behalf  of  the  electric  railway  companies  is  a  rate 
of  return  high  enough  to  attract  new  capital  in  the  freedom  of  the  money  mar- 
ket. The  companies  do  not  frankly  claim,  and  the  public  certainly  does  not  admit, 
that  the  investors  who  are  in  shall  be  permitted  to  erect  an  artificial  barrier 
against  new  investors  and  claim  more  for  themselves  than  they  could  if  the 
barrier  was  down.  It  is  true  that  in  the  Cleveland  seven-per-cent-return 
arbitration  proceeding  the  company  claimed  for  the  existing  investors  the  going 
rate  of  wages  for  money,  notwithstanding  the  contract  under  which  they  invested 
the  money  at  a  given  rate  of  return,  but  the  city's  consent  that  this  demand 
should  be  arbitrated  was  obtained  under  duress  and  was  not  an  admission  of 
the  propriety  of  the  claim.  Now,  when  it  comes  to  labor  the  question  arises: 
Shall  men  be  treated  differently  from  money?  Shall  the  employes  of  a  street 
railway  company  be  paid  the  going  rate  of  wages,  subject  to  the  obligations  of 
term  contracts,  or  shall  they  have  the  right  through  organization  and  the  strike 
to  demand  and  secure  higher  wages  than  the  services  they  render  would  com- 
mand in  the  open  "labor  market"?  Here  we  come  up  against  the  distinction 
often  made  between  capital  and  labor  based  upon  the  conception  that  labor  is 
not  a  commodity  but  a  service,  a  human  relation,  and  that  the  general  welfare 
of  the  community  demands  that  labor  shall  be  freed  from  the  inexorable  law  of 
supply  and  demand  which  controls  the  labor  market,  so-called.  On  this  theory, 
the  employes  engaged  in  a  public  service  such  as  local  transportation  have  the 
right  to  determine  for  themselves  what  compensation  they  shall  receive  and 
under  what  conditions  they  shall  work,  and  have  the  further  right,  if  their  terms 
are  not  conceded  by  the  management,  to  cease  to  work — not  only  that,  but  to 
compel  the  suspension  of  the  service.  A  strike  is  not  the  wholesale  resignation 
of  the  employes,  but  the  wholesale  quitting  of  work  without  quitting  the  job 
or  giving  place  to  others  who  might  be  willing  to  do  the  work  under  the  pre- 
scribed conditions.  The  "right  to  strike."  as  it  is  commonly  understood  in  the 
electric  railway  business,  is  the  right  of  the  men  to  take  a  vacation  without  pay 
and  the  right  of  all  of  them  to  take  it  at  one  time  and  practically  without  notice ; 
it  is  the  right  by  concerted  action  to  interrupt  the  service  and  keep  it  interrupted 
until  tile  management  conies  to  terms  with  the  strikers. 

If  it  be  once  admitted  that  transportation  is  an  essential  public  service,  the 
so-called  "right  to  strike"  as  I  have  defined  it  is  preposterous  in  a  civilized 
conniuinity.  It  is  the  right  to  declare  and  wage  private  warfare  while  public 
interests  arc  paralyzed.  The  public  cannot  possibly  admit  the  right  of  any  body 
of  employes  to  stop  the  public  wagon — essential  public  service  must  go  on.  From 
the  standpoint  of  the  public,  the  case  again.st  the  "right  to  strike"  in  the  electric 
railway  business  is  absolutely  clear.  The  public  admits  that  the  employes  are 
under  obligation  to  it.  Hut  here  conies  in  the  huntan  factor.  The  men  main- 
tain that  their  first  privilege  and  their  first  duty  is  self-preservation  and  that 
their  obligations  to  the  public  are  of  a  secondary  nature.  The  public,  in  the 
broad  sense  of  the  term,  by  which  is  meant  something  more  than  the  car  riders 


The  Right  to  Strike  543 

as  a  class — in  fact,  the  all-inclusive  community  of  which  the  investors  and  the 
operatives  are  a  part,  as  well  as  everybody  else — has  a  vital  interest  not  only  in 
continuity  of  transportation  service,  but  also  in  the  welfare  of  the  men  who 
render  the  service.  This  public  cannot  tolerate  the  "right  to  strike",  in  such  a 
service,  but  neither  can  it  afford  to  take  away  froinj  a  large  group  of  citizens 
the  ultimate  means  of  self-help,  unless  it  is  both  willing  and  diligent  to  set  up 
the  machinery  of  arbitration  by  which  the  informed  and  responsible  judgment 
of  society  can  be  substituted  for  the  ex  parte  judgment  of  the  employes  them- 
selves in  fixing  wages,  hours  and  conditions  of  work.  The  "right  to  strike" 
against  the  decisions  of  such  a  tribunal  cannot  be  recognized.  Individual  em- 
ployes, aggrieved  at  its  decisions,  would  have  two  recourses :  they  could  resign 
upon  proper  notice  in  order  to  improve  their  condition,  or  they  could  resort  to 
the  court  of  public  opinion  and  the  ballot-box  in  an  effort  to  get  the  judgment 
overruled ;  but  the  right  by  concerted  effort  to  interrupt  the  service  until  the 
informed  judgment  of  society  would  consent  to  be  overruled  by  their  interested 
judgment  cannot  for  a  moment  be  admitted  in  a  coherent,  organized  democracy. 

Labor  is  pretty  consistently  and  rather  violently  opposed  to  the  limitation 
of  the  "right  to  strike,"  even  in  essential  public  industries  such  as  transporta- 
tion. This  unwillingness,  it  seems  to  me,  is  proof  of  the  fact  that  our  democracy 
is  not  yet  fully  coherent  and  organized.  Labor  feels  that  it  is  something  apart 
from  the  government ;  it  does  not  feel  its  own  solidarity  with  the  rest  of  the 
community  in  its  political  manifestations.  The  government,  like  the  companies, 
is  regarded  as  something  set  off  against  the  men,  something  not  theirs,  but  their 
enemy's.  The  labor  problem  cannot  be  solved  until  government  wins  the  sup- 
port of  labor;  until  labor  ceases  to  be  an  unassimilated,  undigested  lump  in  the 
political  stomach  of  the  community.  And  so,  while  the  community  cannot  for 
a  moment  admit  the  "right  to  strike"  in  public  service  employments,  it  cannot 
solve  the  problem  merely  by  prohibiting  strikes.  It  must  first  recognize  its  own 
responsibility  to  labor  and  set  up  the  tribunals  through  which  the  legitimate 
interests  of  labor  will  be  conserved,  but  with  the  fullest  protection  that  can  be 
guaranteed  that  labor  engaged  in  public  service  will  share  with  capital  the  dis- 
advantages as  well  as  the  advantages  that  arise  out  of  their  voluntary  devotion 
to  work  in  which  the  public  interest  is  predominant  and  with  respect  to  which 
the  ultimate  public  rights  cannot  safely  be  abrogated. 

It  is  unfortunate  that  the  Proceedings  contain  so  little  bearing  directly  upon 
this  proposed  solution  of  the  labor  problem.  Indeed,  we  ought,  perhaps,  to  call 
it  merely  a  solution  of  one  important  aspect  of  the  labor  problem,  namely,  con- 
tinuity of  service,  with  respect  to  which  the  public  interest  and  the  immediate 
interests  of  men  and  money  combine.  In  time  of  strike  the  public  gets  no 
service,  the  men  get  no  wages,  and  capital  makes  no  profit. 

Mr.  Thomas  L.  Sidlo,  of  Cleveland,  fresh  from  the  experiences  of  the 
Cleveland  Railway  Company  and  the  City  of  Cleveland  with  the  electric  railway 
problem,  recommends  compulsory  arbitration,  as  will  be  seen  from  the  following 
extract  taken  from  pages  1588  and  1589  of  the  Proceedings: 

"This  is  the  most  vexing  and  obstreperous  problem  confronting  the  street  railway  indus- 
try'.    From  present   indications  it  is  likely  to  be   still  more  troublesome   in  the   future.     No 


544  Electric  Railway  Problem 

adequate  solution  has  yet  been  found.  In  recent  times  street  railway  employes  have  found 
the  strike  an  unfailing  weapon  to  enforce  their  demands.  At  present  it  seems  as  if  there 
were  no  definite  limit  to  its  possibilities.  Some  system  of  bonuses  or  some  plan  of  "profit- 
sharing'  must  be  devised  to  bring  the  employes  into  the  partnership  relation  and  to  force 
them  thus  to  accept  the  responsibility  their  type  of  employment  owes  to  the  public.  The 
need  for  some  such  solution  is  irresistible,  unless  the  present  situation  with  regard  to  wages 
changes  in  a  very  marked  way.  In  recent  years  street  railway  labor,  although  not  of  a  high 
order  of  skill,  has  not  been  in  competition  with  the  rest  of  the  labor  market.  Wages  have 
been  determined  by  the  coercive  strength  of  tlie  'local.'  The  suggestion  that  seems  most 
hopeful  at  this  time  contemplates  a  system  of  liberal  annual  percentage  bonuses,  based  on  a 
schedule  of  seniority  and  continuity  of  service,  and  with  no  other  "strings'  to  the  plan. 

"An  aspect  of  the  problem  that  is  not  at  all  clear  relates  to  the  question  of  the  extent  to 
which  public  officials  should  take  a  hand  in  labor  disputes.  From  one  standpoint  a  'hands-off' 
policy  seems  highly  desirable.  This  has  the  elementary  advantage  of  leaving  the  decision 
of  the  dispute  to  its  merits.  On  the  other  hand,  allowing  the  interested  parties  to  fight  it 
out  to  the  bitter  end  usually  means  public  suffering,  an  emerging  of  the  mob  spirit,  violence, 
etc.  For  that  reason  it  is  necessary  for  the  public  interest  to  be  represented.  The  best  way 
to  achieve  this  recognition  of  the  public  interest  is  through  compulsory  arbitration  of  all 
labor  difficulties.  This  method  will  settle  disputes  without  general  punishment,  will  protect 
the  rights  of  the  employes,  and  will  not  seriously  interfere  with  the  employment  relation 
or  break  down  discipline.     Its  introduction  in  this  country  has  already  tx'en  delayed  too  long." 

The  special  street  i^aihvay  commission  of  Massachusetts,  which  filed  its 
report  in  November,  1919,  recommended  legislation  to  prevent  strikes  on  local 
transportation  lines.     With  respect  to  the  labor  problem  the  report  says: 

"Most  of  this  report,  and  all  those  of  like  tenor  that  have  preceded  it,  have  been  primarily 
concerned  with  the  relation  of  capital  to  the  street  railway  service  of  the  Commonwealth. 
There  is,  however,  another  indis[)ensable  element,  and  that  is  labor.  This  community  and 
others  have  within  a  short  time  l)een  paralyzed  in  their  commercial  and  social  activities  by 
strikes  upon  street  railway  systems.  Moreover,  all  of  our  communities  are  living  under  the 
shadow  of  threatened  strikes.  This  Commission  would  fail  in  its  dutj  if  it  did  not  suggest 
some  method  by  which  continuity  of  street  railway  service  may  l)e  assured. 

""The  distinction  I)etween  the  carrying  on  of  public  utilities  and  of  a  private  enterprise 
is  familiar.  In  the  former,  the  public  interest  is  paramount.  The  public  utility  may  be 
carried  on  by  the  state  or  by  individuals ;  it  may  receive  grants  from  the  state ;  may  exercise 
the  power  of  eminent  domain.  (Jn  the  other  hand,  the  rates  it  may  charge  are  regulated, 
the  quality  and  sufficiency  of  its  .service  supervised,  its  financing  controlled. 

'"Once  an  occupation  is  one  of  public  necessity  the  service  is  charged  with  a  peculiar 
obligation,  a  trust  of  which  one  should  not  divest  himself  .it  will.  Life  itself  is  involved  in 
the  continuous  operation  of  our  pulilic  utilities— the  furnishing  of  water,  of  light  and  heat, 
as  well  as  of  transportation.  No  one  need  enter  this  service  unless  he  chooses,  and  once 
engaged  in  it  should  not  Ix-  permitted  to  quit  in  such  a  manner  as  to  paralyze  it.  A  strike 
upon  a  street  railway  brings  the  greatest  suffering  to  those  who  can  least  endure  it;  the 
well  to  (In  may  Iw  incnnvenicnced.  but  they  are  not  seriously  injured.  It  is  the  great  army 
of  wage  workers — men  and  women — who  are  hard  hit.  They  depend  upon  this  transporta- 
tion to  get  to  and  from  their  work.  When  it  ceases  they  suffer,  and  the  mere  fact  that  it  may 
cease  causes  apprehension. 

".\  strike  of  a  single  day  upon  the  ele\-ated  causes  a  loss  directly  and  indirectly  of  several 
hundred  thousand  dollars. 

""We  recommend  a  method  for  preventing  strikes  on  street  railways  under  public  control 
by  making  it  unlawful  for  persons  in  that  ser\'icc,  by  concerted  action  to  fail  to  perform 
from  day  to  day  their  respective  duties. 

""Provision  should  l)e  made  for  an  agreement  between  employer  and  employe  to  submit 
questions  relating  to  wages  and  working  conditions  to  arbitration  by  a  t>oard  to  \ie  selected 
as  shall  Im-  provide<l  in  the  agreement,  failing  in  the  creation  of  which  the  Public  Service 
Commission  shall  act. 

■".Xny  person  violating  the  provisions  of  the  act  would,  ipsn  facio,  be  discharged  from 
his  position  and  Ix-conie  ineligible  to  reemployment  in  such  service  for  a  periixl  not  exceed- 
ing one  year." 

The  commission  submitted  with  its  report  the  draft  of  a  bill  "'to  secure 
cnntiiniity  of  stT\ici'  on  street  railways  under  public  control."  Tlu-  provisions  of 
this  bill  were  as  follows: 

"Section  1.  It  shall  he  unlawful  for  any  officers,  employes,  agents  or  other  persons  in 
the   service   of    any    street    railway    in    the    Commonwealth,    publicly    managed    or   controlled. 


The  Right  to  Strike  545 

by  concerted  action,  combination  or  agreement,  to  hinder,  obstruct  or  prevent  the  continuity 
of  service  of  such  street  railway,  or  to  threaten  such  hindrance,  obstruction  or  prevention. 

"Section  2.  The  duly  constituted  operating  officers  of  any  street  railway  system,  and 
every  person  or  association  of  persons  in  its  service,  shall,  by  written  instrument  or  instru- 
ments, agree  to  submit  to  arbitration  by  a  board  or  boards,  whose  decision  shall  be  final, 
to  be  selected  as  therein  provided,  every-  difference  or  dispute  relating  to  wages  or  compen- 
sation, hours  of  labor  or  working  conditions,  and  any  disputes  or  dittercnccs  that  may  arise 
in  the  course  of  the  operation  or  management  of  such  system,  and  to  abide  by  the  findings, 
determination  or  award  of  such  board.  Copies  of  all  such  written  instruments  shall  be  filed 
with  the  Public  Service  Commission. 

"Section  3.  The  board  shall  hear  the  parties  or  their  representatives  and  determine  all 
matters  in  dispute,  and  such  determination  shall  be  in  force  for  such  period  of  time  as  the 
board  may  fix.  To  the  extent  that  the  matters  in  issue  are  controlled  by  statute  or  may 
require  legislation  the  board  may  make  recommendation  to  the  general  court,  with  drafts 
of  such  proposed  legislation  as  may  be  necessary  to  carry  the  findings  or  recommendations 
into  effect. 

"Section  4.  In  case  of  the  failure  of  the  parties  to  complete  the  selection  of  an  arbitra- 
tion board  in  accordance  with  said  agreement  or  to  make  provision  therefor,  within  sixty 
days  of  a  request  by  either  party,  or  by  the  Governor,  for  the  selection  of  such  a  board, 
the  Public  Service  Commission  shall  serve  as  such  a  board,  and  shall  exercise  all  the  powers 
set  forth  in  the  preceding  section. 

"Section  5.  Any  person  violating  the  provisions  of  section  one  shall  thereupon  be  dis- 
charged from  tlie  service,  and  his  continuance  in  such  service,  or  his  reemployment  or 
reappointment  in  any  capacity  therein  for  a  period  not  e.xceeding  one  year,  as  the  Public 
Service  Commission  may  determine,  shall  be  unlawful." 

It  will  be  observed  that  this  proposed  measure  purports  to  relate  only  to 
street  railways  "publicly  managed  or  controlled,"  although  the  provisions  of 
section  2  seem  to  be  broad  enough  to  apply  to  all  street  railways  within  the  state. 

One  of  the  members  of  the  commission,  Mr.  Roland  W.  Boyden,  in  a  sup- 
plemental statement,  expressed  the  opinion  that  "the  measure  proposed  for  pre- 
venting strikes  should  not  be  limited  to  publicly  controlled  street  railways," 
and  added:  "Also,  I  should  prefer  to  omit  the  penalty,  placing  reliance  upon 
the  agreement,  backed  by  the  men's  sense  of  public  obligation  and  the  force  of 
public  sentiment." 

When  this  measure  came  before  a  special  session  of  the  legislature,  late  in 
1919,  the  employes,  through  their  counsel,  Mr.  James  H.  Vahey,  strenuously 
opposed  its  enactment  into  law.  Mr.  Vahey  maintained  that  the  policy  of  com- 
pulsory arbitration  as  embodied  in  this  bill  was  in  violation  of  the  fundamental 
guaranties  of  the  United  States  Constitution.  In  the  first  place,  he  urged  that 
the  bill  would  violate  the  provisions  of  the  Fourteenth  Amendment  providing 
for  liberty  of  contract.  Upon  this  point  he  cited  the  decisions  of  the  United 
States  Supreme  Court  in  Adair  v.  United  States  (208  U.  S.  161)  and  Coppage 
i\  Kansas  (236  U.  S.  1).  In  particular  he  cited  the  following  words  quoted  by 
Mr.  Justice  Pitney  in  the  Coppage  case  froin  the  opinion  of  the  Kansas  Supreme 
Court: 

"Any  act  of  the  legislature  that  would  undertake  to  impose  on  an  employer  the  obliga- 
tion of  keeping  in  his  service  one  whom,  for  any  reason,  he  should  not  desire,  would  be  a 
denial  of  his  constitutional  right  to  make  and  terminate  contracts  and  to  acquire  and  hold 
property.  Equally  so  would  be  an  act  the  provisions  of  which  should  be  intended  to  require 
one  to  remain  in  the  service  of  one  whom  he  should  not  desire  to  serve.     ****•• 

Applying  this  language  to  the  proposed  Massachusetts  act,  Mr.  \'ahey  said : 

"An  extraordinary  situation  would  be  presented  in  this  Commonwealth  if  the  proposed 
legislation  were  adopted.  The  employes  of  two  street  railway  corporations  would  be  coerced 
against  their  will  to  continue  in  service.  The  fact  that  a  violation  of  Section  1  would  not 
necessarily   disentitle    striking   employes    from    seeking    employment    elsewhere    is    no   answer 


546  Electric  Railway  Problem 

to  the  constitutional  objections  I  have  been  discussing.  It  needs  no  argument  to  convince 
>ou  that  they  would  be  blacklisted  wherever  they  went,  and  would  have  great  difficulty  in 
obtaining  employment." 

Mr.  \'ahey  also  contended  that  the  provisions  of  the  proposed  legislation 
were  repugnant  to  the  "equal  protection"  clause  of  the  Fourteenth  .Amendment. 
He  took  this  view  upon  the  ground  that  the  act  was  discriminatory  insofar  as 
it  purported  to  apply  to  the  employes  of  two  street  railways  only,  namely,  the 
Boston  Elevated  Railway  and  the  Eastern  Massachusetts  Street  Railway,  both  of 
which  were  under  "public  control,"  as  that  term  is  now  used  in  Massachusetts. 

He  also  contended  that  the  proposed  legislation  would  create  involuntary 
servitude  and  therefore  fall  foul  of  the  Thirteenth  Amendment.  In  this  con- 
nection he  said: 

"The  right  to  strike  is  the  only  final  defense  of  the  worker  against  oppression.  It  is 
the  only  weapon  readily  available,  the  use  of  which  he  tlioroughly  understands.  The  right 
is  often  more  powerful  than  its  exercise  would  be.  Knowledge  of  the  power  of  the  workers 
to  act  eflfectively,  if  a  substantial  measure  of  justice  is  not  done  them,  is  often  the  only  influ- 
ence felt  by  a  mean  employer.  In  competitive  industry  the  mean  employer  drags  down  the 
standards  for  the  whole  trade.  If  such  an  employer  knew  that  there  was  no  effective  power 
back  of  a  demand,  or  if  he  knew  that  that  power  must  be  held  in  abeyance  for  a  definite 
period,  he  would  take  every  advantage  afforded  by  that  knowledge." 

Here  Mr.  \'ahey  fails  to  distinguish  between  a  private  employer  in  a  com- 
petitive industry  and  a  [lublic  employer  in  the  electric  railway  field.  For  a 
legislative  body  to  admit  the  force  of  this  particular  argument  would  be  to 
admit  that  the  public,  whom  the  legislature  represents,  might  prove  to  be  a 
"mean  employer."  The  fact  that  labor  often  looks  upon  society  as  now  organ- 
ized as  antagonistic  to  its  interests  and  as  essentially  identical  with  organized 
capital  perhaps  receives  some  support  from  language  which  Mr.  X'ahey  quoted 
from  a  dissenting  opinion  of  Mr.  Justice  Oliver  Wendell  Holmes,  rendered 
when  he  was  a  member  of  the  supreme  judicial  court  of  Massachusetts.  The 
reference  is  to  the  case  of  I'cgclahn  v.  Giiiitiicr.  reported  in  167  Massachusetts, 
where,  at  page  107,  Justice  Holmes  used  the  following  language: 

"One  of  the  eternal  conflicts  out  of  which  life  is  made  up  is  that  between  the  effort  of 
every  man  to  get  the  most  he  can  for  his  services,  and  that  of  society,  disguised  under  the 
name  of  capital,  to  get  his  .services  for  the  least  possible  return.  Combination  on  the  one 
side  is  patent  and  powerful.  Combination  on  the  other  is  the  necessary  and  desirable  counter- 
part, if  the  tiattle  is  to  be  carried  on  in  a  fair  and  equal  way." 

Continuing  his  argument  that  the  proposed  legislation  would  mean  involun- 
tary servitude  for  the  electric  railway  employes  affected  by  it.  Mr.  V'ahey  said: 

"Vou  will  observe  that  in  Section  1  of  the  pro|X)scd  legislatioii  no  reference  is  made  to 
the  term  strikf.  the  prohibition  U-ing  confined  to  any  concerted  action,  combination  or  agree- 
inent  which  hinders,  obstructs  or  prevents  the  continuity  of  .service  of  a  street  railway  pub- 
licly managed  Reduced  to  its  final  analysis,  that  section  really  means  something  more  than 
a  strike,  which  may  often  presupinisc  a  resumption  of  empluynient.  Kor  example.  suppo.--e 
that  the  employes  of  the  Boston  Klevated  Kailway  Company  liecome  dissatisfied  with  their 
conditions  of  emplnvmeiit  and  are  unable  to  get  them  changed  by  the  com|iany.  and  assume 
that  the  Public  .Service  Connnission.  nNiut  which  I  shall  later  on  have  something  to  say.  acts 
as  an  arbitration  loard  and  lays  down  principles  and  policies  which  these  street  railway 
employes  think  arc  unjust,  and  that  they  also  feel  that  it  should  Ix-  futile  in  any  other  arbi- 
tration l)cfore  the  Public  Service  Commission  to  have  those  policies  and  principles  modified. 
what  then?  .According  to  Section  1,  if  they  leave  their  employment  with  no  intention  of 
going  lack  into  the  service  of  the  Boston  Rlevated  Railway  Comjiany,  they  arc  doing  some- 
thing which  is  prohibited  by  law  and  the  result  of  which  might  make  it  irnpossihie  for  them 
to  secure  employment  elsewhere  for  reasons  heretofore  slated.  In  other  words,  any  con- 
certed   action,    combination    or   agreement    which    tends    to   hinder,    obstruct    or    prevent    the 


I 


The  Right  to  Strike  547 

continuity  of  scr\'ice  of  a  street  railway  publicly  managed  is  declared  unlawful  under  any 
circumstances.  If  this  is  not  involuntary  servitude,  I  confess  I  do  not  understand  that 
expression." 

Oil  the  ground  that  one  of  the  companies  affected  by  the  proposed  legisla- 
tion, namely,  the  Eastern  Massachusetts  Street  Railway  Company,  was  not  con- 
fined to  the  State  of  Massachusetts  in  its  operation,  Mr.  Vahey  also  maintained 
that  the  proposed  act  would  be  an  interference  with  interstate  commerce  and  in 
that  respect  violative  of  the  Federal  Constitution. 

Turning  from  the  constitutional  objections,  Mr.  Vahey  discussed  the  eco- 
nomic, social  and  political  objections  which  labor  makes  to  any  restriction  of  its 
right  to  strike.     Upon  this  point  he  said : 

"The  right  to  strike  *  *  *  *  is  inherent  in  every  working  man  in  this  country.  The 
right  to  quit  work  for  any  reason  sufficient  to  the  workman  himself  is  the  concrete  expres- 
sion of  individual  liberty.  Any  curtailment  of  this  right  by  proposed  legislation  of  this 
nature  is  a  negation  of  liberty  and  a  return  to  serfdom,  and  hence  non-.'Vmerican.  It  is 
wrong  in  principle  because  it  destroys  individual  liberty.  It  is  at  variance  with  the  spirit 
of  our  Constitution,  as  I  have  shown  you,  to  compel  men's  actions  contrary  to  their  own  will. 
I  submit  it  is  shocking  to  one's  notions  of  real  Americanism  to  say  to  a  workman,  'Yon 
must  arbitrate  and  accept  whatever  decision  is  rendered ;  if  you  do  not,  you  will  be  penalized.'  " 

Mr.  Vahey  raised  specific  objection  to  the  ultimate  contingent  jurisdiction 
of  the  Public  Service  Commission  as  a  board  of  arbitration  under  the  proposed 
act,  as  will  be  seen  from  the  following: 

"It  is  provided  that  the  Public  Service  Commission,  in  case  the  parties  cannot  agree,  shall 
act  as  an  arbitration  board.  Suppose  that  the  Public  Service  Commission  proved  hostile  to 
organized  labor.  Suppose  that  it  laid  down  uneconomic  principles  of  arbitration  law.  For 
example,  labor  has  consistently  maintained  in  arbitration  matters  that  it  was  entitled  to  a 
living  wage,  that  the  financial  condition  of  the  company  was  immaterial,  and  that  the  supply 
and  demand  doctrine  has  no  place  in  industrial  arbitration  proceedings.  These  contentions 
are  based  upon  sound  economic  reasoning  and  are  strongly  supported  by  precedents  of  the 
highest  source  throughout  the  world,  but  the  Public  Service  Commission  would  not  be  obliged 
to  follow  them  and  could,  if  it  saw  fit,  ignore  them  completely.  It  is  reasonable  to  suppose 
that  just  the  moment  the  Public  Service  Commission  took  a  stand  favorable  to  the  Boston 
Elevated  Railway  Company  and  the  Eastern  Massachusetts  Street  Railway  Company  those 
corporations  woiild  fail  to  agree  upon  any  arbitration  board  suggested  by  the  employes, 
which  would  automatically  cause  the  Public  Service  Commission  to  act  as  an  arbitration  board. 
How  is  it  possible  by  the  most  fanciful  reasoning  to  satisfy  the  human  mind  that  such  a  situ- 
ation could  be  expected  to  be  viewed  with  complacency  by  employes?  It  would  be  mon- 
strously unjust. 

"I  submit  that  the  proponents  of  compulsory  arbitration  in  this  matter  cannot  show  that 
the  workingman  is  protected  by  the  machinery  provided  by  this  act  for  the  determination 
of  standards  and  the  settlement' of  disputes,  the  plain  answer  of  the  employes  is  that  they 
have  no  assurance  that  their  contentions  will  receive  the  consideration  due  them  from  the 
board  of  arbitration,  sitting  as  a  court  under  a  coinpulsory  law.  They  do  not  know  what 
preconceived  notions  of  justice  mav  be  brought  to  bear  on  the  situation  or  what  mfluences, 
political  or  financial,  mav  be  invoked  to  sway  its  judgment.  If  compulsop'  arbitration  fails 
to  secure  important  conditions,  thev  have  no  remedy  at  hand.  They  will  be  penalized  if 
thev  disobev  the  awards.  There  is  no  right  to  appeal.  .^  strike,  at  least,  is  their  own  affair. 
If  it  fails,  they  can  make  plans  for  preventing  its  failure  another  time." 

On  the  general  subject  of  arbitration  Mr.  \'ahey  cited  the  authority  of  an 
article  by  Professor  Frank  T.  Carlton  found  in  the  "Annals"  of  the  American 
Academy  of  Political  and  Social  Science  for  January,  1917,  of  which  the  fol- 
lowing is  a  part : 

"Since  labor  is  struggling  upward  toward  a  higher  standard  of  living  and  toward  higher 
social  standards,  labor  organizations  look  with  suspicion  upon  any  institution  or  method  of 
procedure  in  which  precedent  plavs  a  considerable  role.  Precedent  for  wage  workers  spells 
slavery,  serfdom  or  low  standards  of  living  and  social  inferiority.  Laboring  men  and 
women  are  struggling  to  get  out  of  the  'servant'  class.  They  want  to  be  recognized  as 
'equals'  of  their  employers  and  the  managers  of  the   business   in   which  they   are  eaniing  a 


548  Electric  Railw  av  Problem 

living.  Wage  workers  are  eaytrly  looking  forward  to  the  day  when  labor  as  well  as  capital 
shall  have  a  voice  in  deternunnig  the  conditions  in  industry,  to  the  time  when  the  representa- 
tives oi  the  employes  shall  be  admitted  to  the  meetings  ot  the  boards  ot  directors.  Com- 
pulsory arbitration  would  seem  to  offer  little  opiwrtunity  to  press  forward  along  this  line. 

■■.•\gain,  in  case  no  definite  legal  principles  can  be  invoked,  the  decisions  of  the  board 
depend  in  no  small  measure  upon  the  training,  interests  and  idiosyncrasies  of  the  judge  or 
umpire.  It  has  Ijeen  noted  that  no  fundamental  principles  which  are  of  general  acceptance 
can  be  laid  down  for  the  guidance  of  boards  of  arbitration.  Consequently,  there  is  reason 
for  the  assertion  made  by  labor  leaders  that  the  decisions  of  boards  of  arbitration  depend 
upon  the  personal  biases  and  the  prect>nceivcd  notions  of  the  arbitrators.  In  the  event  of 
the  adoption  of  compulsory  arbitration  in  this  country,  the  choice  of  arbitrators,  or  of  those 
officials  whose  duty  it  would  he  to  make  such  selection,  would  inevitably  become  a  political 
issue.  .\nd  further,  political  considerations  would  lx;come  determining  factors  in  the  rigid 
or  the  flabby  enforcement  of  the  law." 

The  policy  of  enacting  special  legislation  to  restrict  the  rights  of  the  em- 
ployes in  a  single  industry  would,  in  Mr.  \'ahey's  opinion,  cause  profound  dis- 
content.    Upon  this  point  he  said : 

"Such  legislation  obviously  will  weaken  labor  unions  of  public  service  employes,  if  not 
destroy  their  u.sefulness.  It  will  widen  the  gulf  between  capital  and  lalwr.  \'oluntary  arbi- 
tration, where  capital  and  labor  meet  as  friends,  will  be  completely  ended.  Trade  agreements 
will  be  less  useful. 

"It  is  not  perfectly  apparent  that  it  is  unjust  to  compel  a  small  portion  of  the  working- 
men  of  this  Commonwealth  to  arbitrate  and  at  the  same  time  allow  the  great  majority  of 
employes  to  strike  whenever  they  choose?  How  is  it  possible  to  prevent  profound  discontent 
under  such  circumstances?  Is  it  not  ridiculous  to  say  that  machinists  who  work  for  a  street 
railway  cannot  strike  and  must  arbitrate,  while  machinists  who  work  for  a  big  manufac- 
turing concern  can  do  as  they  like?  This  proposed  legislation  is  advocated  upon  the  ground 
that  the  public  is  interested  in  it.  That  is  undoubtedly  true,  but  that  does  not  justify  the 
legislature  in  taking  away  fundamental  rights  from  one  class  of  men  and  permitting  the 
rest  of  the  community  to  continue  in  the  enjoyment  of  them.  In  this  country  we  are  justly 
jealous  of  individual  rights  and  lilxTties,  and  we  resent  governmental  intcrforeiice  with  what 
we  regard  as  our  private  affairs.  To  tlie  average  .-\merican  the  idea  of  compulsory  arbitra- 
tion, which,  under  this  proixised  legislation,  means  involuntary  servitude,  is  decidedly  repug- 
nant to  his  concept  of  lil)erty.  But  in  this  legislation  you  would  create,  by  discriminating 
between  the  employes  of  public  service  companies  and  those  of  other  industries,  not  only 
the  ordinary  rcsentnu'nt  which  is  natural  where  men  no  longer  can  quit  work  when  they 
choo.sc.  but  you  would  plunge  into  the  greatest  conceivable  discontent  a  class  of  workingmen 
who  daily  sec  their  friends  and  neighbors  enjoying  fundamental  rights  which  they,  themselves, 
no  longer  possess." 

In  Mr.  \'ahcy's  language  just  quoted  we  see  that  labor  shares  with  capital 
the  reluctance  to  admit  that  upon  devoting  itself  to  a  public  service  it  thereby 
divests  itself  of.  certain  rights  which  it  would  otherwise  enjoy.  Labor  in  the 
electric  railway  industry,  like  capital,  objects  to  being  regulated  and  declines  to 
accept  in  good  faith  the  full  consequences  of  employment  in  a  public  service. 

Mr.  \'ahey"s  linal  objection  to  the  compulsory  arbitration  feature  of  the 
proposed  act  was  that  compulsory  arbitration  is  against  public  policy  because  it 
would  tend  to  prevent  the  proper  spirit  of  cooperation  between  employes  and 
employers.    This  will  api)ear  from  the  following: 

"In  addition  to  the  foregoing  reasons  1  submit  that  this  proposed  legislation  is  against 
public  p«licy.  I>ccause  it  would  expose  the  public  to  danger  from  the  unwilling  performance 
of  a  service  requiring  devoted  attention.  It  is  impracticable  to  enforce  the  relation  of  master 
and  servant  against  the  will  of  either.  The  duties  of  street  railway  employes  involve  the 
greatest  attention,  judgment  an<l  skill.  The  cfTect  of  compulsory  arbitration  with  respect 
to  the  enforcement  of  awards  would  In-  to  compel  employes  to  remain  in  service  against  their 
will.  The  operation  of  this  rule  might  do  irreparable  injury  to  the  public,  In-cause  it  is 
impossible  to  exact  a  high  degree  of  efficiency  from  men  who  are  compelled  to  work  against 
their  will  and  imder  awards  that  seem  to  them  unfair  and  unjust." 

Mr.  Vahey  maintained  that  compulsory  arbitration  has  been  a  failure  in 
New  Zealand  and  New  South  Wales,  and  that  even  the  Canadian  "Compulsory 


The  Right  to  Strike  549 

Investigation  Act''  has  not  prevented  strikes.  Upon  this  subject  he  quoted  from 
Bulletin  No.  233  issued  by  the  United  States  Bureau  of  Labor,  in  which  Mr. 
Benjamin  M.  Squires  gives  the  result  of  an  exhaustive  investigation  of  the 
operation  of  this  Canadian  law.  The  following  extracts  from  Mr.  Squires' 
report  have  a  direct  bearing  upon  the  principles  underlying  the  proposed  Alassa- 
chusetts  act : 

"Labor's  attitude  toward  any  limitation  of  tlie  right  to  strike  is  well  known.  Strikes 
are  opportunistic  and  are  looked  upon  as  bom  of  necessity.  If  the  right  to  strike  or  to 
strike  at  an  opportune  time  is  taken  away,  then  labor  must  be  assured  that  its  just  demands 
will  be  met  in  some  other  way.  Labor  is  not  ready,  however,  to  leave  wages  and  working 
conditions  entirely  in  the  hands  of  government  boards  of  arbitration. 


"A  restriction  upon  the  right  to  strike  or  lockout  pending  an  investigation  by  a  gov- 
ernment board  as  provided  in  the  Canadian  act  is  generally  favored  by  employers  because 
it  enables  them  to  continue  operation  and  to  prepare  for  the  possible  contingency  of  a  strike 
and  does  not  force  them  to  accept  the  findings  of  such  a  board.  If  the  form  of  such  legis- 
lation is  changed  to  a  compulsory  acceptance  of  findings,  employers  are  as  apt  as  employes 
to  take  exception  to  adverse  decisions.  Employers  are  seldom  violators  of  the  Canadian  act 
in  the  sense  of  declaring  an  illegal  lockout.  For  that  matter,  a  lockout  at  any  time  is  exceed- 
ingly rare.  But  it  should  be  borne  in  mind  that  the  distinction  between  a  strike  and  a  lock- 
out is  not  clear  cut.  By  a  refusal  to  meet  demands  or  to  accept  the  findings  of  a  legally 
constituted  government  board,  the  employer  may  impose  conditions  which,  though  resulting 
in  a  strike,  nevertheless  constitute  a  lockout  as  effectually  as  though  the  doors  of  his  estab- 
lishment were  closed  against  his  employes. 

"In  any  anti-strike  or  lockout  legislation  it  is  necessary'  with  both  employers  and  em- 
ployes to  meet  the  objection  to  what  is  regarded  as  a  curtailment  of  rights  and  privileges. 
Employers  have  the  advantage  in  that  they  have  been  subject  to  a  greater  amount  of  gov- 
ernmental regulation  than  have  workers.  But  if  either  employers  or  employes  are  to  be 
brought  to  the  point  of  voluntarily  accepting  arbitration  as  a  substitute  for  direct  action, 
there  must  be  some  assurance  that  the  underlying  principle  of  arbitration  is  not  merely  a 
restatement  of  the  law  of  supply  and  demand  which  in  the  final  analysis  concedes  the  de- 
mands of  the  stronger  party." 

In  connection  with  this  reference  to  the  Canadian  "Compulsory  Investiga- 
tion Act"  it  should  perhaps  be  noted  that  in  the  1919  epidemic  of  street  railway 
strikes,  to  which  I  have  already  referred.  Canada  was  not  entirely  exempt. 
Beginning  June  22  of  that  year  a  strike  occurred  on  the  Toronto  Railway  Com- 
pany's lines,  which  lasted  for  twelve  days  and  entailed  a  loss  of  approximately 
5228,000  in  gross  revenues. 

The  objections  of  Mr.  Vahey  and  his  associates  to  the  proposed  legislation 
in  Massachusetts  proved  effective  at  the  special  session  of  the  legislature  to 
which  the  street  railway  commission's  report  was  submitted.  It  is  evident, 
however,  that  we  have  reached  a  critical  stage  in  the  development  of  the  rela- 
tions between  the  public  and  labor  in  the  electric  railway  industry,  and  that  it 
will  be  more  and  more  clearly  recognized  as  time  goes  on  that  the  public's  right 
to  continuity  of  service  creates  a  distinction  between  the  rights  of  labor  in  this 
industry  and  the  rights  of  labor  in  an  ordinary  private  industry  where  absolute 
continuity  of  operation  is  not  so  essential  to  the  public  welfare.  That  this  dis- 
tinction exists  as  a  matter  of  law  was  clearly  set  forth  by  the  United  States 
Supreme  Court  in  JVilson  v.  New,  243  U.  S.  332,  in  which  the  Adamson  law 
was  upheld.  It  will  be  remembered  that  in  1916,  in  the  face  of  a  threatened 
tie-up  of  the  railroads  of  the  country,  and  in  response  to  an  appeal  from  the 
President,  Congress  undertook  to  establish  an  eight-hour  day  for  the  employes 
of  carriers  engaged  in  interstate  and  foreign  commerce.     This  act  provided  that 


550  Electric  Railway  Problem 

after  January  1.  1917,  "eight  hours  shall,  in  contracts  for  labor  and  service,  be 
deemed  a  day's  work  and  tlie  measure  or  standard  of  a  day's  work  for  the  pur- 
pose of  reckoning  the  compensation  for  services  of  all  employes  who  are  now 
or  may  hereafter  be  employed  by  any  common  carrier  by  railroad.  *  *  *  * 
and  who  are  now  or  may  hereafter  be  actually  engaged  in  any  capacity  in  the 
operation  of  trains  used  for  the  transportation  of  persons  or  property  on  rail- 
roads, except  railroads  independently  owned  and  operated  not  exceeding  one 
hundred  miles  in  length,  electric  street  railroads,  and  electric  interurhaii  rail- 
roads." 

In   sustaining  this  act.   Chief   Justice   W'iiite,    writing   the   opinion    for   the 
majority  of  the  court,  says: 

"That  the  business  of  common  carriers  by  rail  is  in  a  sense  a  public  business  because  of 
the  interest  of  society  in  the  coMiiiucd  o[)eration  and  rightful  conduct  of  such  business,  and 
that  tlie  public  interest  l)eKets  a  public  right  of  regulation  to  the  full  extent  necessary'  to 
secure  and  protect  it.  is  settled  by  so  many  decisions,  state  and  Federal,  and  is  illustrated  by 
such  a  continuous  exertion  of  state  and  I'ederal  legislative  power,  as  to  leave  no  room  for 
c|uestion  on  the  subject.  It  is  also  equally  tnie  that  as  the  ri^ht  to  tix  by  agreement  between 
the  carrier  and  its  employes  a  standard  of  wages  to  control  their  relations  is  primarily  pri- 
vate, the  establishment  and  giving  effect  to  such  agrced-on  standard  is  not  subject  to  be 
controlled  or  prevented  by  public  authority.  Hut.  taking  all  these  propositions  as  undoubted, 
if  the  situation  which  we  have  described  and  with  which  the  act  of  Congress  dealt  l)e  taken 
into  view — that  is.  the  dispute  iK'tween  the  employers  and  employes  as  to  a  standard  of 
wages,  their  failure  to  agree,  the  resulting  absence  of  such  standard,  the  entire  interruption 
of  interstate  commerce  which  was  threatened,  and  the  infinite  injury  to  the  public  interest 
which  was  imminent — it  would  seem  inevitably  to  result  that  the  power  to  regulate  neces- 
sarily obtained  and  was  subject  to  be  applied  to  the  extent  necessary  to  provide  a  remedy 
for  the  situation,  which  included  the  power  to  deal  with  the  dispute,  to  provide  by  appro- 
priate action  for  a  standard  of  wages  tt)  fill  the  want  of  one  caused  by  the  failure  to  exert 
the  private  right  on  the  subject,  and  to  give  effect  by  appropriate  legislation  to  the  regula- 
tions thus  adopted.  *  •  *  •  If  acts  which,  if  done,  would  interrupt,  if  not  destroy, 
interstate  commerce,  may  be  by  anticipation  legislatively  prevented,  by  the  same  token  the 
power  to  regulate  may  lie  exercised  to  guard  against  the  cessation  of  interstate  commerce, 
threatened  by  a  failure  of  employers  and  employes  to  agree  as  to  the  standard  of  wages, 
such  standard  being  an  essential  prerecpiisile  to  the  uninterrupted  flow  of  interstate  commerce. 

"Mut,  passing  this,  let  us  come  to  briefly  recapitulate  some  of  the  more  important  of  the 
regulations  which  have  In-en  enacted  in  the  past  in  order  to  show  how  necessarily  the  exer- 
tion of  the  power  to  enact  them  manifests  the  existence  of  the  legislative  authority  to  ordain 
the  regulation  now  iK'fore  us.  and  how  completely  the  whole  system  of  regulations  adopted 
in  the  past  would  he  frustrate<l  or  rendered  unavailing  if  the  power  to  regulate  inuler  the 
conditions  stated,  which  was  exerte<l  by  the  act  before  us.  was  not  possessed.  That  regula- 
tion gives  the  authority  to  fix  for  interstate  carriage  a  reasonable  rate,  subject  to  the  limita- 
tion that  rights  of  private  property  may  not  lie  (lestroyed  by  establishing  them  on  a  con- 
fiscatory basis,  is  settled  by  long  practice  and  decisions  That  the  |Kiwer  to  regulate  also 
extends  to  many  jihases  of  the  business  of  carriage,  and  embraces  the  right  to  control  the 
contract  power  of  the  carrier  in  so  far  as  the  public  interest  reipiires  such  limitation,  has 
also  been  inanifested  by  repeated  acts  of  legislation  as  to  bills  of  lading,  tariffs,  and  many 
other  things  too  numerous  to  mention.  Kijually  certain  is  it  that  the  power  has  been  exer- 
cised so  as  to  deal  not  only  with  the  carrier,  but  with  its  servants,  and  to  regulate  the  rela- 
tion of  such  servants  not  only  with  their  employers,  hut  lictween  themselves.  Illustrations 
of  the  latter  are  afTorded  bv  the  Hours  of  Service  Act.  the  Safety  .Xppliance  .Vet.  and  the 
Employers'  Liability  Act.  Clear  also  is  it  that  an  obligation  rests  tipon  a  carrier  to  carry 
on  its  business,  and  that  coixlilions  of  cost  or  other  obstacles  afford  no  excuse  and  exempt 
from  no  resixinsihility  which  arises  from  a  failure  to  do  so.  and  also  that  government  pos- 
•sesses  the  full  regtilatory  power  to  compel  perfonnance  of  such  duty. 

"  •  ♦  *  •  What  would  W  the  \-alue  of  the  right  to  a  reasonable  rate  if  all  movement 
in  interstate  cominrrce  could  Ik'  stoppe<l  as  a  result  of  a  mere  dispute  between  the  parties 
or  their  failure  to  exert  a  primary  private  right  concerning  a  matter  of  interstate  commerce"' 
.Vgain.  what  purivise  wciuld  Ix-  subserved  by  all  the  regulations  established  to  secure  the 
enjoyment  by  the  public  of  an  efticient  and  reasonable  service  if  there  was  no  power  in  gov- 
crtnnetit  to  prevent  all  service  from  ln-ing  destroyed'  I'lirlber  yet.  what  benefits  would  flow- 
to  M'ciely  by  recognising  the  right.  U-cause  of  the  public  interest,  to  regulate  the  relation  of 
empl>>\er  and  emnloye  and  of  the  emploxes  among  themselves,  and  to  give  to  the  latter 
pectd'.ir  and   special   rights   safegM.irding   their   persons,   protecting  them   in   case  of  accident, 


The  Right  to  Strike  551 

and  giving  ethcieiit  remedies  fur  that  pun)ose,  if  there  was  no  power  to  remedy  a  situation 
created  by  a  dispute  between  employers  and  employes  as  to  rate  o£  wages,  which,  it  not 
remedied,  would  leave  the  public  helpless,  the  whole  people  ruined,  and  all  the  homes  of  the 
land  submitted  to  a  danger  of  the  most  serious  character?  And  finally,  to  what  derision 
would  it  not  reduce  the  proposition  that  government  had  power  to  enforce  the  duty  of  oper- 
ation if  that  power  did  not  extend  to  doing  that  which  was  essential  to  prevent  operation 
from  being  completely  stopped  by  filling  the  interregnum  created  by  an  absence  of  a  con- 
ventional standard  of  wages,  because  of  a  dispute  on  that  subject  between  the  employers  and 
employes,  by  a  legislative  standard  binding  on  employers  and  employes  for  such  a  time  as 
might  be  deemed  by  the  legislature  reasonably  adequate  to  enable  normal  conditions  to  come 
about  as  the  result  of  agreements  as  to  wages  between  the  parties? 

"We  are  of  opinion  that  the  reasons  stated  conclusively  establish  that,  from  the  point  of 
view  of  inherent  power,  tlie  act  which  is  before  us  was  clearly  within  the  legislative  power 
of  Congress  to  adopt,  and  that,  in  substance  and  eii'ect,  it  amounted  to  an  exertion  of  its 
authority  under  the  circumstances  disclosed  to  compulsorily  arbitrate  the  dispute  between 
the  parties  by  establishing  as  to  the  subject-matter  of  that  dispute  a  legislative  standard  of 
wages  operative  and  binding  as  a  matter  of  law  upon  the  parties.     ♦     *     ♦     * 

"And  this  leaves  only  to  be  generally  considered  whether  the  right  to  exercise  such  a 
power  under  the  conditions  which  existed  was  limited  or  restrained  by  the  private  rights  of 
the  carriers  or  their  employes. 

"(a)  As  to  the  carrier. — As  engaging  in  the  business  of  interstate  commerce  carriage 
subjects  the  carrier  to  the  lawful  power  of  Congress  to  regulate,  irrespective  of  the  source 
whence  the  carrier  draws  its  e.xistence,  and  as  also,  by  engaging  in  a  business  charged  with 
a  public  interest,  all  the  vast  property  and  every  right  of  the  carrier  become  subject  to  the 
authority  to  regulate  possessed  by  Congress  to  the  extent  that  regulation  may  be  exerted, 
considering  tiie  subject  regulated  and  what  is  appropriate  and  relevant  thereto,  it  follows  that 
the  ver\-  absence  of  the  scale  of  wages  by  agreement,  and  the  impediment  and  destruction  of 
interstate  commerce  which  was  threatened,  called  for  the  appropriate  and  relevant  remedy — the 
creation  of  a  standard  by  operation  of  law.  binding  upon  the  carrier. 

"(b)  .\s  to  the  employe. — Here  again  it  is  obvious  that  what  we  have  previously  said 
is  applicable  and  decisive,  since  'whatever  u'ould  be  the  right  of  an  employe  engaged  in  a 
private  business  to  demand  such  ivagcs  as  he  desires,  to  leave  the  employment  if  he  desires, 
*  *  *  *  and  by  concert  of  action,  to  agree  ivith  others  to  leaz'e  upon  the  same  condition, 
siicli  rights  are  necessarily  subject  to  limitation  ti'hen  employment  is  accepted  in  a  business 
charged  zvitli  a  public  interest  and  as  to  which  the  power  to  regulate  commerce  possessed  by 
Congress  applied,  and  the  resulting  right  to  fix,  in  case  of  disagreement  and  dispute,  a  stand- 
ard of  wages,  as  we  have  seen,  necessarily  obtained. 

"In  other  words,  considering  comprehensively  the  situation  of  the  employer  and  the 
employe  in  the  light  of  the  obligations  arising  from  the  public  interest  and  of  the  work  in 
which  they  are  engaged,  and  the  degree  of  regulation  which  may  be  lawfully  exerted  by 
Congress  as  to  that  business,  it  must  follow  that  the  exercise  of  the  lawful  governmental  right 
is  controlling.  *  *  *  *  The  capacity  to  exercise  the  private  right  free  from  legislative 
interference  affords  no  ground  for  saying  that  legislative  power  does  not  exist  to  protect  the 
public  interest  from  the  injury  resulting  from  a  failure  to  exercise  the  private  right.  In 
saying  this,  of  course,  it  is  always  to  be  borne  in  mind  that,  as  to  both  carrier  and  employe, 
tlie  beneficent  and  ever-present  safeguards  of  the  Constitution  are  applicable,  and  therefore 
both  are  protected  against  confiscation  and  pgainst  every  act  of  arbitrary  power  which,  if 
given  effect  to.  would  amount  to  a  denial  of  due  process,  or  would  be  repugnant  to  any  other 
constitutional  right.  .\nd  this  emphasizes  that  there  is  no  question  here  of  purely  private  right, 
since  the  hm'  is  concerned  oiilx  icif/i  those  vho  are  engaged  in  a  business  charged  zvith  a 
public  interest,  where  the  subject  dealt  witli  as  to  all  tlie  parties  is  one  involved  in  that  busi- 
ness, and  which  we  have  seen  comes  under  the  control  of  the  right  to  regulate  to  the  extent 
that  the  power  to  do  so  is  appropriate  or  relevant  to  the  business  regulated." 

In  this  case  the  right  of  the  Government  to  regulate  labor,  as  well  as  capital, 
in  the  transportation  industry,  was  clearly  established,  especially  by  the  language 
which  I  have  italicized  in  the  above  quotation.  This  applies  where  the  industry 
is  "affected  with  a  public  interest,"  even  though  it  may  be  privately  operated. 
How  much  more  clearly,  therefore,  would  it  apply  in  the  case  of  a  public  function 
publicly  performed  where  continuity  of  service  is  essential  to  the  public  welfare! 

The  Industrial  Conference  convened  by  the  President  on  December  1,  1919, 

in  its  preliminary  statement,  said: 

"The  continuous  operation  of  public  utilities  is  vital  to  public  welfare.  .As  the  capita! 
invested  is  employed  in  public  use,  so  is  the  labor  engaged  in  public  servce:  and  the  with- 
drawal  of  either   with   the   result   of   suspending   service  makes   the   people   the    real   victim. 


552  Electric  Railway  Problem 

While  the  continuous  oi)eration  of  all  utilities  is  conducive  to  the  general  convenience  of  the 
people,  that  of  some  of  them  is  essential  to  their  ver\-  existence.  Of  the  latter  class  the  rail- 
ways are  a  conspicuous  example  and  bear  the  same  relation  to  the  body  politic  as  do  the 
arteries  to  the  human  body.  Suspension  produces  practical  social  and  economic  anarchy  and 
may  impose  hardship  even  to  the  point  of  starvation  upon  large  sections  of  the  community. 
The  interruption  in  such  essential  public  utilities  is  intolerable." 

In  its  final  report,  issued  March  6,  1920.  the  Conference  recommended  a 
general  plan  for  the  adjustment  of  industrial  disputes,  which,  witli  certain  modi- 
fications, was  to  be  made  applicable  to  public  utilities.  A  note  attached  to  the 
public  utilities  section  of  its  report  says: 

"The  Conference  wishes  to  point  out  that  the  continuity  of  employment  in  public 
utilities  offers  an  opportunity  for  collective  bargaining  beyond  that  which  has  to  do  with 
standards  only,  the  usual  form  in  general  industry.  The  kind  of  collective  bargaining  here 
described,  and  which  is  practicable  in  the  case  of  public  utilities,  is  a  mutually  advantageous 
extension  of  the  collective  bargaining  principle  into  the  region  of  a  positive  agreement  to  give 
and  to  undertake  actual  employment. 

"Since  the  Conference  issued  its  preliminary  statement  on  December  19.  1919.  the  Con- 
gress has  dealt  with  the  railway  situation  by  the  Transportation  .-Xct,  1920,  and  a  Special 
Commission  also  has  tx.'en  created  with  respect  to  bituminous  coal  mining.  .\  majority  of 
the  Conference,  therefore,  has  deemed  it  unnecessary  to  suggest  any  provisions  for  the  legal 
prevention  of  strikes  in  public  utilities,  in  this  plan.  iK-lieving  that  the  continuous  operation 
of  such  utilities  will  be  secured  through  the  acquiescence  of  employes  in  the  workings  of  the 
machinery  created  by  the  plan,  especially  when  voluntarily  invoked  or  accepted  by  them. 

"Mr.  Gregory-,  however,  feels  that  the  continuous  operation  of  railroads  and  other  trans- 
portation systems,  of  water,  light,  gas.  telegraph  and  telephone  plants  and  of  groups  of  coal 
mines,  all  essential  to  the  convenience  and  frequently  the  ver\-  e.xistcnce  of  the  general  public, 
should  he  assured.  He  considers  that  the  Conference  has  provided  fair  and  adequate  machinery 
for  the  prompt  adjustment  of  disputes  between  employer  and  employe. 

"He  was  willing  to  accept  a  plan  which  would  have  made  lockouts  and  strikes  in  these 
essential  industries  unlawful  during  the  time  the  proposed  tribunals  were  seeking  to  determine 
and  publish  the  facts  and  settle  the  issues  involved,  and  during  the  subsequent  brief  periixl 
within  which  the  parties  to  the  controversy  were  to  .iccept  or  reject  the  award  made,  and 
during  the  period  covered  by  the  award  in  ca.se  both  parties  accepted  it. 

"He  considers  that  the  plan  adopted  furnishes  no  real  guaranty  that  either  of  the  con- 
testing forces,  even  after  having  voluntarily  submitted  its  contentions  to  the  tribunals,  and 
even  while  representatives  of  its  own  unrestricted  choosing  are  sitting  as  judges  and  partici- 
pating in  an  effort  to  settle  the  dispute  by  a  decision  which  must  be  unanimous  in  order  to 
lie  binding,  shall  not  repudiate  these  tribunals  and  thereby  precipitate  the  very  situation  which 
the  proposed  machinery  is  intended  to  prevent." 

It  will  be  seen  that  tlie  Industrial  Conference  at  the  start  recognized  that 
the  interruption  of  essential  public  utility  services  is  intolerable,  but  later  on  the 
majority  reached  the  conclusion  that  it  was  unnecessary  to  suggest  anv  pro- 
visions for  the  legal  prevention  of  strikes  in  public  utilities,  believing  that  the 
plan  suggested  for  the  voluntary  adjustment  of  disputes  would  make  coercive 
measures  unnecessary. 

The  subject  is  so  important  tliat  I  shall  give  an  analysis  of  the  two  plans 
proposed  in  New  York  just  before  tlie  United  States  entered  the  war.  .\  full 
description  and  discussion  of  them  was  published  in  the  Utilities  Magazine  for 
August,  1917,  under  the  title.  "I'roposed  C.uaranties  of  Continuity  of  Service 
in  Public  Utilities  in  New  York."  This  article  starts  off  with  the  following 
statement : 

"In  upluilding  the  .■\<lamson  I^iw  the  I'liited  States  Supreme  Court  has  established  the 
principle  th.il  the  |>arami>unt  public  necessity  for  continuity  of  service,  in  a  business  affected 
with  a  public  interest  and  therefore  subject  to  public  regulation,  gives  legislative  bodies,  even 
luider  our  constitutional  restrictions,  the  right  not  only  to  regulate  hours  and  conditions  of 
work,  but  also,  in  the  absence  of  voluntary  agreement  between  emplovcrs  and  employes,  to  fix 
wage  standards  and  prohibit  concerted  efforts  to  interrupt   service." 


The  Right  to  Strike  553 

It  appears  that  the  New  York  Public  Service  Commission  for  the  First  Dis- 
trict, following  its  rather  unhappy  experience  in  trying  to  handle  the  strike 
situation  in  New  York  City  in  the  summer  of  1916,  turned  its  attention  to  the 
study  of  measures  to  prevent  the  recurrence  of  such  troubles.  Mr.  Oscar  S. 
Straus,  then  chairman  of  the  commission,  and  Mr.  Julius  Henry  Cohen,  who 
had  been  retained  as  the  commission's  special  counsel  in  connection  with  the 
street  railway  strike  ditTiculties,  devised  for  the  commission  a  "proposed  plan 
to  provide  for  fair  and  reasonable  wages  and  working  conditions  and  to  prevent 
interruption  of  the  service  on  street  railroads."  This  plan  was  made  the  subject 
of  a  series  of  public  hearings  during  the  month  of  February,  1917,  as  a  pre- 
liminary to  its  revision  and  formulation  into  a  definite  legislative  program. 
Another  plan  was  worked  out  by  the  Merchants  Association  of  New  York, 
embodied  in  a  bill  and  introduced  in  the  legislature  during  the  1917  session. 

The  first  item  in  the  commission's  plan  v^-as  the  affirmative  declaration,  to 
be  embodied  in  the  public  service  commissions  law,  of  the  obligation  of  street 
railway  companies  to  "provide  for  the  payment  of  fair  and  reasonable  wages 
and  salaries  to  all  employes  engaged  in  the  service"'  and  to  "make  provision  for 
fair  and  reasonable  working  conditions  in  the  performance  of  such  service." 

The  second  item  was  an  atifirmative  declaration  of  the  obligation  of  street 
railway  companies  to  provide  themselves  with  the  employes  necessary  to  "secure 
continuous,  uninterrupted,  safe  and  adequate  transportation  of  persons  or  prop- 
erty" and  to  "promote  the  security  or  convenience  of  employes,  passengers, 
shippers  or  the  public."  The  employes  which  the  companies  were  to  procure 
and  have  in  service  were  to  be  "adequate  in  number,  competent,  and  governed  by 
rules  and  regulations  as  to  discipline,  competency,  wages,  hours  of  work,  work- 
ing conditions,  employment,  promotion,  benefits,  retirement  upon  pension  or 
otherwise,  discharge  or  termination  of  service  or  reinstatement  and  contract  or 
terms  of  employment."  in  accordance  with  the  provisions  of  the  proposed  act. 

The  third  item  of  the  plan  was  to  the  etYect  that  the  determination  of  what 
shall  constitute  fair  and  reasonable  wages  and  fair  and  reasonable  conditions 
of  work  might  be  made  either  (a)  by  mutual  agreement  between  employer  and 
employe;  (b)  by  the  wage  board  to  be  constituted  according  to  the  provisions 
of  the  proposed  act;  or  (c)  by  the  public  service  commission  of  the  district 
having  jurisdiction  over  the  employer.  A  later  item  of  the  plan  which  seemed 
to  have  the  efifect  of  modifying  this  one  provided  that  "agreements,  rules  or 
schedules  regulating  wages  or  working  conditions"  should  be  filed  with  the  Pub- 
lic Service  Commission  and  be  "subject  in  all  respects  to  its  approval." 

The  fourth  item  provided  for  the  organization  of  the  employes  on  the  basis 
that  any  ten  or  more  etnployes  engaged  in  any  branch  of  any  service  over  which 
the  commission  had  jurisdiction  "may  form  an  association  or  union,  or  a  branch 
or  local  of  any  existing  association  or  union,  and  shall  thereupon  have  the  right 
to  represent  its  members  in  all  negotiations  with  employers,  and  to  appear  and 
be  heard  in  any  proceeding  relating  to  wages  or  working  conditions  alTecting 
its  members,  upon  condition  that  it  shall  file  semi-annually  with  the  commission : 
(a)  a  certified  copy  of  its  articles  of  association,  certificate  of  incorporation  and 
by-laws,  rules  or  governing  regulations;   (b)  a  full  and  true  list  of  its  officers; 


554  Electric  Railway  Problem 

(c)  a  full  and  true  statement  of  the  nunitx-r  of  its  members  and  the  branches 
of  the  service  in  which  they  are  employed;  and  (d)  a  consent  in  writing,  signed 
by  its  duly  authorized  officers,  to  accept  and  abide  by  all  decisions,  awards  and 
orders  of  the  commission  or  the  wage  board  when  approved  by  the  commission." 

In  the  fifth  item  it  was  provided  that  any  association  or  union  registered  in 
the  manner  above  described  might  negotiate  with  any  employer  under  the  juris- 
diction of  the  commission  for  the  purpose  of  establishing  a  joint  agreement 
upon  wages  and  working  conditions.  Upon  the  application  of  either  party,  the 
commission  was  to  designate  an  impartial  person  to  preside  over  such  negotia- 
tions, but  without  power  to  decide  or  vote  upon  any  subject-matters  involved 
in  them. 

The  next  item  of  the  plan,  and  the  one  that  proved  to  be  one  of  the  two 
storm  centers  of  discussion  at  the  public  hearings,  provided  that  the  commis- 
sion should  make  suitable  rules  and  regulations  for  the  establishment  of  a  wage 
board  whose  duty  it  would  be  to  investigate  and  certify  to  the  commission  its 
findings  upon  all  matters  of  wages  and  working  conditions.  The  wage  board 
was  to  be  constituted  as  follows:  One-half  its  members  were  to  be  nominated 
by  the  employer  and  one-half  by  the  representatives  of  the  employes.  Any  duly 
registered  association  or  union  would  be  entitled  to  nominate  such  number  of 
representatives  as  the  commission  should  determine  to  be  "rea.sonably  propor- 
tionate" to  the  number  of  its  members,  with  due  regard  to  representation  of 
unorganized  employes  and  taking  iiUo  account  the  total  number  of  all  employes. 
If  the  persons  so  nominated  by  the  respective  parties  were  approved  by  the 
commission,  the  latter  was  to  organize  and  complete  the  wage  board,  provide 
suitable  acconnnodations  for  it.  and  furnish  such  clerical,  statistical  and  other 
assistance  to  it  as  might  be  required  for  the  due  performance  of  its  work.  The 
members  of  the  wage  board  were  to  receive  such  compensation  for  their  services 
as  should  be  fixed  by  the  commission,  and  the  compensation  so  fixed  was  to  be 
paid  by  the  state.  In  the  introductory  statement  at  the  first  of  the  series  of 
public  hearings.  Chairman  Straus  said  that  the  conmiission  had  purposely  left 
open  the  question  as  to  whether  there  should  be  one  wage  board  for  the  entire 
district  under  the  jurisdiction  of  a  commission  or  a  separate  wage  board  for 
each  individual  utility,  and  upon  this  point  particularly  he  invited  suggestions. 

The  ne.\t  item  of  the  plan  related  to  hearings  and  determinations.  It  pro- 
vided that  ail  applications  for  the  fixing  of  wages  or  working  conditions  not 
established  by  nuitual  agreement  should  be  referred  to  the  wage  board  for  hear- 
ings and  findings,  and  that  upon  the  rc])ort  of  the  wage  board  the  commission 
siiould  make  a  determination  binding  upon  all  parties  concerned.  In  case  the 
wage  board  failed  to  agree,  or  if  no  wage  board  was  established,  then  the  hear- 
ings were  to  be  had  before  the  commission  itself,  which  woukl  make  its  deter- 
mination upon  its  own  findings,  but  applications  for  a  wage  determination  were 
not  to  be  made  under  this  ])lan  until  a  reasonable  opportunity  had  been  given  to 
both  cnii)I()yfr  and  employe  lo  come  to  a  nuuual  understanding.  The  determina- 
tion of  what  should  constitute  such  reasonable  opportunity  was  to  be  left  with 
the  wage  board,  or  in  ca.se  of  its  failure  to  agree,  or  in  case  no  wage  board  had 
been  established,  then  to  the  commission. 


The  Right  to  Strike  555 

The  next  item  of  the  plan  provided  that  the  maintenance  of  discipline  and 
efficiency  should  rest  with  the  employer,  but  any  employe  who  thought  himself 
aggrieved  and  who  was  unable  to  secure  redress  from  his  employer  might  obtain 
through  the  wage  board  or  the  commission  an  investigation  of  his  grievance. 
If  either  of  these  bodies,  upon  investigation,  found  that  the  petitioner  was  justly 
aggrieved,  it  was  to  make  such  order  and  award  as  it  deemed  fair  and  reason- 
able, and  for  the  good  of  the  service,  including  the  reinstatement  of  a  discharged 
employe,  and  in  such  case  an  award  of  back  pay. 

The  next  item  referred  to  existing  and  future  contracts.  All  existing  con- 
tract? fixing  wages  or  working  conditions  were  to  remain  in  full  force,  and  no 
person  regularly  engaged  in  an  operating  service  was  to  be  engaged  or  retained 
in  the  service  for  an  indefinite  period  or  upon  a  hiring  at  will,  but  the  parties 
were  required  to  fix  a  definite  period  or  term  of  service,  and  in  the  absence  of 
any  other  agreement  it  was  to  be  understood  and  implied  that  this  period  or 
term  was  for  one  year  and  thereafter  from  year  to  year,  unless  terminated  upon 
thirty  days'  notice.  The  operating  service  as  defined  included  the  furnishing 
of  motive  power,  and  the  classes  of  operatives  specifically  mentioned  were  motor- 
men,  drivers,  conductors,  engineers,  trainmen,  brakemen,  firemen  and  switch- 
men. 

The  next  item  of  the  plan  covered  the  matter  of  limitations  upon  strikes 
and  lockouts,  and  this  proved  to  be  the  second  storm  center  of  discussion.  It 
was  provided  that,  pending  negotiation,  investigation  and  determination  as  above 
outlined,  there  should  be  no  lockout  or  strike  on  any  service  subject  to  the  pro- 
visions of  the  proposed  act  and  that  no  action  should  be  taken  in  group  or  concert 
or  by  agreement  tending  to  interrupt  the  service ;  but  it  was  expressly  stated  that 
nothing  contained  in  this  provision  should  be  construed  to  prevent  employes  from 
organizing  to  improve  or  better  their  condition  in  accordance  with  the  provisions 
of  the  plan. 

A  violation  of  any  of  the  provisions  of  the  proposed  act  "by  any  person, 
firm  or  corporation,  officer,  agent  or  employe  of  an  association  or  union  or  by  any 
employer,  officer  or  agent"  was  to  be  a  misdemeanor  punishable  by  fine,  the 
amount  of  which  was  left  to  be  determined  later  on.  The  provisions  of  the  plan 
were  to  apply  to  street  railways  and  to  employes  and  organizations  of  employes 
engaged  in  the  service  of  street  railways. 

While  the  Public  Service  Commission  plan  applied  only  to  street  railroads, 
the  Merchants  Association  plan  applied  to  all  public  utilities  not  engaged  in 
interstate  commerce,  and  specifically  included  corporations  and  their  employes 
who  were  engaged  in  the  work  of  transportation,  transmission  of  intelligence, 
or  the  furnishing  of  light,  power,  heat  or  water.  The  central  feature  of  the 
Merchants  Association  plan  was  the  provision  requiring  the  public  service  cor- 
poration and  each  of  its  employes  to  enter  into  reciprocal  contractual  relations. 
After  a  reasonable  period  of  probation,  which  should  not  exceed  six  months  in 
duration,  every  person  whom  the  corporation  desired  to  employ  permanently 
and  who  on  his  part  desired  so  to  be  employed,  was  to  be  required  as  a  condi- 
tion of  such  employment  to  enter  into  a  service  contract  for  a  period  of  not 
less  than  one  vear  nor  more  than  three  years,  under  the  terms  of  which  both  the 


556  Electric  Railway  Problem 

power  of  the  corporation  to  discharge  the  employe  and  of  the  employe  to  with- 
draw from  the  service  were,  during  the  period  of  the  contract,  definitely  lim- 
ited. No  form  of  service  contract  proposed  by  a  corporation  could  be  adopted 
for  use  until  it  had  been  approved  by  the  Public  Service  Commission.  This  con- 
tract was  to  specify  the  particular  acts  or  omissions  either  by  the  corporation 
or  by  the  employe  which  would  constitute  violations  of  the  agreement  and  the 
fine  or  other  penalty  to  be  imposed  for  each  violation.  Also  the  contract  was  to 
describe  the  mode  of  procedure  for  the  appeal  of  either  party  from  penalties 
assessed  against  it  under  the  terms  of  the  contract. 

Both  the  corporation  and  each  employe  were  to  provide  funds  for  the  pay- 
ment of  fines  imposed  in  accordance  with  the  terms  of  the  service  contract.  The 
employer's  penalty  fund  was  to  be  established  in  an  amount  to  be  approved  by 
the  Public  Service  Commission  and  to  be  deposited  with  a  trustee,  also  approved 
by  the  commission.  The  employe's  penalty  fund  was  to  be  created  through  the 
retention  by  the  corporation  of  20  per  cent  of  his  wages  from  the  date  when 
the  service  contract  took  effect,  through  a  period  equal  to  ten  weeks  of  full  time 
service,  or  in  other  words,  this  fund  was  to  be  made  up  of  the  equivalent  of 
two  weeks'  wages  of  the  employe.  The  corporation  was  required  on  each  anni- 
versary of  the  date  of  the  service  contract  to  pay  the  employe  interest  at  the 
rate  of  5  per  cent  upon  the  average  amoimt  of  the  penalty  fund  so  retained 
from  his  wages  during  the  preceding  year,  and  at  the  termination  of  the  service 
contract  in  any  of  the  ways  provided  for  the  employe  was  to  receive  any  balance 
then  existing  in  his  penalty  fund. 

The  employer  or  employe,  as  the  case  might  be,  was  required  to  give  to 
the  other  notice  of  any  claimed  violation  of  the  terms  of  the  service  contract 
within  ten  days  after  the  aggrieved  party  had  come  to  know  of  such  violation. 
The  adjudication  of  claims  as  between  the  employer  and  the  employe  was  to  be 
effected  in  one  of  the  following  ways:  (1)  by  mutual  agreement  and  consent; 
(2)  by  the  board  of  award;  (3)  by  the  Public  Service  Commission  on  appeal 
from  a  decision  of  the  board  of  award;  or  (4)  by  an  action  in  court  to  enforce 
or  set  aside  the  commission's  order.  A  board  of  award,  to  be  created  bv  joint 
action  of  each  corporation  and  its  employes,  was  to  consist  of  from  three  to 
nine  members,  one  of  whom  was  to  be  appointed  by  the  Public  Service  Commis- 
sion and  the  others  in  equal  numhers  by  the  company  and  its  employes.  The 
members  of  the  board  were  to  serve  for  one  year  and  until  their  successors 
were  duly  qualified.  Obviously,  the  comjjany  would  need  no  help  in  selecting 
its  representatives,  but  the  plan  established  the  machinery  by  which  the  repre- 
sentatives of  the  em])loyes  were  to  be  selected.  On  or  before  December  1  of 
each  year  the  corporation  was  to  distribute  to  all  employes  who  had  been  in 
service  one  year  or  longer  cards  on  which  each  employe  might  write  the  names 
of  as  many  persons  as  the  employes  were  entitled  to  appoint.  These  cards  were 
to  be  signed  and  delivered  in  a  sealed  envelope  not  later  than  December  20  to 
the  secretary  of  the  corporation,  upon  whom  the  duty  would  rest  inunediately 
after  that  date  to  open  the  envelopes,  to  tabulate  the  votes,  to  report  to  the 
Public  Service  Commission  in  a  sworn  statement  the  names  of  all  persons  voted 
for  and  the  number  of  votes  cast  for  each  and  to  declare  elected  those  receiving 


The  Right  to  Strike  557 

the  highest  number  of  votes.  To  start  with  in  every  case,  the  number  elected 
by  the  corporation  and  by  the  employes  respectively  to  serve  for  the  first  year 
was  to  be  three,  but  thereafter  the  number  might  be  detemiined  by  a  majority  of 
the  members  of  the  existing  board  within  thirty  days  prior  to  the  expiration  of 
their  term  of  office. 

A  service  contract  could  be  terminated  by  the  corporation  either  ( 1 )  because 
the  employe  had  been  guilty  of  any  misconduct  defined  in  the  contract  as  a 
cause  of  discharge;  or  (2)  because  the  business  rendered  the  employe's  services 
no  longer  necessary,  in  which  case  the  employe  either  should  be  given  thirty 
days'  notice  of  his  intended  discharge,  or  should  be  paid  two  weeks'  salary  or 
wages  if  discharged  without  notice;  or  [3)  because  of  disability  on  the  part  of 
the  employe  such  as  to  disqualify  him  for  rendering  service  for  which  he  was 
employed,  in  which  case  the  employe  was  to  be  entitled  to  thirty  days'  salary 
and  immediate  release,  unless  the  board  of  award  certified  that  his  disability  was 
due  to  his  own  wrongful  conduct.  On  the  other  hand,  the  employe  could  ter- 
minate the  service  contract  either  (1)  because  of  valid  family  or  personal  neces- 
sity certified  to  by  the  board  of  award;  or  (2)  because  of  disqualifying  illness 
or  of  unfavorable  occupational  effect  upon  his  health  duly  certified  by  the  board 
of  award;  or  (3)  without  penalty  and  without  stating  the  cause  of  his  with- 
drawal, provided  the  employer  was  given  not  less  than  thirty  days'  notice  and 
gave  his  consent. 

The  plan  stipulated  that  the  corporation  should  recognize  and  respect  the 
right  of  the  employe  to  membership  in  any  lawful  organization,  and  should  not 
discriminate  against  him  because  of  such  membership.  The  employe  also  was 
to  have  the  right  alone  or  in  combination  with  others  to  ask  from  the  employer 
concessions  in  wages,  hours  of  work,  or  conditions  of  service.  Any  such  request 
was  to  be  given  prompt  and  fair  consideration,  and  the  company  was  not  to  dis- 
criminate against  the  employe  because  of  his  participation  in  the  request. 

The  Merchants  Association  plan,  like  the  Public  Service  Commission  plan, 
provided  for  continuity  of  service,  and  prohibited  any  employe  from  combining 
with  others  to  cause  embarrassment  or  interruption  of  the  service  to  the  public 
which  was  required  under  the  company's  franchise.  Any  corporation  that  dis- 
charged an  employe  during  the  term  of  the  service  contract  with  him,  except  as 
provided  in  the  act,  and  any  employe  who  during  his  term  of  service  wilfully 
refused  or  neglected  to  perform  the  service  required  of  him  by  the  contract,  was 
to  be  guilty  of  a  misdemeanor. 

Perhaps  the  most  important  criticism  of  the  Public  Service  Commission  plan 
developed  at  the  public  hearings  was  that  made  by  the  Committee  on  Public 
Utilities  and  Franchises  of  the  National  Consumers'  League.  This  committee,  in 
its  memorandum,  maintained  that  the  interest  of  the  general  public  in  continuity 
of  service  is  not  in  fact  paramount,  but  that  the  rights  of  the  employes  are  to 
be  considered  of  equal  importance.  Indeed,  the  committee  went  so  far  as  to  say 
that  "from  a  wider  point  of  view  the  public  has  an  interest  in  seeing  industrial 
peace  preserved  which  far  exceeds  in  importance  its  own  demands  for  safety  and 
continuity  of  service."  The  committee's  fundamental  objection  was  to  the  com- 
pulsion that  would  restrict  the  employes'  right  to  strike.     "All   forms  of  com- 


558  Electric  Railway  Problem 

pulsion  in  settling  industrial  disputes,"  said  the  committee,  "are  more  and  more 
held  to  be  of  doubtful  benefit  by  officials  who  have  the   widest   experience   in 
industrial   mediation   and   arbitration.     ♦     *     *     *     There    is    apparently   grave 
doubt  on  the  part  of  experts  whether  compulsion  in  itself  will  accomplish  the 
end  sought,  and  whether  public  investigation  and   full  publicity  are  not   rather 
to  be  regarded  as  the  most  effective  instruments  in  bringing  about  settlements. 
*     *     ♦     *     What   is   immediately   needed   is  machinery    for  a   continuous   and 
comprehensive  inquiry  into  all   the  conditions  of   labor,   with   full   publicity   for 
all  the  findings."      Among  the  committee's   specific   criticisms   of   the   commis- 
sion's  draft,   emphasis   was   laid   upon   the   claim    that   the    plan    would    unduly 
restrict  the  rights  of  the  employes.     P^articular  reference  was  made  to  the  pro- 
vision requiring  the  employes  to  pledge  themselves  in  advance  to  abide  by  the 
orders,  decisions  or  awards  of  the  commission.     The  committee  also  called  atten- 
tion to  the  disadvantages  to  the  unions  in  the  proposed  composition  of  the  wage 
boards,  and  pointed  out  that,  while  the  employer's  representatives  on  a  board 
would   obviously   stand   as   a   unit,   the   employes'   representative   would   be    dis- 
organized and  inevitably  break  up  into  different  sections.     "There  is  great  dan- 
ger," said  the  committee,  "that  this  plan  would  promote  the  formation  of  artificial 
or  fictitious  organizations  under  the  control  of  an  unscrupulous   employer.     It 
would  undoubtedly  increase  the  divisions  in  the  ranks  of  labor  rather  than  pro- 
mote the   power  of   collective   bargaining.     *     *     *     *     Unorganized    workers 
are  by  necessity  represented  by  the  spokesmen  of  the  unions.     If,  at  any  time, 
they   are  not   satisfied   with   the   findings,   it   is   open   to   them   to   organize   and 
make  their  influence  felt  for  themselves."     The  committee  urged  the  importance 
of  having  no  union  represented  on  the  wage  board  unless  it  included  at  least  one- 
fourth  or  one-fifth  of  the  employes,  and  also  urged  that  the  public,  the  recog- 
nition of  whose  interests  was  at  the  very  foundation  of  the  plan  itself,  should  have 
representation  on  the  board.     The  committee  suggested  that  the  representatives 
of  each  of  the  three  parties — employer,  employes  and  the  public — should  cast  their 
vote  as  a  unit.     The  committee  also  criticised  the  provision  of  the  plan  calling 
for  "fair  and  reasonable"  wages  and  working  conditions.     It  contended  that  this 
standard  was  altogether  too  indefinite  to  be  satisfactorily  applied,  and  suggested 
that  "the  actual  facts  as  to  the  prevailing  conditions  of  the  service"  should  be 
placed  at  tlie  disposal  of  the  wage  board.     "It  is  an  obligation  upon  the  public 
conscience,"  said  the  committee,  "that  the  benefits  of  the   franchises  which  are 
granted  to  the  street  railroads  should  not  be  enjoyed  exclusively  by  the  traveling 
public  or  by  the  corporate  stockholders,  but  that  they  should  be  shared  in  fair 
proportion  by  the  men  who  do  the  work.     There  is  every  reason,  therefore,  to 
give  the  boards  an  opportunity  to  consider  the  earnings  of  the  companies  as  an 
important  factor  in  fixing  the  wage  scale."     The  committee  al.so  pointed  out  that 
the  restriction  imposed  upon  the  employes  by  the  prohibition  of   "lockouts"   is 
illusorj'  so  far  as  any  benefit  to  the  men  is  concerned,  for  without  resorting  to 
a   lockout   the   employer   could   still    make   "wholesale   dismissals   of    individuals 
charged   with   insubordination  or  any  kind  of  oiTense."     The  committee  main- 
tained thiit  the  employes  of  a  street  railway  company  do  not  now  enjoy  any  of 
the  advantages  conferred  tipon  the  company  by  the  franchises,  and  alleged  that 


The  Right  to  Strike  559 

the  primary  aim  and  benefit  of  the  proposed  plan,  namely,  the  rendering  of  con- 
tinuous service,  would  accrue  to  the  companies  who  would  thereby  be  saved  from 
the  forfeiture  of  their  franchises.  Indeed,  it  was  pointed  out  that  "the  em- 
ployes of  franchise  companies  from  the  nature  of  the  service  are  subject  to 
special  obligations  and  restrictions  which  do  not  obtain  in  private  employment," 
and  it  was  urged  that  "they  should  be  guaranteed  a  high  level  of  compensation 
and  of  working  conditions."  "As  quasi-public  servants,"  contended  the  com- 
mittee, "they  might  well  be  put  in  the  same  class  with  the  direct  employes  of  the 
state  or  municipality.  Men  entering  public  service  have  certain  rights  and  pri- 
vileges, such  as  security  of  position,  in  general  better  pay,  and  more  and  more 
frequently  a  right  to  retirement  pay.  If  a  number  of  such  substantial  rights  were 
definitely  guaranteed  to  the  public  service  employes,  it  would  go  a  long  way, 
without  compulsion,  towards  avoiding  the  present  troubles  that  disrupt  the 
service."  The  committee  further  suggested  that  the  provisions  of  the  plan  were 
insufficient  to  secure  full  and  immediate  publicity,  and  urged  that  the  Public 
Service  Commission's  power  be  extended  so  as  to  include  express  authority  to 
require  from  the  companies  reports  concerning  all  the  conditions  of  labor. 

Mr.  Samuel  Gompers  also  appeared  before  the  commission  on  behalf  of 
organized  labor,  and  strongly  opposed  the  compulsory  features  of  the  plan,  stoutly 
maintaining  that  the  men  could  not  be  prevented  by  law  from  exercising  their 
"God-given  natural  right"  to  stop  working.  The  representatives  of  the  principal 
traction  companies  of  New  York  City  also  expressed  their  general  opposition  to 
the  commission's  plan.  Col.  Timothy  S.  Williams,  then  president  of  the  Brook- 
lyn Rapid  Transit  Company,  was  most  definite  and  outspoken  in  his  criticisms. 
He  feared  that  instead  of  procuring  continuity  of  service  and  the  establishment 
of  better  relations  between  the  companies  and  their  employes,  the  plan  "would 
be  productive  of  unrest  and  dissatisfaction  tending  to  disturb  relations  which  are 
now  harmonious  and  fairly  satisfactory." 

"You  speak  of  employers  and  employes  of  street  railroad  corporations,"  said  he,  "and 
you  arraign  one  against  the  other.  *  *  *  *  As  president  or  director  of  a  street  railroad 
corporation  I  am  just  as  much  an  employe  as  a  conductor  or  a  motornian.  The  real  employers 
are  the  numerous  body  of  men  and  women  and  institutions  that,  having  acquired  savings,  put 
those  savings  at  work  in  supplying  and  developing  transportation.  They  are  a  substantial  part 
of  what  is  called  the  public.  Your  plan  *  *  *  *  presupposes,  not  natural  and  spon- 
taneous harmony  between  these  participants,  but  antagonism,  and  the  doubtful  peace  sought 
to  be  enforced  by  law  or  official  fiat.  *  »  *  *  Your  plan  may  look  like  the  short  route 
to  industrial  peace  but  it  is  not  the  natural  route,  nor  the  safe  route,  nor  the  permanent 
route,  nor  is  it  founded  on  a  sound  principle.  In  its  practical  application  it  would  tend  to 
breed  trouble,  not  to  allay  it.  *  *  *  *  No  legislative  reforms  are  likely  to  be  so  abortive 
as  those  which  have  to  do  with  the  delicate  relations  between  labor  and  capital,  and  which 
on  the  one  side  may  threaten  fundamental  principles  of  individual  freedom,  and  on  the  other 
side,  imperil  or  unnecessarily  shackle  business  and  industry.  The  better  and  surer  way  to 
correct  industrial  evils  is  by  encouraging  a  more  enlightened  comprehension  of  respective 
self-interest  between  employed  and  employers." 

Colonel  Williams  cited  the  success  of  his  own  company  in  maintaining  har- 
monious relations  with  its  employes.  As  a  matter  of  fact,  his  car  lines  were 
the  only  important  ones  in  the  city  that  were  not  affected  by  the  strikes  of  1916, 
but  since  that  time  they  have  not  been  immune. 

These  two  New  York  plans,  while  differing  widely  in  details,  agreed  in 
their  fundamental  adherence  to  the  principle  of  legal  compulsion  for  the  preven- 


560  Electric  Railway  Problem 

tion  of  the  interruption  of  public  utility  service  through  the  concerted  action  of 
employes.  It  was  against  this  principle  that  the  Consumers'  League  and  the 
representatives  of  labor,  and  to  a  certain  extent  the  companies  themselves,  pro- 
tested most  vigorously.  From  the  standpoint  of  those  interested  primarily  in  the 
welfare  of  the  employes,  it  seemed  essential  that  the  full  protection  of  the  men 
should  take  precedence  over  the  interests  of  the  traveling  public.  While  it  was 
universally  recognized  that  continuity  and  sufficiency  of  service  were  of  great 
public  importance,  there  was  a  disposition  on  the  part  of  the  advocates  of  the 
employes  to  refuse  to  recognize  the  public  interest  as  paramount.  The  then 
recent  strikes  on  the  New  York  City  street  railway  systems  and  the  threatened 
strike  on  the  railroad  system  of  the  United  States  appeared  to  them  as  mere 
incidents  in  the  development  through  a  long  course  of  years  of  the  relations  be- 
tween labor  and  capital,  and  did  not  in  their  opinion  give  ground  for  the  asser- 
tion that  the  relative  importance  of  the  interests  of  the  three  parties — employers, 
employes  and  the  public — had  materially  shifted.  The  Public  Service  Commis- 
sion's plan  and  the  Merchants  Association  plan  in  ettect  said  to  the  employes: 
"You  must  keep  on  working.  The  state  will  see  that  you  are  properly  protected 
in  the  matter  of  wages,  hours  and  conditions  of  labor."  The  spokesmen  of  the 
employes,  on  the  other  hand,  said  in  substance :  "Give  us  first  the  protection  that 
we  ask  in  the  matter  of  hours,  wages  and  conditions  of  labor,  and  it  will  be  un- 
necessary for  you  to  forbid  us  to  strike,  for  then  we  shall  have  no  reason  to 
strike."  What  to  one  party  seemed  getting  the  cart  before  the  horse,  to  the 
other  seemed  getting  the  horse  before  the  cart.  The  proponents  of  the  plan  of 
compulsion  differed  quite  radically  with  the  committee  of  the  Consumers'  League 
in  one  respect :  they  maintained  that  the  employes  of  public  service  corporations 
now  do  as  a  matter  of  fact  enjoy  substantial  and  peculiar  benefits  growing  out 
of  the  nature  of  the  business,  and  out  of  the  privileges  conferred  and  the  obliga- 
tions imposed  by  public  franchises.  They  pointed  out  particularly  that  public 
utilities  are  not  by  any  means  subject  to  the  same  fluctuations  in  the  demand  for 
service  which  is  characteristic  of  most  other  lines  of  business ;  that  the  franchise 
requirements  of  continuous  service  to  prevent  forfeiture  automatically  exclude 
from  consideration  the  possibility  of  lockouts  or  temporary  shutdowns  from 
which  employes  in  other  branches  of  work  so  often  suffer;  and  that  the  em- 
ployes of  public  utilities,  particularly  of  street  railways,  coming  as  they  do  in 
continuous  contact  with  the  ])ublic.  are  in  a  much  more  favorable  position  for 
securing  the  support  of  public  opinion  in  their  struggles  for  better  wages  and 
working  conditions  than  the  employes  of  private  industries. 

A  consideration  of  the  I'ublic  Service  Commission  plan,  and  of  the  various 
objections  to  it  and  criticisms  of  it,  leads  inevitably  to  the  conclusion  that  as 
presented,  it  was  defective  in  many  respects,  and  that  the  two  plans  together 
raised  a  fundamental  issue  which  seems  to  involve  primarily  a  struggle  for 
precedence  between  the  interests  of  the  public  as  a  direct  or  indirect  consumer  of 
public  utility  service,  particularly  transportation,  and  the  interests  of  the  em- 
ployes of  the  public  scr\'ice  corporations. 

An  important  distinction  which  we  sometimes  overlook  is  that  between  the 
public  as  a  consumer  of  utility  service,  and  the  general  public  constituting  society 


The  Right  to  Strike  561 

as  a  whole,  whose  interests  are,  or  should  be,  paramount  in  the  formulation  and 
execution  of  all  governmental  policies.  As  a  consumer  of  utility  service,  the 
public,  like  any  other  buyer  of  goods,  is  interested  in  getting  as  much  as  it  can 
for  as  small  a  price  as  possible.  The  public  in  this  narrower  sense  is,  therefore, 
primarily  interested  in  good  service  and  low  rates.  It  has  no  interest  in  the 
security  of  public  utility  investments,  nor  in  their  receiving  a  fair  return,  nor 
in  the  guaranty  of  good  wages,  short  hours,  and  reasonable  conditions  of  employ- 
ment to  the  employes,  except  as  these  things  indirectly  react  upon  the  character 
of  the  service  rendered,  or  upon  the  rates  to  be  charged  for  the  service  in  the 
future.  On  the  other  hand,  the  general  public,  of  which  government  is  the  organ, 
is  as  much  interested  in  the  security  and  reasonable  profitableness  of  the  invest- 
ment and  in  the  welfare  of  the  employes  as  it  is  in  the  cheapness  of  the  service 
to  the  consumers.  The  general  public  includes  all  three  of  the  parties  immedi- 
ately concerned  and  is  interested  in  the  preservation  of  the  equities  among  them. 
Indeed,  every  special  interest  is  compelled  ultimately,  in  a  civilized  community, 
to  rely  upon  the  sense  of  justice  of  society  as  a  whole  acting  through  govern- 
mental agencies ;  and  it  is  safe  in  doing  so  because  the  observance  of  the  law  of 
justice  has  been  proven  by  the  world's  experience  to  be  the  first  rule  of  self- 
preservation  for  political  societies.  The  establishment  of  courts  freed  as  far  as 
possible  from  temporary  and  conflicting  political  influences  and  the  establishment 
of  public  service  commissions  removed  from  the  special  financial  interests  of  the 
local  consumers  of  public  utility  service  are  attempts  to  organize  in  an  effective 
way  society's  sense  of  justice.  Ultimately  every  individual  and  special  interest 
has  to  "throw  itself  on  the  mercy  of  the  court" ;  for  beyond  government,  there 
is  no  human  guaranty  of  any  right  whatever  in  the  relations  of  men  to  one 
another.  We  ought,  therefore,  to  consider  the  public  service  commissions,  the 
courts,  or  any  other  governmental  agencies  established  for  the  purpose  of  pre- 
venting strikes  in  public  utilities,  as  representing  the  interests  of  society  as  a 
whole — the  general  public  as  distinguished  from  the  consumers  of  the  utility. 
If  we  make  this  distinction  there  can  be  no  doubt  whatever  that  the  interests  of 
the  general  public  are  paramount  as  against  the  interests  of  any  one  or  all  of  the 
three  parties  immediately  concerned  in  the  operation  of  a  public  utility. 

From  this  point  of  view,  the  interest  of  the  narrower  public — the  consumers 
— appears  to  be  coordinate  with  that  of  the  employes  and  the  employers,  and 
cannot  claim  precedence  over  them  except  to  the  extent  that  the  welfare  of  the 
consumers  as  such  may  be  more  important  to  society  as  a  whole  than  the  welfare 
of  either  the  employers  or  the  employes.  It  is  not  clear  beyond  the  possibility 
of  dispute  that  the  interests  of  the  consumers  are  more  important  than  the  in- 
terests of  the  other  parties.  True,  the  consumers  are  vastly  more  numerous 
than  either  the  employes  or  the  employers,  even  if  we  accept  Colonel  Williams' 
definition  of  the  employers  as  the  stockholders  and  bondholders  who  have  put 
their  savings  into  public  utility  investments.  On  the  other  hand,  it  is  also  a  fact 
that  the  interest  of  a  street  railway  employe  in  the  conduct  of  the  street  rail- 
way business  is  much  more  important  to  him  than  the  interest  of  the  average 
citizen  in  the  conduct  of  the  street  railway  business.  To  the  employe  the  street 
railway  business  is  his  life;  to  the  average  citizen  who  rides  on  the  cars,  it  is  only 


562  Electric  Railway  Problem 

one  of  many  factors  of  his  life.  To  be  sure,  with  the  growth  of  cities  and  in- 
creasing dependence  of  citizens  upon  street  railway  transportation,  this  particular 
factor,  except  as  modified  by  automobile  competition,  tends  to  become  more  and 
more  important.  In  comparing  the  interests  of  the  riding  public  with  the  in- 
terests of  the  bondholders  and  stockholders,  we  may  also  say  that  possibly  the 
average  investor  has  more  at  stake  in  the  street  railway  business  than  the  citizen 
who  rides  on  the  cars.  Clearly,  the  interest  of  the  employes,  if  we  include  in 
that  term  all  the  operating  men  who  devote  their  lives  to  the  business,  is  more 
intense  on  the  average  than  either  the  interest  of  the  investors  or  those  of  the 
riding  public.  If  the  investors  fail  to  earn  a  fair  return  upon  their  investments 
their  loss,  as  a  rule,  is  only  partial  and  incidental;  if  the  citizens  who  ride  have 
to  pay  excessive  rates  or  submit  to  inadequate  service,  their  loss  also  as  a  rule 
is  partial  and  incidental ;  but  if  the  employes  suffer  through  either  insufficient 
wages,  excessive  hours  or  improper  conditions  of  work,  their  loss  is  not  partial 
or  incidental  but  affects  them  directly  "where  they  live."  With  the  great  increase 
in  the  size  of  cities,  the  dependence  of  the  individual  car  rider  ujion  the  con- 
tinuity of  service,  as  well  as  upon  the  quality  of  service,  gets  to  be  more  and 
more  vital.  To  many  it  appears  that  interruption  of  street  railway  service  in  a 
great  city  affects  so  profoundly  so  many  individuals  and  so  many  interests  as 
practically  to  constitute  a  paralysis  of  social  life,  thereby  threatening  not  merely 
the  interests  of  the  individuals  who  wish  to  ride  and  cannot,  but  the  vital  proc- 
esses of  society  itself.  The  fundamental  question,  therefore,  appears  to  be  this: 
"How  great  a  calamity  to  the  comxiumity  at  large  is  a  street  railway  strike?" 
While  it  may  possibly  be  true  that  the  calamitous  consequences  of  street  railway 
strikes  sometimes  have  been  overstated,  nevertheless,  other  things  being  equal, 
they  become  more  and  more  disastrous  to  the  general  public  as  cities  grow  and 
traffic  increases. 

I  cannot  agree  with  the  position  taken  by  the  labor  leaders  and  the  Con- 
sumers' League  in  opposition  to  compulsion.  1  believe  that  contiiuiity  of  service 
has  become  of  sufficient  importance  to  society  at  large  to  warrant  the  legal  pro- 
hibition of  street  railway  strikes.  As  Chief  Justice  White  well  said  in  the 
Adamson  law  decision,  the  rights  of  the  employe  to  demand  what  wages  he  de- 
sires, to  leave  his  employment  if  he  does  not  get  them,  and  by  concert  of  action 
to  agree  with  others  to  leave,  "are  necessarily  subject  to  limitation  when  employ- 
ment is  accei)tcd  in  a  business  affected  with  a  public  interest."  This  being 
"affected  with  a  public  interest"  is  what  differentiates  public  utilities  from  ordi- 
nary private  industries.  It  is  the  increase  in  the  consumers'  interest  that  dis- 
turbs the  old  tripartite  equilibrium  and  tends  to  make  the  interests  of  the  patrons 
of  the  utility  preponderant.  Whatever  may  be  our  view  as  to  the  present  status 
of  this  development,  it  seems  reasonably  clear  that  the  prohibition  of  strikes  in 
businesses  affected  with  a  public  interest  is  not  only  pemiissible.  but  theoretically 
logical  and  necessary.  Those  who  object  to  compulsion  on  theoretical  grounds 
take  a  position  that  is  quite  untenable.  It  is  much  as  if  two  farmers  quarreled 
over  the  ownership  of  a  |)iece  of  land,  and  one  of  them  insisted  on  the  right  to 
barricade  the  public  highway  in  ortler  to  prevent  the  other  from  hauling  his 
produce  to  town.     To  the  general  public  which   would  prohibit   him   from   ob- 


The  Right  to  Strike  563 

structing  the  higlnvay  and  would  offer  to  decide  the  dispute  through  a  court  es- 
tablished for  such  purposes,  he  would  say:  "No!  I  object  to  compulsion  being 
applied  to  me.  First,  make  my  neighbor  do  what  I  want  him  to,  and  there  will 
be  no  need  for  restraining  me,  for  then  I  will  not  wish  to  close  the  road.  Or, 
if  you  do  not  wish  to  compel  him  to  be  fair,  leave  it  to  me ;  for  1  can  exercise 
more  compulsion  by  shutting  him  away  from  his  market,  than  you  can  by  all  the 
court  decrees  in  the  world."  The  strike  is  a  form  of  private  war — mild  at  times, 
and  then  again  not  so  mild.  By  what  right  should  public  business  be  interrupted 
with  impunity  through  these  private  wars?  Why  should  they  not  be  prohibited 
and  the  disputants  compelled  to  take  their  claims  before  a  public  tribunal  and 
rely  for  protection  upon  the  community's  sense  of  justice,  which  is  the  ultimate 
protection  of  every  man  and  every  legitimate  interest?  Unsuccessful  strikes 
leave  labor  sore  and  plotting  for  the  next  struggle.  Successful  strikes  leave 
capital  full  of  distrust,  bitterness  and  fear.  Shall  we  ask:  Does  war  promote 
good  feeling  and  the  spirit  of  cooperation?  Interruptions  of  service  not  only 
cause  the  temporary  discomfiture  of  the  public,  but  also  tend  to  niake  impossible 
the  spirit  of  public  cooperation  upon  which,  as  everybody  admits,  the  financial 
success  of  the  electric  railways  depends.  Street  railway  strikes  are  a  serious 
public  menace.  They  must  be  prevented.  As  a  matter  of  right  the  public  must 
assume  ultimate  responsibility  for  the  wages,  hours  and  conditions  of  work  of 
electric  railway  employes,  and  in  view  of  the  public  nature  of  the  employment 
the  men  must  surrender  some  of  the  rights  that  attach  to  labor  in  strictly  private 
industry.  It  may  be  that  the  legal  prohibition  of  the  strike  will  become  a  more 
or  less  academic  question  if  the  public  first  takes  adequate  measures  for  the  ful- 
fillment of  its  own  responsibility  towards  street  railway  labor,  but  on  general 
principles  it  cannot  for  a  moment  be  conceded  that  labor's  "right  to  strike"  is 
paramount  to  the  public's  right  to  have  local  transportation  service  go  on  with- 
out interruption.  At  the  same  time,  punitive  legislation  is  useless  unless  it  is 
effective,  and  in  matters  like  this  it  can  hardly  be  effective  unless  accompanied 
by  preventive  legislation  that  is  eft'ective  in  the  first  instance,  and  it  may  be 
that  proper  preventive  measures,  while  in  theory  preparing  the  way  for  and 
justifying  punitive  measures,  will  in  fact  make  the  latter  unnecessary.  This  can 
be  determined  by  experiment,  but,  as  a  matter  of  principle,  after  the  community 
has  adopted  measures  which  in  its  judgment  make  strikes  in  essential  public 
industries  unnecessary,  its  right  to  prohibit  and  penalize  them  cannot  be  doubted 
and  ought  not  to  be  denied  or  given  up  by  implication  or  otherwise.  If  the  rights 
of  the  einployes  in  a  public  industry  cannot  be  protected  without  the  use  of  the 
strike,  we  need  a  change  of  government.  The  ultimate  remedy  for  such  a  con- 
dition is  political,  and  street  railway  motormen  and  conductors  have  the  same 
recourse  to  the  court  of  public  opinion  and  the  ballot  box  that  other  groups  of 
citizens  have. 


Chapter   XL\'I 

THE  PROGRAM   OF  THE   AMALGAMATED 

Mr.  W.  Jctt  l.aiiik.  former  secretary  of  tlie  National  War  Labor  Board, 
submitted  a  brief  on  behalf  of  the  Amalg^amated  Association  of  Street  and  Elec- 
tric Railway  Eniployes  of  America,  had  general  charge  of  the  preparation  of  the 
labor  case,  and  was  himself  one  of  the  principal  witnesses  before  the  Commission 
on  labor's  behalf.  While  he  did  not  discuss  specifically  the  theoretical  aspects 
of  the  employes'  "right  to  strike"  as  against  the  public's  right  to  continuity  of 
service,  Mr.  Lauck.  on  behalf  of  the  employes,  declared  emphatically  that  the 
public  interest  in  the  electric  railway  industry  is  paramount,  as  will  be  seen 
from  the  following  statement  taken  from  ])ages  83  and  84  of  his  brief: 

"The  paramount  interest  in  tin.-  entire  situation  is  the  public  interest.  It  is  dependent 
on  the  street  railways.  The  public  cannot  permit  them  to  cease  operation.  The  transportation 
facilities  arc  too  vitally  ImjuikI  up  in  tl'.eir  daily  lives  and  activities.  The  public,  therefore, 
is  forced  to  act. 

"The  present  cmcrRcncy  has  only  stimulated  and  brought  into  the  foreground  the  signifi- 
cant relation  lietwecn  the  street  railways  and  the  seneral  public.  The  realization  of  this  truth 
has  been  steadily  developing.  In  lornior  years,  electric  railways  were  looked  uixjn  as  purely 
private  enterprises.  They  were  regulated  only  on  the  ground  that  they  were  monopolies. 
Their  securities  were,  to  a  large  extent,  speculative,  and  oftcred.  because  of  the  monopoly 
control  of  the  companies  and  tlie  extraordinary  growth  of  towns  and  urban  centers,  unusual 
opportunities  for  speculation,  manipulation,  and  large  returns.  Street  car  passengers  were 
looked  to  by  the  companies  as  a  source  of  revenue  and  profit. 

"With  the  growth  in  urban  life,  however,  this  original  conception  gradually  changed. 
The  trend  of  opinion  came  more  and  more  to  the  conviction  that  the  street  railways  were 
social  institutions.  The  modern  view,  entirely  aside  from  the  present  plight  of  the  railways, 
has  come  to  Ik'  that  the  street  transportation  industry  is  a  public  institution  serving  as  high- 
ways or  common  carriers  for  the  people.  If  this  is  the  generally  accepted  view  at  the  present 
tiine.  and  the  teslimuny  before  the  Commission  clearly  shows  that  it  is,  the  practical  question 
is:  What  measures  shall  the  Commission  recommend  not  only  to  rehabilitate  the  industry 
financially  and  conserve  the  proiierties.  but  also,  what  constructive  policies,  permanently  to 
develop  and  maintain  the  most  economical  and  efficient  facilities  for  the  nse  and  convenience 
of  the  public.  The  fundamental  point  is.  in  other  words,  how  can  the  street  railways  Iw  best 
rehabilitated,  operatctl.  and  developed  for  the  lienefit  of  the  people,  due  regard  being  had  for 
the  fundamental  and  proper  interests  of  capital  invested  in  the  properties  and  of  labor 
empliiyed  by  the  street  niilway  companies.  The  public  is  undoubtedly  willing  to  pay  for  the 
efficient  operation  of  street  railways  on  the  basis  of  just  guaranties  to  capital  and  labor.  The 
problem  of  the  Conunission  is  to  consider  all  facts  and  constructive  proposals  and  to  recom- 
mend, with  these  just  guaranties  to  lalxir  and  capital  in  mind,  a  practical  scheine  of  reor- 
ganization and  operation  of  the  indnstr}." 


says: 

"( 

prudent 


Going  on  to  discuss  the  rights  of  capital.  Mr.  Lauck.  at  ])age  84  of  his  brief. 


"Capital  has  the  right  to  demand  that  its  investment  insofar  as  it  has  licen  actuallv  and 
,..  ..dciuly  made  and  honestly  administered  should  be  not  only  conserved,  but.  if  the  public 
should  accpiirc  any  or  all  "f  the  properties,  that  it  should  reimburse  the  owners  for  the 
.ictual  values,  or.  on  the  other  baud,  if  the  public  should  oidy  operate  and  not  actiuire  the 
properties  outriglit.  that  capital  shoidd  receive  a  reasonable  and  proper  rate  of  return." 


Union  Labor  Program  565 

With  respect  to  the  fundamental  rights  of  labor  and  the  interest  of  the  em- 
ployes in  the  rehabilitation  of  the  electric  railway  industry,  the  following  declara- 
tion is  made  at  pages  84  and  85  of  the  brief : 

"The  employes  have  as  direct  and  more  vital  interest  in  the  prosperity  of  the  industry 
than  even  the  investors  of  capital.  Should  street  railways  become  insolvent,  the  owners  of 
capital  might  suffer  a  hea\'\-  pecuniarj-  loss.  The  employes,  on  the  other  hand,  would  lose  their 
immediate  means  of  livelihood.  Furthermore,  many  of  the  employes  have  spent  a  number 
of  years  or  a  lifetime  in  the  service  of  the  industry.  They  have  devoted  their  working  years 
to  the  acquisition  of  training  and  experience  which  they  could  not  sell  as  advantageously  in 
other  lines  of  industrial  employment.  They  may  be  said,  therefore,  to  have  a  vested  interest 
in  their  positions  on  the  street  railways  which  is  even  more  valuable  and  vital  to  them  than 
the  vested  interest  which  capital  has  is  to  the  owners  of  street  railway  securities. 

"The  employes  are  therefore  an.xious  to  have  the  industry  rehabilitated  and  made  prosper- 
ous. They  are  desirous  of  having  the  public  protected  because  the  public  interest  is  paramount. 
They  insist,  however,  and  too  great  emphasis  cannot  be  put  upon  their  coi''cntion,  that  the 
reconstructive  policy  undertaken  must  be  based  upon  and  accepted  as  a  fundamental  prelimi- 
nary-, the  rights  of  labor,  as  accepted  by  all  civilized  and  leading  industrial  nations  in  the  Treaty 
of  Peace  with  Germany,  and  the  principles  which  have  been  accepted  and  proclaimed  by  our 
own  Government  as  those  which  should  govern  the  relations  between  employers  and  employes." 

The  three  fundamental  planks  in  the  Amalgamated  Association's  program, 
as  set  forth  by  Mr.  Lauck  and  the  other  witnesses  who  testified  on  behalf  of 
labor,  are  (1)  "the  right  to  organize,  or  union  recognition;"  (2)  "the  establish- 
ment, on  the  basis  of  a  national  standard,  of  a  living  wage  for  the  employes  in 
the  industry;"  and  (3)  "the  eight-hour  workday."  After  presenting  and  urging 
the  importance  of  these  three  fundainental  demands,  Mr.  Lauck,  in  his  oral  testi- 
mony, reaffirms  the  doctrine  that  the  public  interest  in  the  electric  railway  in- 
dustry is  paramount.     At  pages  1967  and  1968  of  the  Proceedings,  he  says : 

"We  are  advocating  these  principles  as  a  part  of  the  industrial  Bill  of  Rights,  so  to  speak, 
which  is  a  part  of  the  new  idea  of  democracy  in  industry.  Of  cour.se.  as  we  are  all  aware, 
out  of  the  war  has  come  an  entirely  different  attitude  towards  industry,  the  idea  being  more 
and  more  prevalent  that  industry-  is  a  social  institution,  and  must  work  for  the  common  good; 
that  both  labor  and  capital  in  their  rights  must  be  protected,  but  tliat  the  public  interest  must 
be  paramount.  So  it  has  occurred  to  us  in  the  consideration  of  this  body  that  here  you  have 
a  situation  where  the  public  interest  is  manifestly  predominant  and  where  there  should  be  a 
recognition  of  these  principles  in  working  out  a  constructive  program.  .\nd  we  have  refrained 
from  asking  specifically  for  the  establishment  of  any  rates  of  pay  by  the  Commission;  putting 
in  the  data  as  illustrating  w-hat  should  be  a  living  wage ;  but  we  ask  that  the  Commission 
recognize  these  principles  and  then  they  can  be  worked  out  by  the  management  and  the 
employes  in  the  way  that  seems  wise  and  best  to  them,  and  in  the  way  that  will  prevent  dis- 
locations or  undue  interference  with  the  proper  development  of  the  industry. 

"But  we  think  that  labor  has  a  right  to  the  recognition  of  these  principles  which  were 
in  the  War  Labor  Board  and  the  Peace  Treaty  and  we  earnestly  request  the  Commission  to 
consider  them,  and  irrespective  of  the  immediate  financial  effect,  leaving  it  to  the  good  judg- 
ment of  the  management  and  employes  to  apply  them  in  the  best  way  possible,  and  we  are 
perfectlv  content  to  have  the  employes  clothed  with  the  responsibility  of  cooperating  to  the 
fullest  extent  and  making  them  in  every  way  fully  responsible.  We  are  fearful  on  the  other 
hand  of  failure  to  recognize  these  principles,  as  we  all  know  the  tendency  now  is  in  industry, 
and  especiallv  on  public  utilities,  if  we  do  not  have  the  fair  measure  of  economic  rights  on  the 
part  of  employes,  the  tendency  will  be  to  drive  the  conservative  leaders  into  more  radical 
proposals,  and'mavbe  that  has  the  tendency,  as  in  steam  railroads,  to  the  advocacy  of  schemes 
which  are  reallv'the  autocracv  of  labor,  which  we  do  not  think  is  any  better  than  the 
autocracy  of  capital,  but  the  autocracy  of  industr>-  ought  to  be  in  the  public,  not  in  capital  or 
labor  but  in  the  public  and  with  just  guaranties  to  both  capital  and  labor." 

The  clear  inference  from  the  statement  just  quoted  is  that  the  Amalgamated 
Association  is  opposed  to  the  so-called  Plumb  Plan  advocated  by  the  railroad 
brotherhoods,  and  would  regard  such  a  plan  as  tending  to  establish  the  "autoc- 
racy of  labor"  which,  in  Mr.  Lauck's  opinion,  would  be  no  better  than  the 
"autocracy  of  capital."     It  would  not  be  safe  to  infer  from  this  testimony  that 


566  Electric  Railway  Problem 

the  Amalgamated  Association  would  be  willing  to  accept  a  plan  under  which  the 
paramount  interest  of  the  public  in  continuity  of  service  would  be  protected  by 
the  prohibition  of  the  strike,  along  with  guaranties,  deemed  by  the  public  to  be 
adequate,  that  the  fundamental  rights  of  labor  shall  be  conserved.  Still,  Mr. 
Lauck's  declaration  forms  a  logical  basis  for  such  a  conclusion  and  such  a  policy. 
It  is  perhaps  fair  to  assume  that  the  employes,  if  asked  to  accept  this  conclusion, 
would  strongly  insist  that  before  accepting  it  they  be  shown  the  guaranties,  and 
be  satisfied  that  they  are  in  fact  adequate.  They  might  take  a  position  similar 
to  that  taken  by  Mr.  James  H.  N'ahey  in  relation  to  the  legislation  proposed  by 
the  Massachusetts  street  railway  commission,  and  furthermore,  might  main- 
tain that  if  their  fundamental  demands  as  outlined  by  Mr.  Lauck  and  their  other 
witnesses  are  conceded  anti-strike  legislation  will  be  unnecessary.  It  is  incum- 
bent upon  us,  therefore,  to  examine  in  some  detail  the  principles  for  which  the 
Amalgamated  Association  demands  clear-cut  recognition. 

The  first  principle  for  which  the  Amalgamated  Association  contends  is  the 
recognition  of  the  union.  In  support  of  the  "right  to  organize"'  for  collective 
bargaining,  Mr.  Lauck  cites  in  his  brief  the  text  of  the  labor  clauses  of  the  Treaty 
of  X'ersailles  in  which  "the  right  of  association  for  all  lawful  purposes  by  the 
employed  as  well  as  by  the  employers"  is  laid  down  as  a  principle  of  special  and 
urgent  importance.  In  this  same  connection,  Mr.  Lauck  cites  the  principles 
"which  our  own  Federal  Ciovernment  adopted  as  an  industrial  code  or  constitu- 
tion, so  to  speak,  during  the  great  war,  and  which  were  interpreted  and  applied 
by  the  National  War  Labor  Board,"  including  the  following: 

"The  right  of  workers  to  organize  in  trade  unions  and  to  bargain  collectively  through 
chosen  representatives  is  recognized  and  affirmed.  Tliis  right  shall  not  be  denied,  abridged, 
or  interfered  with  by  the  employers  in  any  manner  whatsoever. 

"The  right  of  employers  to  organize  in  associations  or  groups  and  to  bargain  collectively 
through  chosen  representatives  is  recognized  and  affirmed.  This  right  shall  not  be  denied, 
abridged,  or  interfered  with  by  the  workers  in  any  manner  whatsoever. 

"Employers  should  not  discharge  workers  for  membership  in  trade  unions,  nor  for 
legitimate  trade-union  activities. 

"The  workers,  in  the  exercise  of  their  right  to  organize,  should  not  use  coercive  measures 
of  any  kind  to  induce  persons  to  join  their  organizations  nor  to  induce  employers  to  bargain 
or  deal  therewith. 

"In  establishments  where  the  union  shop  exists  the  same  shall  continue,  and  the  union 
.standards  as  to  wages,  hours  of  lalwr.  and  other  conditions  of  employment  shall  be  maintained. 

"In  establishments  where  union  and  non-union  men  and  women  now  work  together  and 
the  employer  meets  only  with  employes  or  representatives  engaged  in  said  establishments. 
the  continuance  of  such  conditions  shall  not  Ik-  deemed  a  grievance.  This  declaration,  how- 
ever, is  not  intended  in  any  manner  to  deny  the  right  or  discourage  the  practice  of  the  fonna- 
tion  of  latnir  unions  or  the  joining  of  the  same  by  the  workers  in  said  establishments,  as 
guaranteed  in  the  preceding  section,  nor  to  prevent  the  War  1-abor  Board  from  urging  or 
any  umpire  from  granting,  under  the  inachinery  herein  provided,  improvement  of  their 
situation  in  the  matter  of  wages,  hours  of  lalvir,  or  other  conditions  as  shall  be  found  desirable 
from  time  to  time." 

In  support  of  the  right  of  the  employes  to  organize  in  the  electric  railway 
industn,-,  Mr.  Lauck,  in  his  brief,  says: 

"The  lime  has  |)assed  when  collective  bargaining  can  or  should  be  interpreted  in  any  other 
way  than  as  to  mean  the  recognition  of  trade  unions  or  lalxjr  organizations.  Ai  urged  by 
emplo>es.  it  means  union  recognition.  They  do  not  contentplate.  neither  will  they  accept 
committee  systems  promoted  and  installed  on  the  initiative  of  street  railway  officials  for  the 
reason  that  they  know  that  any  such  systems  of  collective  liargaining  do  not  really  safeguard 
the  interests  of  labor,  and  cannot,  therefore,  permanently  endure  or  lie  permanently  effective. 
Thrv  demand  the  recognition  of  the  rights  of  the  employes  to  organize  into  labor  unions,  and 
to  deal  with  the  companies  with  accredited   rcpn-sentatives.     This  does  not   necessarily  mean 


Union  Labor  Program  567 

the  adoption  of  the  closed  shop  principle,  but  does  mean  that  the  street  railway  managements 
shall  conduct  all  negotiations  as  to  wages,  working  conditions,  and  relations  with  a  recognized 
labor  organization.  In  localities  where  the  employes  of  the  companies  are  not  already  organized 
into  unions,  it  shall  be  the  duty  of  railway  managers  not  to  discourage  the  employes  to  form 
labor  unions  as  a  means  of  dealing  with  the  management. 

"This  principle  as  to  union  recognition  is  no  longer  a  debatable  issue.  It  has  been  sanc- 
tioned by  the  society  of  civilized  nations.  Furthermore,  it  is  absolutely  essential  to  that  form 
of  cooperation  between  street  railroad  managements  and  employes  which  will  lead  to  efficient, 
economical,  and  stable  operation,  and,  as  a  consequence,  is  to  the  highest  degree  of  real  service 
to  the  public." 

Air.  Lauck  in  his  oral  testimony  lays  emphasis  upon  the  fact  that  the  Amal- 
gamated does  not  look  upon  a  local  organization  of  street  railway  employes, 
having  no  outside  affiliations,  as  a  union  in  the  sense  in  which  the  recognition  of 
the  union  is  laid  down  as  a  fundamental  principle  of  street  railway  labor  policy. 
This  point  came  out  in  the  discussion  of  the  cooperative  plan  of  organization  in 
the  Philadelphia  Rapid  Transit  Company  under  the  Mitten  management.  Mr. 
Lauck's  distinction  between  a  real  union  and  a  local  organization  such  as  that 
in  Philadelphia  is  stated  in  his  testimony  at  page  1881  of  the  Proceedings,  as 
follows : 

"The  Chairman  :  Where  you  get  all  the  men  organized  into  a  society  that  gives  them  many 
benefits  and  privileges,  what  would  you  call  it  if  it  is  not  a  union  of  the  men? 

"Mr.  Lauck :  You  miglit  call  it  a  local  union ;  but  in  the  accepted  term  of  unionism  it 
would  be  called  by  the  labor  representative  a  company  union,  you  might  say.  On  the  part 
of  the  employers,  they  would  consider  it  a  union.  But  from  the  strict  standpoint  of  unions 
or  labor  organizations,  it  would  not  be  considered  as  such,  because,  having  no  national  or  other 
affiliations,  it  would  be  considered  an  organization  of  employes,  but  not  a  union  in  the  accepted 
sense  of  the  term. 

"Commissioner  Mahon :  It  would  be  considered  by  the  labor  man  as  being  coirpletely 
under  company  direction? 

"Mr.  Lauck :     Yes. 

"The  Chairman:     That  is  not  so  at  Philadelphia,  is  it? 

"Commissioner  Mahon  :     VVe  think  so,  that  is  our  opinion. 

"Mr.  Lauck :  They  would  consider  it  as  what  they  would  term  in  a  colloquial  sense  a 
company  union.     All  of  them  are  known  by  that  name." 

Mr.  Lauck  is  of  the  opinion  that  any  form  of  collective  bargaining  not  based 
on  unions  is  futile ;  and  that  local  organizations  of  employes  not  affiliated  with 
employes  in  the  same  business  in  other  communities  cannot  in  the  long  run  be 
effective.  In  his  opinion  "company  unions"  or  committee  systems  cannot  stand 
because,  with  the  pressure  from  below  urging  the  committees  to  present  certain 
things  to  the  management,  coupled  with  the  fear  that  if  they  do  present  them 
they  will  become  "marked  men"  and  incur  the  displeasure  of  the  management  or 
suffer  in  their  working  relations  and  conditions,  they  go  to  pieces  between  the 
grinding  of  the  upper  and  the  nether  millstones.  When  asked  whether  the  com- 
pany can  control  its  employes  when  the  latter  have  the  right  to  elect  their  own 
representatives,  by  a  secret  ballot  system,  Mr.  Lauck,  at  page  1882  of  the  Pro- 
ceedings, makes  the  following  statement: 

"They  cannot  control  their  employes  at  all.  I  do  not  think  they  can  do  that,  but  I  think 
there  is  not  so  much  danger  from  the  employer  or  the  company  controlling  its  employes  under 
a  system  of  that  kind,  but  from  the  fact  that  the  employes  cannot  make  any  impression  on 
the  company,  as  they  have  no  basis  of  action.  If  the  company  refused  to  accede  to  any 
reasonable  request,  they  have  not  the  basis  of  strength  in  the  organization  to  force  the  com- 
pany in  the  way  they  would  if  they  had  a  national  affiliation,  with  the  financial  resources  of 
the  national  association,  and  all  the  strength  which  would  come  from  the  affiliated  bodies  in 
other  establishments  of  the  same  kind. 

"The  Chairman  :     They  have  the  right  to  strike  if  they  choose. 

"Mr.  Lauck  :  They  could  strike,  but  the  strike  would  he  futile  because  they  would  not 
have  any  means  of  support  beyond  their  own  local  funds  and  would  not  have  the  cooperation 


568  Electric  Railway  Problem 

of  other  members  in  their  cral't  engaged  in  similar  work  in  other  industries,  say  in  street  rail- 
way industry  in  other  localities,  so  that  the  chances  would  l)e  very  much  against  them  as 
compared  with  the  usual  unions,  which  in  the  event  ol  an  authorized  strike  would  have  the 
support  of  the  national  organization,  not  only  as  to  advice  but  as  to  financial  resources,  strike 
benefits." 

From  an  examination  of  the  record  it  does  not  appear  that  the  labor  wit- 
nesses proved,  or  attempted  to  prove,  otherwise  than  by  argument,  the  superior 
benefits  derived  by  the  employes  when  organized  in  unions  affiliated  with  the 
Amalgamated  as  compared  with  benefits  derived  by  employes  from  informal  or 
strictly  local  organizations.  The  fact  that  the  Amalgamated  Association  has 
been  influential  in  improving  wages,  hours  and  conditions  of  work  in  the  electric 
railway  industry  was  rather  assumed  than  proven.  Perhaps  the  most  significant 
fact  supporting  this  assumption,  brought  out  in  the  testimony,  is  that  the  coopera- 
tive plan  in  Philadelphia  under  stress  of  war  conditions  had  to  be  modified  so 
as  to  enable  the  employes  to  get  a  living  wage,  and  in  connection  with  that  modi- 
fication a  new  standard  was  establi.shed  by  agreement  between  the  company  and 
the  men  to  the  effect  that  the  wages  paid  in  Philadelphia  are  to  be  determined  by 
the  average  wages  paid  in  Chicago.  Cleveland,  Detroit  and  Buffalo,  the  four 
cities  which  at  the  time  of  the  agreement  were  supposed  to  be  the  best  from  the 
standpoint  of  the  men.  It  is  noteworthy  that  the  street  railway  employes  in  each 
of  these  four  cities  are  unionized.  It  is  claimed,  therefore,  on  the  part  of  the 
Amalgamated,  that  the  employes  of  the  Philadelphia  Rapid  Transit  Company 
are  now  reaping  the  fruits  which  were  first  won  by  the  electric  railway  employes 
in  these  other  cities  through  the  activities  of  the  Amalgamated.  Nevertheless, 
the  case  for  union  recognition  as  presented  to  the  Conmiission  was  based  pri- 
marily upon  the  declarations  of  policy  made  by  the  Federal  Government  during 
the  war  and  embodied  in  the  labor  clauses  of  the  Peace  Treaty  rather  than 
upon  new  and  special  proofs.  As  we  have  seen,  Mr.  l.auck  took  the  position 
that  union  recognition  "is  no  longer  a  debatable  issue." 

The  second  fundamental  principle  upon  which  the  representatives  of  labor 
laid  stress  was  the  establishment  of  a  living  wage.  This  principle  was  also 
supported  by  the  citation  of  the  labor  provisions  of  the  Peace  Treaty  and  bv  the 
program  of  the  Federal  (lovernmcnt  as  applied  by  the  National  War  Labor 
Board.  Upon  this  jmint  the  Treaty  states  "that  labor  should  not  be  regarded 
merely  as  an  article  of  coiumcrce"  and  that  among  the  methods  and  principles 
deemed  to  be  of  special  and  urgent  importance  for  regulating  labor  conditions 
in  all  industrial  communities  is  "the  i)ayment  to  the  employed  of  a  wage  adequate 
to  maintain  a  reasonable  standard  of  living  as  this  is  understood  in  their  time 
and  country."  The  labor  program  formulated  by  the  Federal  Ciovemment  dur- 
ing the  war  included  the  following  provisions  with  respect  to  the  living  wage: 

"(1)  The  right  of  all  workers  including  common  latwrers  to  a  living  wage  is  hereby 
declar«l. 

"(2)  In  fixing  wages,  minimum  rates  of  pay  .shall  be  established  which  will  insure  the 
subsistence  of  the  worker  and  his  family  in  health  and  reasonable  comfort." 

Commenting  upon  these  declarations,  Mr.  Lauck  in  his  testimony,  at  pages 
1890  and   1891   of  the  Proceedings,  says: 

"Another  remarkable  development  in  this  connection  has  been  that  almost  without  ex- 
ception all  the  religious  or  ecclesiastical  organizations  of  the  country  and  of  Great   Britain 


Union  Labor  Program  569 

and  Europe  have  given  their  sanction  to  this  same  principle,  and  ihey  not  only  give  their 
sanction,  bnt  are  practically  carrying  on  educational  propaganda  and  practical  measures,  have 
collected  funds,  and  are  engaged  in  the  work  of  giving  widespread  consideration  to  this  prin- 
ciple, and  attempting  to  realize  its  practical  application  in  some  way. 

"So  that  it  might  be  said  that  to  demand  a  living  wage  for  the  employes  of  the  street 
railways,  as  a  condition  to  any  reports  by  the  board  is  a  verj'  sound  position,  not  only  from 
the  standpoint  of  public  policy  of  this  Government,  the  standpoint  of  the  public  policy  as 
announced  by  all  the  leading  industrial  and  commercial  nations  of  the  world  in  the  Peace 
Treaty,  but  it  has  received  the  universal  sanction  of  the  churches  of  all  denominations,  both 
Protestant  and  Catholic  churches ;  it  has  the  sanction  of  the  leading  employers  of  labor  in 
this  country,  as  set  forth  in  the  principles  enunciated  and  followed  by  the  National  War 
Labor  Board;  it  is  the  fundamental  economic  and  political  right  to  which  labor  is  entitled  by 
every  ethical  and  moral  consideration ;  and  to  deny  the  motormen  and  conductors  the  principle 
of  a  living  wage,  it  seems  to  me.  in  the  face  of  these  announced  policies  and  practices  of  our 
own  Government,  and  in  the  face  of  the  guaranties  of  all  civilized  nations  in  the  Peace 
Treaty,  would  he  more  than  equivalent  to.  and  more  serious  than  the  denial  of  free  speech, 
the  denial  of  the  right  of  assembly  or  religious  freedom  or  any  other  civic  right  or  liberty. 
In  other  words,  as  we  shall  claim  later,  we  claim  this  now  as  a  fundamental,  economic  right 
to  labor  which  should  be  embodied  in  the  recommendations  of  this  board  for  the  financial 
rehabilitation  of  the  industry." 

While  the  Amalgamated  did  not  ask  the  Commission  to  fix  in  specific  figures 
a  standard  or  living  wage  for  electric  railway  employes,  it  did  produce  evidence 
to  the  effect  that  in  the  pre-war  days  motormen  and  conductors  were  underpaid 
from  the  point  of  view  of  what  is  recognized  in  the  labor  movement  as  a  living 
wage ;  that  since  the  opening  of  the  war  their  wage  increases  have  at  least  no 
more  than  kept  pace  with  the  increase  in  the  cost  of  living;  that,  therefore,  they 
are  still  underpaid;  and  specifically  that  in  October,  1919,  when  the  evidence  was 
presented,  a  living  wage  based  on  a  "minimum  comfort  budget"  for  a  familv  of 
five  would  be  approximately  §2.000  a  year,  which,  figured  on  the  basis  of  an  eight- 
hour  workday  and  325  workdays  per  year  would  require  an  hourly  wage  rate  of 
77  cents.  In  this  connection  it  is  noteworthy  that  at  the  time  of  the  hearings  no 
electric  railway  in  the  country  was  paying  as  high  a  rate  as  this,  but  that  in  May, 
1920,  the  Cleveland  Railway  Company  agreed  to  a  new  scale  of  wages  with  75 
cents  per  hour  as  the  maximum  rate. 

In  support  of  the  claim  that  trainmen's  wages  before  the  war  were  not  up 
to  a  living  standard,  the  Amalgamated  produced  as  witnesses  Mr.  Arthur  Sturgis, 
an  electrical  engineer  of  Boston,  who,  since  1914,  has  devoted  a  great  deal  of  his 
time  to  the  preparation  of  statistics  for  street  railway  arbitrations,  and  Professor 
William  F.  Ogburn,  of  Columbia  University,  an  eminent  authority  on  budgetary 
studies.  Mr.  Sturgis  analyzed  the  special  reports  on  street  and  electric  rail- 
ways issued  by  the  Census  Bureau  for  1902,  1907  and  1912,  the  advance  sheets 
of  the  report  for  1917,  and  the  street  railway  statistics  for  1918  presented  by  Mr. 
James  W.  Welsh,  statistician  for  the  American  Electric  Railway  Association. 
On  the  basis  of  this  analysis  Mr.  Sturgis  found  that  the  average  yearly  wage 
of  conductors  and  motormen  in  the  different  periods  mentioned  was  as  follows: 

1902  $606        1917  $934 

1907  655        1918    990 

1912  in 

Mr.  Lauck  in  his  brief  said  that  "according  to  the  most  authoritative  students, 
annual  earnings  of  $900  by  the  head  of  an  average  household  were  barely  suf- 
ficient prior  to  the  war  for  a  minimum  of  physical  subsistence."  He  cites  as 
authority  an  investigation  made  for  the  Russell  Sage  Foundation  by  Dr.  Robert 


570  Electric  Railwav  Problem 

Cort  Chapin  and  published  in  1909  under  the  title  "The  Standard  of  Living 
among  Working  Men's  Families  in  New  York  City."  From  this  work  the  fol- 
lowing general  conclusions  are  quoted : 

"1.     "An  income  under  $800  is  not  enough  to  permit  tlie  maintenance  of  a  normal  standard. 

"2.  'An  income  of  $900  or  over  probably  permits  the  maintenance  of  a  normal  standard, 
at  least  as  far  as  the  physical  man  is  concerned. 

"3.  "It  seems  probable  that  on  an  amount  ranging  from  $800  to  $900,  the  standards 
prevailing  among  Bohemians,  Russians,  Austrians,  and  Italians  may  be  maintained,  but  that 
it  is  the  exception  rather  than  the  rule,  when  the  more  expensive  standards  of  the  .\merican 
and  kindred  nationalities  are  maintained  on  this  amount. 

"4.  '.\  comparison  of  the  families  by  nationalities  shows  that  at  almost  every  point  a  lower 
standard  of  expenditure  prevails  among  the  Bohemians.  Russians,  .\ustrians,  and  Italians 
than  among  the  .Americans.  Teutons,  and  Irish.  The  families  of  the  former  group  on  in- 
comes above  $700  to  $800  begin  to  save  and  show  a  surplus  *  *  *  »  while  families  of 
the  other  group  do  not  reach  the  saturation  point,  so  to  speak,  below  an  income  of  $900  or 
$1,000. 

"5.  'The  standard  of  living  \'aries  as  the  two  jaws  of  the  vise,  wages  and  prices,  con- 
tract and  relax.' " 

From  Lauck  &  Sydenstricker's  book,  "Conditions  of  Labor  in  American 
Industries  (1917),"  Mr.  Lauck  quotes  as  follows: 

"The  various  recent  investigations  of  budgets  of  families  in  different  ranges  of  income 
appear  to  indicate  quite  clearly  that  the  point  of  adi-i|uate  subsistence  is  not  readied  until  an 
income  of  about  $8(X)  or  $900  is  provided.  Tlie  i)erccntagc  of  family  income  spent  for  food 
remains  practically  the  same,  or  is  greater,  in  families  with  incomes  of  less  than  that  amount; 
in  families  with  incomes  of  $800  or  more,  the  percentage  of  income  spent  for  food  is  found 
to  be  proportionately  less  as  income  increases,  indicating  that  only  then  is  income  sufficient 
to  allow  a  surplus  left  from  food,  rent.  etc..  to  be  spent  on  'incidentals.'" 

At  page  1826  of  the  Proceedings,  Mr.  Lauck  calls  Professor  Ogburn's  atten- 
tion to  Dr.  Cliapin's  conclusions  in  1907,  and  elicits  the  following  testimony  with 
respect  to  the  relation  of  the  average  pre-war  wage  of  motormen  and  conductors 
to  the  living  wage : 

"Mr.  Lauck :  Vou  rememlx-r  Dr.  Chapin's  conclusions  in  1907  as  to  the  relations  of 
incomes  at  that  time  to  the  standards  of  living? 

"Mr.  Ogburn:     In  a  general  way,  yes,  I  remember  that. 

"Mr.  Lauck  :  He  says  an  income  under  $800  is  not  enough  to  permit  of  the  maintenance 
of  a  normal  standard ;  is  that  correct  ? 

"Mr.  Ogburn:     Ves ;   1  think  it   is  pretty  generally  accepted. 

"Mr.  Lauck:     I  am  talking  about  before  the  war,  now. 

"Mr.  Ogburn :     Yes. 

"Mr.  Lauck  :  .\nd  an  income  of  $900  or  a  little  over  permits  of  the  maintenance  of  a 
normal  standard,  at  least  as  far  as  the  physical  man  is  concerned? 

"Mr.  Ogburn:     What  I  call  the  bare  subsistence  level. 

"Mr.  Lauck:     Before  the  war? 

"Mr.  Ogbuni:     Yes. 

"Mr.  Lauck:  Mr.  Sturgis  testified  this  morning  that  in  1914  the  average  annual  earnings 
of  the  street  railway  motonnen  and  conductors  were  $8()4 ;  so  that  on  that  standard  of  com- 
parison it  would  Ik*  below  a  subsistence  level,  would  it  not  ? 

"Mr.  Ogbuni:     Yes.  considering  that   Mr.  Chapin's   figures  are   fairly  conservative. 

"Mr.  I^uck  :     .-Xnd  his  figures  were  made  in  1907,  seven  years  before  I9I4. 

"Now,  Mr.  Sturgis  testified  this  morning,  if  1  remember  correctly,  that  in  1907  the 
average  annual  earnings  of  a  motonnan  and  conductor  were  $655.  Mr.  Chapin  .says,  in  1907, 
that  an  income  under  $8(X)  was  not  sufficient  to  permit  of  the  maintenance  of  a  normal 
standard,  so  that  he  would  be  underfed,  undcrclothed,  uiiderhoused  and  subnormal.  Then,  in 
1914,  this  figure  of  $864,  according  to  Dr.  Chapin's  standard,  would  be  below  the  subsistence 
level,  and  according  lo  your  own  standard  or  the  results  of  your  own  study  at  that  time? 

"Mr.  Ogburn  :  Yes,  Chapin's  figure  might  he  a  little  higher  than  that.  1  mean  it  might 
Ik-  a  little  over  $9lX)  by  1014  on  account  of  foixl  having  gone  up. 

"Mr.  Linck  :     Tlierr  were  seven  years  there  that  were  not  provided  for. 

"Mr.  Ogburn :     Yes. 

"^lr.  I^uck :  .■\nyhow,  it  would  indicate  that  these  earnings  were  entirely  inadequate, 
would  it  not,  according  to  your  conclusions  as  to  the  subsistence  level? 

"Mr.  Ogburn  ;     Well,  yes,  one  would  think  so." 


Union  Labor  Program  571 

Mr.  Sturgis  presented  evidence  to  show  that  the  average  maximum  hourly 
rate  paid  by  120  electric  railway  companies  in  January,  1914,  was  28  cents,  and 
that  the  average  maximum  rate  paid  to  employes  of  all  of  the  227  local  divi- 
sions of  the  Amalgamated  on  January  1,  1919,  was  41.1  cents.  These  figures 
were  subsequently  brought  up  to  October  5,  1919,  when  the  average  was  45.32 
cents.  This  indicated  an  increase  of  about  62  per  cent  in  wages  as  compared 
with  an  increase  of  7i  or  80  per  cent  in  the  cost  of  living  during  approximately 
the  same  period.  Referring  to  the  change  in  the  cost  of  living  from  June,  1914, 
to  September.  1919.  Professor  Ogburn,  at  page  1802  of  the  Proceedings,  says : 

"Yes,  I  usually  think  of  it  as  between  75  and  80  per  cent.  It  is  questionable  whether 
you  can  figure  it  to  the  e.xact  fraction  of  a  per  cent,  but  I  would  say  for  the  country  as  a 
whole  from  75  to  80  per  cent  would  be  a  fairly  scientific  estimate  of  the  increase." 

The  evidence  seems  fully  to  support  the  contention  of  the  Amalgamated  that 
wages  were  not  increased  by  the  National  War  Labor  Board,  and  have  not  since 
been  increased,  enough  to  put  the  motormen  and  conductors  in  a  relatively  better 
position  with  respect  to  the  cost  of  living  than  they  were  in  before  the  war. 
This  conclusion  is  also  supported  indirectly  by  the  testimony  of  Mr.  Leifur  Mag- 
nusson,  an  economist  employed  in  the  Bureau  of  Labor  Statistics,  who  appeared 
before  the  Commission  not  as  a  representative  of  the  Bureau,  but  as  a  witness 
for  the  Amalgamated.  Mr.  Magnusson  presented  a  statement  showing,  on  the 
basis  of  an  eight-hour  day,  the  daily  earnings  in  ninety  principal  occupations 
in  1914  and  again  in  1919,  with  the  percentage  of  increase  in  each  case.  Mr. 
Magnusson's  tabulation  is  printed  in  full  at  pages  49  to  51  of  Mr.  Lauck's  brief. 
It  shows  that  among  the  various  classes  of  workmen  listed  the  motormen  and 
conductors  on  electric  railways  earned  in  1914,  on  the  eight-hour  day  basis,  an 
average  daily  wage  of  $2.27,  and  in  1919  an  average  daily  wage  of  $3.38,  an  in- 
crease of  48.9  per  cent.  In  1919  the  motormen  and  conductors  were  next  to  the 
lowest  on  the  list.  Below  them  were  the  trapper  boys  engaged  in  bituminous 
coal  mining  in  the  Hocking  Valley  district,  whose  average  daily  wage  was  $2.65. 
It  is  noteworthy  that  in  1914  laborers  in  arsenals,  greasers  and  couplers  in 
bituminous  coal  mining,  laborers  in  navy  yards,  and  common  laborers  in  the  iron 
and  steel  industry  all  received  lower  wages  than  motormen  and  conductors,  while 
in  1919  they  all  received  higher  wages.  Of  the  ninety  occupations  listed  only 
fifteen  showed  a  smaller  percentage  increase  in  wage  rates  from  1914  to  1919 
than  the  increase  in  trainmen's  wages.  In  fact,  twenty-one  of  the  ninety  showed 
an  increase  of  over  100  per  cent  as  compared  with  the  trainmen's  increase  of 
48.9  per  cent.  While  the  relatively  greater  increase  of  wages  in  other  occupa- 
tions does  not  in  itself  prove  that  the  increase  in  trainmen's  wages  has  not  been 
proportionate  to  the  increase  in  the  cost  of  living,  it  points  in  that  direction  and 
may  be  taken  as  supporting  the  positive  testimony  of  such  witnesses  as  Mr. 
Sturgis  and  Professor  Ogburn. 

The  issue  with  respect  to  wages  presented  by  the  Amalgamated  simmers 
down  to  the  fundamental  questions  as  to  whether  or  not  the  principle  of  a  living 
wage  should  be  established  in  the  electric  railway  industry  and  as  to  what  a 
living  wage  is  under  present  conditions.  On  both  these  points  Professor  Og- 
burn's  testimony  is  of  great  interest  and  importance.     It  should  be  stated  that 


572  Electric  Railway  Problem 

prior  to  Professor  Ogburn's  connection  with  Columbia  University  he  served  as  a 
special  agent  of  the  Bureau  of  Labor  Statistics  connected  with  the  cost  of  living 
investigations,  and  as  director  of  the  cost  of  living  department  of  the  National 
War  Labor  Board,  and  prior  to  that  was  a  professor  in  the  University  of  \\'ash- 
ington,  where,  in  1917,  he  prepared  the  budget  accepted  by  the  board  of  arbitra- 
tion in  the  award  to  the  trainmen  employed  on  the  electric  railway  lines  of  Seattle. 
Speaking  of  the  general  question  of  the  standard  of  living  and  the  origin  and 
development  of  the  idea  of  a  minimum  or  living  wage,  at  pages  1803  and  1804 
of  the  Proceedings,  Professor  Ugburn  says : 

"111  regard  to  the  question  of  the  standard  ot  living,  it  has  been  my  custom  in  con- 
nection with  the  wage  adjustments  of  the  \\  ar  Labor  Board  to  think  of  the  cost  of  living 
in  quite  two  separate  categories,  one  Ijeing  the  category  of  the  increase  or  decrease  as  the 
case  may  be  in  the  cost  of  living,  and  that  was  oftentimes  used  by  the  Board  in  adjusting 
the  increases.  However,  in  some  cases  it  was  claimed  by  parties  in  dispute  or  in  the  arbitration 
that  it  would  be  unfair  to  adjust  wages  by  the  amount  of  the  increased  cost  of  living,  although 
that  might  be  measured  fairly  satisfactorily,  for  the  reason  that  in  the  pre-war  period  the 
living  as  enjoyed  by  the  workingmen's  family  was  inadequate.  That  was  met  in  a  number 
of  disputes  and  is  claimed  by  the  working  i)co|)Ie  quite  frequently. 

"Well,  you  see,  if  that  point  is  raised,  it  would  seem  the  satisfactory  way  to  meet  that 
is  to  make  some  study  as  to  what  is  an  adequate  standard  of  living.  That  brings  up  a  question, 
therefore,  of  a  study  of  levels  or  standards  of  living  irrespective  of  any  increases,  just  a  static 
concept  of  how  much  does  it  take  to  live? 

"Now.  that  question  is  of  course  one  of  immense  difficulty  in  determining.  It  is  one.  how- 
ever, which  experts  in  economic  and  social  sciences  have  been  engaged  in  studying  for  a 
number  of  years. 

"In  studying  the  c|uestion  of  the  standard  of  living  they  have  focussed  their  attention,  I 
should  say,  rather  largely  on  what  might  be  called  a  minimum  subsistence  level  or  a  bare 
subsistence  level  as  it  is  sometimes  spoken  of.  ^'ou  can  very  readily  see  that  there  will  be 
various  levels  of  living  according  to  the  income  which  a  family  enjoys.  .■\nd  .so  one  might 
conceivably  study  a  level  at  any  particular  point  in  the  scale.  But  attention  has  been  focussed, 
I  should  say.  most  upon  what  is  called  a  bare  subsistence  level. 

"The  idea  originated  a  number  of  years  ago  on  the  part  of  social  reformers  and  statesmen 
who  were  interested  in  what  they  called  setting  a  mim'mum.  You  find,  for  instance,  in  the 
L'niled  States  that  a  good  many  states  have  set  minimum  wages  in  re^rd  to  the  living  of 
an  unmarried  woman ;  and  you  will  find  in  sonic  of  the  European  countries  and  particularly 
.•\ustralia  and  New  Zealand  that  the  states  have  set  a  minimum  standard  of  living  for  a 
family  as  well  as  for  an  unmarried  woman. 

"These  minimum  ideas  have  been  considered  quite  a  little  by  charity  organization  societies 
and  relief  agencies  in  our  larger  cities,  settlement  house  workers  and  so  on.  The  idea  seems 
to  he  spreading,  and  according  to  prediction  1  wcnild  think  bids  fair  to  become  quite  an  im- 
portant point  in  our  national  policy.  The  British  I^bor  movement  seems  to  be  very  much 
concerned  with  this  .same  idea  which  they  phrase  as  a  national  minimum,  and  the  platform 
of  their  party  states  it  this  way :  "That  there  shall  Ix!  a  line  drawn  across  society  lielow 
which  no  family  shall  be  permitted  to  live'  The  idea  as  we  express  it  in  America  is  some- 
times phrased  this  way,  that  the  minimum  standard  of  living  or  the  minimum  hare  subsistence 
level  is  a  level  below  which  when  wage  earners  fall  in  a  particular  industry  that  industry- 
is  said  to  be  parasitic;  that  is  to  say.  the  theory  or  policy  of  the  minimum  wage  is  that  the 
slates  should  not  permit  an  industry  to  pay  less  than  a  living  wage.  •  •  *  •  That  has 
gone  into  effect  so  far  as  uimiarried  women  go.  hut  that  is  the  theory,  that  the  state  would 
ho  justified  in  using  its  authority  as  a  state  in  forcing  an  industr\-  to  pay  these  wages  or 
force  it  to  desist.  .'Vs  I  say,  they  have  not  by  use  of  the  state  authority  applied  it  in  the 
United  States  to  families. 

"That  is  the  general  positifm  by  which  the  minimum  wacc  concept  comes  into  our  political 
and  social  life.  Now.  a  great  deal  would  naturally  center  around  the  (|uestion  of  the  measiire- 
mrnt  of  this  point.  That  is  to  say.  how  can  you  determine  what  this  point  is?  Naturally, 
minimum  wage  legislation  and  studies  will  Ik-  successful  to  the  extent  that  they  are  able  to 
.scicntificallv  determine  a  point  or  a  standard,  and  by  a  point  or  a  standard  1  mean  to  set  some 
point  in  which  there  is  some  scientific  validity." 

Professor  <  tpbnrn  points  out  that  the  determination  of  the  amount  of  in- 
come required  for  the  maintenance  of  a  proper  standard  of  living  is  measured 
in  various  ways.     He  refers  to  a  study  made  in  Johnstown.  Pennsylvania,  during 


Union  Labor  Program  575 

the  pre-war  period,  by  the  Children's  Bureau  Department  of  the  Bureau  of 
Labor.  This  study  was  subsequently  extended  to  a  number  of  other  cities. 
It  showed  that  in  pre-war  days  in  families  having  an  income  of  $550  the  infant 
mortality  rate  was  about  150.  whereas,  in  families  having  an  income  of  $1,250 
the  infant  mortality  rate  was  only  65.  He  states  that  at  the  time  of  giving  his 
testimony  the  equivalent  incomes  would  be  about  $950  and  $2,200,  respectively. 
He  also  refers  to  malnutrition  as  a  test  of  the  standard  of  living  and  cites  the 
study  made  in  the  schools  of  New  York  City  a  few  years  ago  in  which  it  was 
found  that  approximately  20  per  cent  of  the  100,000  children  examined  were 
underfed.  He  also  refers  to  the  results  shown  by  the  draft  during  the  war  with 
respect  to  which  the  Provost-Marshal  reports  that  of  men  between  21  and  31 
years  of  age  only  70  out  of  every  100  chosen  were  accepted  as  physically  quali- 
fied for  general  military  duty.  He  admits  that  "the  economic  cause  would  not 
account  for  all  disbarments  on  the  draft,  because  of  various  physical  ailments 
which  may  not  be  due  to  economic  causes."  but  thinks  that  perhaps  one-half 
may  be  attributable  to  these  causes.  In  that  connection  he  cites  a  remark  credited 
to  Mr.  Lloyd  George  to  the  effect  that  "if  they  had  had  a  better  minimum  wage 
in  England  they  would  have  had  a  luillion  more  men  with  which  to  defend  the 
country."  He  also  refers  to  housing  conditions  as  a  criterion  of  the  standard 
of  living;  and  here  again  it  is  largely  a  matter  of  the  infantile  death  rate.  With 
respect  to  diet  and  "calories"  as  a  criterion.  Professor  Ogburn  says,  at  page 
1807  of  the  Proceedings : 

"There  is  just  one  other  point  on  that  I  might  speak  of  in  connection  with  the  question 
of  what  are  the  criteria  for  determining  this  particular  level  of  living,  and  that  centers  around 
the  question  of  food.  I  referred  indirectly  to  it  in  speaking  of  malnutrition  a  while  ago ; 
but  a  diet  is  considered  to  be  a  highly  important  factor  in  maintaining  a  general  well-being. 
Of  course,  it  is  essential  in  what  we  call  existence.  The  most  convenient  and  common  index 
of  the  diet  value  is  an  energy  unit  called  the  calorv'.  In  other  words,  to  keep  the  human 
machine  going,  it  has  to  be  fed  fuel,  just  as  an  engine  will  have  to  be  fed  coal  to  make  the 
machinery  turn  around;  and  this  food  generates  these  fuel  units  called  the  calory. 

"The  question  arises,  what  should  be  the  supply  of  this  energy  value  to  a  man?  It  has 
usually  been  set  for  a  man  at  moderately  hard  muscular  work  as  being  3,500  calories  per  man 
per  day.  This  is  the  standard.  I  believe,  set  by  .^twater.  and  it  is  the  standard  employed,  I 
think,  by  the  Department  of  Agriculture  of  the  United  States  Government." 

Professor  Ogburn  points  out  that  there  has  recently  been  somewhat  of  a 
reaction  against  the  "calory  standard"  on  the  ground  that  food  has  other  values 
besides  that  of  furnishing  energy.  He  goes  on  to  say  that  when  a  diet  for  a  man 
contains  3,500  calories  a  day  it  is  on  the  average  assumed  to  be  an  adequately 
balanced  diet,  although  it  might  be  possible  to  get  a  proper  balance  of  the  various 
chemicals  required  by  the  human  system  without  having  so  many  calories.  It  is 
assuined,  however,  that  "the  ordinary  housewife,  not  particularly  trained  in  these 
matters,  would  probably,  on  the  average,  not  get  an  adequately  balanced  dietary 
unless  she  computed  it  on  a  basis  sufficiently  liberal  to  furnish  3,500  calories  per 
man  per  day." 

In  Professor  Ogburn's  budget  studies  a  family  is  assumed  to  consist  of  a 
man,  his  wife  and  three  children.  Particular  emphasis  is  laid  on  certain  studies 
of  the  Bureau  of  Labor  Statistics  from  which  Professor  Ogburn  drew  the  con- 
clusion that  at  the  time  he  was  giving  his  testimony  a  proper  diet  for  the  average 
family  would  involve   an  expenditure  of    from  $700  to  $750  a  year   for   food 


574  Electric  Railway  Problem 

alone.     His  testimony  on  this  point  is  found  at  page  1808  of  the  Proceedings, 
as  follows : 

"In  the  study  which  the  Bureau  of  Labor  Statistics  has  made,  they  went  to  considerable 
pains  to  get  good  food  figures,  and  they  went  to  a  large  cost  to  get  these  things  analyzed,  and 
this  is  a  point  which  1  am  about  to  mention  now,  which  1  think  is  very  important  in  coming 
to  this  question  of  a  satisfactory  living  standard. 

"The  Bureau  took  about  300  dietaries,  which  yielded  3,500  calories  per  man  per  day ;  that 
is,  they  analyzed  these  dietaries,  and  then  they  added  up  the  price  of  them  themselves  for  the 
year  1918,  approximately. 

"They  found  in  1918  for  a  family  of  3.35— adult  male,  his  wife  and  children,  children 
being  split  up  in  fractions,  according  to  the  amount  they  consumed — that  $575  was  required 
to  purchase  food  for  this  size  family. 

"Food  has  probably  increased  since  that  time  about  15  per  cent,  which  would  bring  the 
cost  of  3,500  calories  for  this  size  family  up  to  about  $650  or  $660. 

"This  particular  unit  of  3.35  is  somewhat  smaller  than  the  unit  customarily  used  by 
students  for  measuring  the  family.  They  come  nearer  using  one  of  3.8  or  3.9.  If  you  bring 
it  up  to  that  figure,  it  will  bring  the  cost  of  an  adequate  dietary  up.  then,  as  found  in,  say.  12 
cities  scattered  in  representative  sections  of  the  United  States,  to  between  $700  and  S750  at 
the  present  time ;  and  1  think  that  is  a  figure  which  is  very  much  worth  while  considering 
because  of  the  big  importance  which  focKl  bears  in  the  budget,  and  which  the  other  items  bear 
in  their  relation  to  food. 

"I  lieliove  the  Commission  is  fairly  fortunate  in  being  able  to  get  a  figure  like  this, 
because  if  this  study  had  not  In-cn  made,  it  is  very  questionable  whether  you  could  have  had 
any  such  good  or  accurate  figure  as  this  one.  I  therefore  set  a  gcXKl  deal  of  stock  by  this 
particular  point,  that  it  will  take  on  the  average  for  the  United  States,  in  these  cities,  from 
$700  to  $750  for  a  man.  his  wife  and  three  children  of  the  conventional  age  stated. 

"Mr.  Lauck :     That  is  just  for  food? 

"Mr.  Ogburn :    That  is  just  for  food." 

Professor  Ogburn  states  that  in  June.  1918,  he  estimated  the  "bare  subsis- 
tence budget"  at  between  $1,3.^0  and  $1,400  as  will  appear  from  the  following 
testimony  found  at  page  1809  of  the  Proceedings: 

"I  worked  on  this  for  the  National  War  Labor  Board  in  June.  1918,  to  some  extent,  and 
I  used  about  four  or  five  diflferent  methods.  .Xt  that  time  1  set  the  bare  subsistence  at 
♦  *  •  »  between  $1,350  and  $1,400  *  »  *  •.  and  I  did  it  by  using  this  food  quota- 
tion, this  methixl. 

"Then  1  took  three  budgets,  which  are  somewhat  well  recognized,  and  which  authorities 
have  accepted.  I  took  Prof.  Chapin's  budget  made  in  New  York  in  1907,  a  very  csreful 
study;  I  ttxik  the  New  York  Board  of  Estimate  budget  drawn  up  by  the  City  Government 
for  its  own  employes,  and  I  took  a  budget  made  by  the  New  York  Factory  Investigating 
Commission,  a  legislative  commission.  I  took  each  of  tho.se  budgets,  and  considering  the 
increa.ses  in  the  cost  of  living,  brought  tluin  up  to  date,  so  to  speak;  and,  with  the  exception 
of  one,  they  came  to  Ix^twern  $1.4.i0  and  $1..^00.  The  New  York  Factory  Investigating  Com- 
mission came  to  $1..120  and  some  o<ld  dollars,  but  that  budget  was  considerably  inadequate  in 
some  of  the  sundries  or  miscellaneous  items.  It  left  out  a  good  many  things  which  a  family 
would  have  to  have  in  order  to  live. 

"So  that  I  came  to  the  conclusion  at  that  time  that  what  I  would  call  a  fair  subsistence 
which  wouUl  he  really  a  liare  physical  subsistence — and  it  would  be  very  conservative,  it 
would  not  be  an  exaggeration  at  all — would,  at  that  time,  nm  between  $1,350  and  $1,400, 
judged  by  these  four  or  five  different  standards." 

In  view  of  the  increases  in  the  cost  of  living  between  June,  1918,  and  (Octo- 
ber, 1919,  estimated  at  about  12  per  cent.  Professor  Ogburn,  at  page  1811  of  the 
Proceedings,  says : 

"I  think  you  can  pretty  well  substantiate  to<lay  the  fact  that  it  will  take  between  $1,550 
and  $1,600  to  maintain  the  bare  subsistence  level   to<lay.     I   believe  so." 

Professor  Ogburn  calls  attention  to  the  fact  that  below  the  "hare  subsistence 
level"  arc  "the  charity  level,  being  inadequate  in  sundries,  and  the  pauper  level, 
where  one  gets  in  flebt  and  so  forth."  Above  the  bare  subsistence  level  is 
another  level  which  was  adopted  as  the  basis  for  the  Seattle  trainmen's  budget, 
worked  out  by   Professor  <  )gburn   in    1917,  which  at  that  time  came  to  about 


Union  Labor  Program  575 

$1,500,  and  the  "minimum  comfort  budget"  which  Professor  Ogburn  worked  out 
for  the  War  Labor  Board  in  June,  1918,  which  at  that  time  came  to  about  $1,700. 
Referring  to  the  standard  of  living  for  which  these  budgets  were  supposed  to 
provide,  Professor  Ogburn  says,  at  page  1812  of  the  Proceedings : 

"This  budget,  which  we  arc  now  discussing  is  supposed  to  dehneate  a  level  above  what 
we  call  the  minimum  subsistence,  and  is  variously  called  the  minimum  health  and  decency 
or  the  minimum  comfort  or  the  minimum  health  and  comfort.  I  shall  refer  to  it  as  the 
minimum  comfort  budget.  It  is  somewhat  more  liberal  in  food,  although  the  food  in  the 
two  budgets  does  not  vary  so  very  much.  The  rent  figure  is  somewhat  more  liberal.  I 
particularly  set  down  there  a  larger  item  for  insurance  and  savings.  That  figure  of  insurance 
and  savings  is  one  very  debatable  as  to  what  should  be  set  down.  I  have  set  dowii  a  health 
figure  nearly  the  same  as  in  the  minimum  budget.  I  have  given  somewhat  more  in  clothing, 
because  it  does  seem  to  me  that  comfort,  social  position  and  so  on  center  around  rent  and 
clothing." 

The  following  is  a  general  summary  of  the  "minimum  comfort  budget"  upon 
which  the  Amalgamated  bases  its  claim  for  a  living  wage : 

Cost  June,  Cost  July, 

Item  igi8  /p/9 

Food     $625.00  $723.00 

Clothing : 

M&n    92.50  101.00 

Woman    87.00  94.00 

Boy    13   years    57.00  62.50 

Girl  8  to  10  years 37.52  42.25 

Boy  4  to  7  years 39.50  44.25 

Rent    220.00  240.00 

l-'uel  and  Light  75.00  88.00 

Insurance   and   Savings    150.00  150.00 

Heahh     60.00  65.00 

Furnishings    50.00  60.00 

Education     20.00  20.00 

Carfare     55.00  58.00 

Organizations   (church,  labor  and  others) 24.00  26.00 

Comforts   (tobacco,  candy,  gifts,  drinks,  etc.) 43.00  33.00 

Recreation     50.00  56.00 

Miscellaneous    (barber,    stamps,    cleaning,    etc.)....  75.00  78.00 

Total    $1,760.50  $1,941.00 

Some  of  the  minor  items  are  explained  more  in  detail  in  the  analysis  of 
sundries,  as  follows: 

Cost  June,  Cost  July. 

Item  igiS  1919 

Organizations,    labor   and    others    $15.00  $16.(X) 

Education    (newspapers,   magazines  and   books)....  20.00  20.00 

Church    9.00  10.00 

Health    (physician,  drugs  and   dentist) 60.00  65.00 

Cleaning   and   Laundry    25.00  27.00 

Tobacco     15.00  16.00 

Gifts    8.00  9.00 

Candy  and   Soft   Drinks    5.00  8.00 

Drinks     15.00 

Amusements  and   Vacation    50.(X)  56.00 

Stamps,    barber,    stationery,    etc 15.00  16.00 

Exigencies   and   waste    35.00  3S,(X) 

It  is  noteworthy  that  the  budget-makers  were  able  to  hold  down  the  cost  of 
living  to  the  extent  of  $15  per  annum  on  account  of  the  total  disappearance  of 
"drinks"  between  June,  1918,  and  July,  1919.  For  a  car  crew  this  saving  would  be 
$30,  which,  if  divided  up  among  the  166,000  revenue  passengers  handled  by  each 


576  Electric  Railway  Problem 

crew,  on  the  average,  during  a  year,  would  amount  to  three  one  hundred  and 
sixty-sixths  of  a  cent  on  the  fare.  Hooray  for  Prohibition !  Even  at  that,  the 
item  amounts  to  $2,000,000,  or  well  on  towards  half  as  much  as  the  estimated 
losses  of  gross  revenues  due  to  the  strikes  of  1919  on  the  big  systems  carrying 
7S  per  cent  of  the'total  electric  railway  traffic  of  the  country.  What  the  fellows 
will  do  who  were  allowed  the  $15  a  year  for  drinks,  and  used  it  some  other  way, 
remains  to  be  seen. 

Professor  Ogburn  explains  the  "minimum  comfort  budget"  at  page  1S13  of 
the  Proceedings,  as  follows  : 

"Mr.  Lauck :  Would  you  e.xplairi  that  budget  to  the  Commission  for  the  reason  that  we 
expect  to  use  that  budget  as  a  basis  tor  our  coiUontiou  as  to  the  principle  of  a  living  wage? 

"Mr.  Ogburn  :  Yes.  The  theory  of  a  minimum  comfort  budget  is  not  quite  as  clearly 
delineated  as  the  theory  of  a  bare  subsistence  budget.  Hut  one,  as  I  say,  thinks  of  a  bare 
subsistence  budget  as  being  a  living  which  all  industries  ought  to  pay  their  working  men; 
at  least  that  is  the  theory  of  those  who  hold  to  the  living  wage  theory.  Whereas,  the  bare 
subsistence  budget  does  not  necessarily  imply  that  it  is  an  adequate  budget  or  that  it  is  satis- 
factory to  the  lalwr  people  or  that  it  is  even  necessarily  wholly  desirable  in  a  democracy. 
Whereas,  a  budget  that  is  somewhat  more  liberal.  I  think,  comes  nearer  meeting  an  actuality. 

"Now,  the  minimum  comfurt  budget  is.  1  think,  not  wholly  a  theoretical  proi>osition. 
That  is  to  say.  it  is  a  description  of  an  actual  situation,  and  the  fact  that  it  has  been  received 
and  commented  upon  rather  widely  and  the  fact  that  there  have  been  various  individuals 
working  at  this  particular  level  seems  to  indicate  that  there  is  a  level  which  is  in  considerable 
demand  above  what  you  would  call  a  bare  subsistence  level." 

At  page  1819  of  the  Proceedings,  Professor  Ogburn  goes  on  to  explain 
particularly  the  item  of  $150  for  insurance  and  savings: 

"I  did  put  down  in  this  budget  $150  for  insurance  and  savings,  which  I  may  say  is  con- 
siderably larger  than  the  families  ever  do  .sive  or  put  up  even  during  the  campaign  of  Liberty 
Loans  at  this  particular  level.  That  is  another  departure  from  the  actual  Ijudget  and  is  a 
point  in  making  the  standard. 

"Commissioner  Meeker:  Is  that  amount  actually  above  the  combined  amount  for  insur- 
ance and  savings  at  this  level? 

"Mr.  Ogburn :     Yes. 

"Mr.  Lauck:     What  was  your  idea  in  doing  that.  Professor  Ogburn? 

"Mr.  Oglnim :  Perha|>s  I  should  have  stated  this,  that  what  1  w;is  doing  in  these  two 
cases  was  setting  what  I  conceived  t<i  be  a  standard  budget.  The  question  often  arises  as  to 
whether  a  standard  budget  is  exactly  the  .same  as  an  actual  budget.  1  figure  that  it  ought 
to  be  very  nearly  the  same  as  an  actual  budget  and  not  too  purely  refined ;  that  is  to  say, 
there  is  no  question  alxiut  the  fact  that  humankind  smokes,  humankind  drinks  and  so  so; 
that  humankind  expects  certain  ex|)enditures  for  recreation.  Therefore,  you  cannot  leave 
tlie.se  things  out.  Yon  have  to  make  it  fairly  approximate  and  close  to  the  actual  expendi- 
ture. But  I  have  varied  here  and  there — I  have  put  a  little  bit  more  for  food  and  a  little  bit 
more  (or  sickness  and  savings,  simply  as  it  would  seem  to  be  the  concept  of  what  a  standard 
budget  should  Ix?." 

A  little  further  on,  at  |)ages  1S20  to  IS22  of  the  Proceedings,  Professor 
Ogburn  poiiUs  otii  that  his  "Minimtim  Comfort  riud^jct"  is,  after  all,  a  very  con- 
servative one,  and  intimates  tli.it  a  little  higher  budget  level  would  not  do  the  em- 
ployes any  special  harm,     lie  says: 

"The  church  item  is  put  down  at  $9.  which  is  very  near  thi  figure  which  families  of  that 
particular  income  actually  spend.     Perhaps  it  may  Ik  a  little  bit  more. 

"Mr.  I.auck  :  ^■ou  have  $J4  for  church,  lal>or  and  other  organizations,  have  you  not? 
$9  of  that  for  church,  and  the  other  for  labor  union  dues  and  societies  and  so  forth? 

".\lr.  Ogburn;  Yes.  I  put  down  $KS  for  organizations — lalx>r  and  other  organizations. 
$15  a  year. 

"Commissioner  Ntahon:    That  is  too  low. 

"Mr.  <  )Kl)urn  :     This  was  in  the  summer  of  1918.     Probably  it  was  very  low  then. 

"Mr.  I-iiick:  The  comforts  arc  very  conservative,  are  they  not.  or  very  low — $.?3  for 
tolncco,  candy,  Christmas  gills  and  everything  of  that  kind' 

"Mr.  Ogluini :     Yes;  considering  the  fact  that  if  you  really  look  at  human  nature  frankly. 


Union  Labor  Program  577 

of  course  that  is  verj'  low;  there  is  no  question  about  that.  I  think  that  when  you  get  into 
a  question  of  the  minimum  comfort  budget— as  the  questions  of  Mr.  Lauck  have  been  headed 
in  that  direction— you  really  have  to  form  the  conception  that  there  is  still  another  budget 
level. 

"I  mean  to  say  that  I  do  not  believe  that  you  could  look  at  this  budget  and  think  of  it 
as  an  adequate  budget  for  working  people.  I  mean  to  say  *  *  *  *  it  is  perfectly  pos- 
sible to  conceive  of  another  budget  level  where,  if  they  had  a  telephone,  or  if  they  had  a 
nurse  occasionally,  when  some  one  was  sick  in  the  house,  or  where  they  had  a  somewhat 
better  type  of  housing,  where  they  took  more  opportunities  in  education,  and  were  able  to 
send  their  children  through  the  high  school— we  figure  that  less  than  10  per  cent  get  through 
the  high  schools — I  think  you  would  have  to  conceive  of  a  budget  level  as  being  above  this. 

"The  point  I  make  is  that  this  minimum  budget  is,  strictly  speaking,  a  minimum  budget 
of  a  certain  level,  and  it  is  not  necessarily  designed  or  set  as  a  maximum  budget  at  all,  or 
perhaps  even  what  the  working  people  would  call,  necessarily,  an  adequate  budget.  It  is  along 
the  line  of  those  minimum  budgets. 

"Mr.  Lauck:  It  really  seems  to  provide  for  food  and  clothing  to  keep  them  warm  and, 
you  might  say,  just  removes  the  spectre  of  want  or  the  possibility  of  want  from  the  door, 
does  it? 

"Mr.  Ogburn  :    That  is  the  idea,  yes. 

"Mr.  Lauck  :  That  is,  they  have  some  slight  hold  on  the  future  by  savings  and  insur- 
ance;  they  are  adequately  clothed  so  far  as  comfort  is  concerned,  and  fed  properly? 

"Mr.  Ogburn :    Yes. 

"Mr.  Lauck:  But  beyond  that  there  is  nothing  to  waste  or  nothing  to  develop  or  e.x- 
pand  on? 

"Mr.  Ogburn:     Yes. 

"I  would  like  to  introduce  one  piece  of  evidence  here  bearing  upon  the  point  I  am  dis- 
cussing, which  I  think  is  of  considerable  value  in  regard  to  food  budgets. 

"\\  hat  we  did  over  at  the  Bureau  of  Labor  Statistics  was  to  take  families  of  husband 
and  wife  and  three  cliildren  with  specific  incomes,  say,  $2,000,  $1,800,  $1,600,  $L400,  $1,200 
and  $1,000,  and  we  analyzed  their  dietaries  and  took  an  average  of  all  their  foods  which  they 
ate  and  reduced  it  to  a  permanent  basis,  and  analyzed  it ;  and  out  of  about  12  cities,  Chicago, 
Providence,  New  York,  Denver.  St.  Louis,  San  Francisco,  Seattle,  Boston,  St.  Paul,  Minne- 
apolis, New  Orleans  and  .Atlanta,  we  found  that,  as  an  average  in  those  cities,  when  the 
income  is  $2.000 — this  is  in  1918 — the  purchase  of  calories  was  3,533 ;  that  is  the  actual  num- 
ber of  calories  purchased  when  the  income  was  $2,000. 

"Commissioner  Meeker:  \\'ill  you  explain  that?  That  is  that  many  calories  per  adult 
male? 

"Mr.  Ogburn :     That  many  calories  per  adult  male,  yes. 

******** 

"Mr.  Ogburn :  Wiien  the  income  is  $1,800  the  actual  number  of  calories  purchased 
was  3,400. 

"At  $1,600  the  number  of  calories  purchased  was  3,278  average;  that  is  a  little  over  3,200. 

"At  $1,400  the  calories  purchased  were  3,217. 

"When  the  income  was  $1,200,  for  this  size  family,  the  calories  purchased  were  3,015 — 
about  3,000  calories. 

"When  the  income  was  $1,000,  the  food  that  they  purchased  yielded  2,935  calories. 

"Those,  I  think,  are  about  as  good  figures  as  you  will  find  anywhere  in  existence  bearing 
upon  the  calories  purchased  according  to  income. 

"Therefore,  it  is  only  when  they  get  pay  over  $1,600  and  around  $1,800  or  $2,000  that 
they  actually  buy  a  sufficient  number  of  calories." 

At  pages  1825  and  1826  of  the  Proceedings,  after  stating  that  he  has  brought 
his  budget  up  to  date,  Professor  Ogburn  says: 

"I  figured  out  that  $1,950  to  $2,000  would  be  the  cost,  now,  of  what  I  might  call  the 
minimum  comfort  budget. 

"When  vou  think  of  that  figure  in  terms  of  wages,  you  think  the  wages  may  sound  pretty 
big :  but  when  you  think  of  it  in  terms  of  the  details  of  the  budget,  it  really  does  not  buy  so 
very  much. 

"Mr.  Lauck:     It  is  just  keeping  want  from  the  door,  so  to  speak,  is  it  not? 

"Mr.  Ogburn:     It  is  providing  minimum  comfort,  yes." 

With  regard  to  the  Seattle  "minimum  comfort"  budget  of   1917,   which   is 

reproduced  at  pages  68  and  69  of  Mr.  Lauck's  brief.  Professor  Ogburn  testifies 

at  page  1827  of  the  Proceedings,  as  follows : 

"Mr.  Ogburn :  Yes.  that  budget  was  made  somewhat  in  the  following  manner :  There 
was  trouble  on  in  Seattle  in  regard  to  the  railway  situation  out  there,  and  I  believe  they  had 


578  Electric  Railway  Problem 

a  strike  of  two  or  three  weeks  and  they  submitted  it  to  a  Board  of  Arbitration,  of  which 
Doctor  Suzzalo,  President  of  the  University,  was  Chairman.  And  Doctor  Suzzalo  asked  his 
department  of  economics  and  sociology  to  make  a  study  of  the  living  costs  of  motormen's  and 
conductors'  families  and  set  a  budget  in  Seattle.  That  was  in  1917,  I  believe.  And  Professor 
Parker  and  myself  and  several  of  the  other  men  conducted  an  investigation  over  the  city  and 
set  this  figure  of  $1,505.  .\nd  they  discussed  this  budget,  1  am  told — I  was  not  at  the  meet- 
ing or  on  the  board — but  they  discussed  it  a  couple  of  days,  I  understand,  and  accepted  it 
witluiut  a  single  change  at  that  time.  And  tliat  budget  there  of  $1,505  in  Seattle  in  1917 
was  what  I  conceived  to  tje  a  minimum  comfort  budget  at  that  time.  That  is  to  say,  it  com- 
pares with  my  $1,700  budget  somewhat  later  on. 

"Mr.  Lauck  :  To  bring  it  up  to  date  it  would  be  appro.ximately  what  your  minimum  com- 
fort budget  would  be  now  in  terms  of  money? 

"Mr.  Ogburn :    Yes. 

"Mr.  Lauck:     Between  $1,900  and  $2,000? 

"Mr.  Ogburn:     Yes,  approximately  that. 

"Mr.  Lauck:  The  board  headed  by  Doctor  Suzzalo  of  the  University  of  Washington 
adopted  this,  and  there  was  a  representative  of  the  company  on  the  board? 

"Mr.  Ogburn:    Yes." 

At  page  1828  of  the  Proceedings,  we  find  Professor  Ogburn's  budget  conclu- 
sions reiterated  as  follows: 

"Mr.  Lauck:  So  I  gather  your  general  conclusions  are  that  wages  to  be  adequate  now 
should  be  based  on  an  income  approximately  of  $1,900  to  $2,000  after  making  allowance  for 
the  increased  cost  of  living  since  these  budgetan,-  standards  have  been  worked  out. 

"Mr.  Ogburn :  Yes,  I  would  not  necessarily  say  that  would  tw  adequate,  it  might  not 
necessarily  be  adequate,  but  it  would  give  them  a  little  bit  more  than  a  bare  subsistence.  It 
would  give  them  what  I  call  a  minimum  comfort  allowance,  it  would  be  a  minimum  comfort 
budget. 

"Mr.  Lauck:  You  might  say  it  would  remove  the  element  of  inadequateness  and  make 
them  barely  adequate. 

"Mr.  Ogburn:     Yes,  I  would  say  that. 

"Mr.  Warren:  It  would  give  them  the  equivalent  of  what  $1,760  would  have  given  them 
in  June  a  year  ago. 

"Mr.  Ogburn :    Yes." 

To  those  who  are  not  entirely  familiar  with  the  theory  back  of  the  living 
wage,  the  question  will  at  once  arise:  Why  should  the  electric  railways  pay  every 
motorman  and  every  conductor  enough  to  enable  him  to  support  a  wife  and  three 
children,  when  as  a  matter  of  fact  he  may  be  a  single  man  or,  if  married,  have 
no  children?  Ubviously,  a  "living  wage,"  based  on  a  standard  family  budget, 
may  leave  one  man  with  thirteen  children  in  the  depths  of  poverty,  while  it  en- 
ables another,  who  happens  to  be  immarried,  to  indulge  in  many  luxuries.  Why 
should  not  the  electric  railways  depend  upon  the  law  of  supply  and  demand,  and 
pay  what  is  necessary  to  attract  an  adequate  number  of  competent  men.  and 
no  more?  In  spite  of  the  claims  advanced  by  the  witnesses  for  labor  that  the 
compensation  of  motormen  and  conductors  prior  to  the  war  was  too  low,  it  is  a 
matter  of  common  knowledge  that  the  electric  railways  normally  had  waiting 
lists.  With  respect  to  reasons  for  taking  a  family  of  five  as  the  standard  in 
figuring  out  a  living  wage,  I'rofessfjr  Ogburn  testifies  at  page  1831  of  the  Pro- 
ceedings : 

"The  Chairman:  Do  any  of  the  industries  classify  wages  according  to  whether  a  person 
is  married  or  unmarried  or  whether  he  has  a  family  of  five,  three  or  two? 

"Commissiimer  Mahim  :     Or  seven  or  nine? 

"The  Chairman  :     That  is  right. 

"Mr.  Ogbuni:  No.  hut  the  point  you  are  speaking  of  now  is  usually  looked  at  in  tb- 
way.  It  is  quite  a  job  to  work  out  these  budgets  and  plan  them  out  and  make  careful  stuc! 
and  so  forth,  and  students  of  social  problems  who  work  them  out.  work  them  out  for  .i 
inmily  of  five  on  this  tasis :  That  three  children  arc  approxiinately  necessary  on  the  average 
lor  the  survival  of  the  race.  That  is  to  say,  a  man  and  wife  in  dying  should  be  succeeded 
In-  two  individuals,  and  two  children  therefore  should  grow  to  manhoo<l  and  womanhood,  to 
the  marr>ing  age,  and  if  one  allows  the  chances  of  death  to  strike  off  one  during  that  period 


Union  Labor  Program  579 

during  which  they  are  growing  into  manhood  and  womanhood,  a  man  naturally  thinks  of 
three  children. 

"The  Chairman:     Is  that  the  average  family  in  this  country? 

"Mr.  Ogburn :  X'erj-  nearly.  Then  there  is  a  good  deal,  of  course,  which  centers  around 
the  question  of  what  about  men  who  are  not  married  and  so  on.  It  is  supposed  to  be  a 
pretty  good  policy  to  encourage  early  marriage.  It  is  supposed  to  be  rather  a  desirable  thing 
for  the  health,  welfare,  morals  and  so  forth  of  the  community;  and  it  is  also  considered 
to  be  .somewhat  better  for  marriage  to  occur  early  and  have  children  to  be  born  fairly  early. 
And  for  all  these  reasons  it  would  seem  unwise  for  a  state,  inasmuch  as  it  concerns  itself 
with  the  minimum  race  and  so  on,  to  set  anything  lower  than  a  family  of  five.  That  at  least 
has  been  the  policy  in  the  past.  This  has  been  discussed  and  w-orked  out  after  considerable 
research.  Mr.  Rountree  in  a  chapter  in  his  recent  book^  has  concerned  himself  with  this, 
and  he  takes  all  tlie  various  exceptions  that  arise,  where  a  man  has  a  large  family  and  where 
a  man  has  a  small  family,  and  he  figures  on  starting  in  and  saving  and  equipping  a  home, 
and  the  pressure  of  children  as  they  come  on  and  so  forth,  and  he  has  a  good  deal  to  say, 
and  I  may  say  the  result  of  his  conclusions  particularly  justify  this  size  of  family." 

Later  on,  when  Mr.  Lauck  himself  was  on  the  stand,  he  was  asked  as  to 
what  would  happen  to  the  budget  and  wages,  if  the  cost  of  living  should  go 
down.  In  his  reply  he  intimated  that  the  cost  of  the  budget  would  go  down, 
but  as  to  wages  it  would  be  well  to  have  an  understanding  in  advance.^  His  tes- 
timony on  this  point  appears  at  page  1930  of  the  Proceedings,  as  follows : 

"The  Chairman:  Now,  if  this  budget  of  $2,000  were  adopted  would  there  be  any  pos- 
sible way  by  which  that  could  be  reduced  if  the  cost  of  living  should  be  substantially  reduced? 

"Mr.  Lauck :     It  would  fluctuate  with  the  cost  of  living,  yes,  sir. 

"The  Chairman:     So  you  believe  that  the  budget  should  fluctuate  with  the  cost  of  living? 

"Mr.  Lauck :  If  the  cost  of  living  is  reduced,  the  cost  of  the  budget  would  go  down, 
yes,  sir. 

"The  Chairman  :  Do  you  believe  that  your  organization  would  be  perfectly  willing  to 
consider  a  reduction  in  the  budget  if  the  cost  of  living  should  go  down? 

"Mr.  Lauck :  Well.  I  have  never  consulted  with  the  organization,  but,  judging  from 
what  I  know  of  organizations  of  this  kind,  it  would  have  to  be  understood  if  you  recommended 
a  specific  budget  that  it  was  flexible  with  the  cost  of  living  in  the  beginning,  otherwise  if  the 
wage  rate  was  established  I  think  it  would  be  impossible  to  reduce  it." 

If  once  the  principle  of  the  living  wage  be  admitted  as  properly  applicable 
to  electric  railway  trainmen,  the  evidence  submitted  on  their  behalf  with  respect 
to  the  income  required  to  provide  for  a  minimum  comfort  budget  is  pretty  con- 
vincing. Practically  no  evidence  was  offered  on  behalf  of  the  public  or  of  the 
American  Electric  Railway  Association  to  controvert  these  claims  and  it  cannot 
be  said  that  the  evidence  on  the  budget  and  the  living  wage  was  materially 
weakened  by  the  cross  e.xamination.  However,  in  the  statement  submitted  by 
Mr.  C.  J.  Joyce  on  behalf  of  Mr.  Thomas  E.  Mitten,  President  of  the  Philadelphia 
Rapid  Transit  Company,  reference  is  made  to  the  growing  unfriendliness  of  the 
public  toward  both  capital  and  labor  on  account  of  the  increasing  cost  of  street 
railway  transportation.  At  pages  1515  and  1516  of  the  Proceedings,  Mr.  Mitten 
says: 

"Frank  statement,  fair  dealing  and  honest  purpose,  with  patience  and  perseverance,  may 
be  counted  in  the  long  run  to  win  the  support  of  a  community. 

"The  public  have  for  so  long  been  befooled  and  bedeviled  that  they  are  now  in  a  mood 
to  question  the  demands  not  only  of  capital  but  also  of  labor.  This  feeling  is  growing  in 
its  intensity  as  the  citizen  of  inquiring  mind  discovers  that  while  all  about  is  heard  the 
demand  for  a  living  wage,  yet  all  evidence  of  merchants  is  to  the  effect  that  the  wage-earner 
is  now  demanding  the  most  expensive  class  of  goods  and  buying  with  great  prodigality.  The 
owners  of  automobiles  among  the  wage-earners  have  become  legion,  and  it  would  seem  that 
the  difficulty  now  is  as  much  with  the  higher  price  of  gasoline  as  with  the  increased  cost  of 
our  daily  bread." 

While  the  public  can  have  no  reason  to  complain  if  carpenters,  bricklayers, 
foundrymen  and  other  mechanics  rendering  skilled   service  in   various  occupa- 


580  Electric  Railway  Problem 

tions  enjoy  sufficient  affluance  to  own  automobiles,  it  can  hardly  be  expected  to 
"stand  for"  wages  in  the  electric  railway  industry  so  high  as  to  permit  employes 
to  enjoy  the  luxury  of  automobiles  so  that  their  families  will  not  have  to  ride 
in  the  "poor  man's  carriage"  which  they  drive.  In  fact,  from  the  electric  rail- 
way point  of  view  an  employe  (other  than  a  general  otticerj  who  would  own 
an  automobile  or  even  ride  in  one,  might  be  suspected  of  disloyalty  to  his  own 
industry,  as  he  would  be  giving  "aid  and  comfort  to  the  enemy"  by  supporting 
a  competitive  means  of  transportation.  Doubtless,  as  the  Amalgamated  is 
deeply  interested  in  the  financial  rehabilitation  and  prosperity  of  the  electric  rail- 
ways, it  would  join  with  the  management  in  disciplining  one  of  its  members  for 
such  an  offense  as  that. 

It  is  by  no  means  clear  that  Professor  ( )gburn's  minimum  comfort  budget 
would  enable  a  motorman  or  conductor  to  support  an  automobile  unless  he  should 
choose  it  as  a  substitute  for  a  family.  It  is  doubtless  true,  however,  that  if  it 
should  appear  in  arbitration  proceedings  initiated  upon  the  demand  of  the  street 
railway  employes  for  higher  wages  that  any  considerable  number  of  them  are 
already  owners  of  automobiles  the  public  would  not  be  very  kindly  disposed 
toward  fare  increases  made  necessary  in  order  to  establish  for  the  men  the  prin- 
ciple of  a  living  wage  high  enough  to  enable  a  still  larger  number  of  them  to 
get  cars  of  their  own.  When  organized  labor  takes  the  position  that  labor  is  not 
a  commodity  and  that  wages  should  not  be  regulated  by  the  law  of  supply  and 
demand  it  nmst  accept  also  the  principle  that,  along  with  the  living  wage  for  the 
employes,  goes  the  right  of  the  public  to  transportation  service  at  a  reasonable  cost. 
In  this  connection  it  is  noteworthy  that,  on  the  basis  of  the  1917  figures,  when 
the  average  number  of  revenue  passengers  handled  per  car  crew  was  166,000,  a 
yearly  wage  of  $2,000  for  each  trainman  would  mean  2.41  cents  per  fare  for 
trainmen's  wages  as  compared  with  1.13  cents  per  fare  for  the  trainmen's  wages 
actually  paid  in  1917.  Of  course,  if  the  efficiency  of  trainmen's  labor,  in  terms 
of  revenue  passengers  carried,  should  be  greatly  increased  by  the  general  intro- 
duction of  the  one-man  safety  car  the  increase  in  the  cost  of  transportation  service 
resulting  from  wage  increases  would  be  correspondingly  offset. 

In  this  connection  I  may  refer  to  the  experience  of  the  Michigan  Railway 
Company,  which  o|)erates  in  four  cities  having  about  50,000  population  each,  and 
also  operates  interurban  service  connecting  these  and  other  cities.  .\s  a  result 
of  an  investigation  undertaken  in  the  summer  of  1919  to  determine  the  cost  of 
transportation  service  on  this  company's  lines  in  the  city  of  Kalamazoo,  where 
the  company  is  operating  under  a  franchise  rate  schedule  which  calls  for  a  cash 
fare  of  5  cents  and  provides  for  the  sale  of  tickets  at  the  rate  of  6  for  25  cents, 
I  recommended  tiial  the  flat  5-cent  fare  without  tickets  be  put  into  effect  and 
that  the  system  l)e  completely  ecjuipped  with  one-man  safety  cars.  The  com- 
pany insisted  that  a  higher  fare  was  necessary  and  tinally  an  agreeiuent  was  made 
with  the  City  Commission  to  the  effect  that  a  straight  7-ccnt  fare  should  be  per- 
mitted during  the  remaining  three  years  of  the  life  of  the  franchise,  and  that  one- 
man  .safely  cars  should  be  immediately  installed.  This  agreement  was  submitted 
to  the  electors,  and,  on  account  of  the  combined  opiwsition  to  the  one-man  cars 
and  the  7-ccnt  fare,  failed  to  receive  the  necessary  immber  of  votes  to  make  it 


Union  Labor  Program  581 

effective.  Later  on,  the  company's  employes  demanded  radical  increases  in 
wages  and  the  company  stated  that  the  granting  of  the  men's  demands  would 
mean  a  10-cent  fare.  The  Kalamazoo  Gazette  of  May,  20,  1920,  reports  that 
in  the  arbitration  proceeding  between  the  company  and  its  men  "many  of  the 
employes  on  the  stand  admitted  to  owning  automobiles."  The  arbitration  board, 
by  unanimous  vote,  awarded  the  trainmen  on  the  city  lines  an  increase  from  a 
minimum  of  40  cents  and  a  maximum  of  42  cents  to  a  minimum  of  60  cents  and 
a  maximum  of  62  cents.  The  men  had  asked  for  a  scale  running  from  75  cents 
to  80  cents.  On  the  interurban  lines  the  scale  awarded  was  from  65  cents  to 
70  cents,  instead  of  the  old  scale  of  40  cents  to  48  cents  and  the  scale  demanded  of 
from  80  cents  to  90  cents. 

It  is  very  probable  that  injustice  may  be  done  to  electric  railway  employes 
by  virtue  of  the  publicity  given  to  statements  such  as  those  quoted  from  Mr. 
Mitten  and  from  the  Kalamazoo  Gazette.  It  is  quite  possible  that  the  auto- 
mobile standard  of  living  displayed  by  certain  street  railway  employes  is  due  in 
some  cases,  to  financial  prosperity  not  connected  with  the  electric  railway  busi- 
ness, and,  in  other  cases,  to  the  same  causes  that  are  occasionally  effective  in 
enabling  policemen  to  show  signs  of  wealth  not  easily  accounted  for.  Such  ex- 
ceptional cases  do  not  disprove  the  soundness  of  the  general  demand  for  a  living 
wage,  but  unless  fully  explained  they  will  surely  tend  to  create  an  adverse  public 
opinion  which  is  likely  to  be  very  damaging  to  the  employes.  It  will  be  remem- 
bered that  in  the  summer  of  1919  an  increase  of  wages  was  awarded  to  the  train- 
men of  the  Boston  Elevated  Railway  system,  bringing  the  maximum  compensa- 
tion on  the  surface  lines  up  to  60  cents  an  hour  and  for  motormen  on  the  rapid 
transit  lines  up  to  62  cents  an  hour.  This  was  one  of  several  awards  to  which 
special  reference  was  made  by  a  number  of  witnesses  before  the  Commission  as 
indicating  the  possibility  that  future  increases  in  trainmen's  wages  were  likely 
to  become  a  more  important  and  troublesome  factor  than  ever,  both  from  the 
point  of  view  of  the  financial  condition  of  the  companies  and  from  the  point  of 
view  of  the  public  with  respect  to  fare  increases.  Recently,  the  union  of  motor- 
men  and  conductors  on  the  Boston  lines  decided  to  apply  for  an  increase  in  wages 
from  a  maximum  of  60  cents  an  hour  to  a  maximum  of  95  cents  an  hour.  At  the 
time,  it  was  said  that  the  new  schedule,  if  granted,  would  increase  the  annual 
payroll  about  $4,500,000.  Meantime,  the  Boston  Elevated  Railway,  with  its  10- 
cent  fare,  had  been  skimming  along  with  a  narrow  margin  of  surplus  above  the 
cost  of  service  as  defined  by  the  special  act  under  which  the  system  is  being 
operated  by  public  trustees.  The  men's  demands  were  referred  to  a  board  of 
arbitration,  and  under  date  of  May  4,  1920,  as  will  appear  from  the  Electric 
Railway  Journal  of  May  15,  Mayor  A.  J.  Peters  made  a  direct  appeal  to  Mr.  H. 
Ware  Barnum,  general  counsel  for  the  company  and  its  representative  on  the 
arbitration  board,  strongly  urging  that  no  increase  be  granted  to  the  street  rail- 
way employes  at  the  present  time  for  reasons  set  forth  in  detail.  In  this  letter,  re- 
ferring to  the  predominance  of  the  public  interest.  Mayor  Peters  says : 

"I  believe  it  may  be  safely  .said  that  tlie  public  interest  is  predominant  in  industrial  dis- 
putes, especially  in  the  case  of  public  utilities,  and  it  is  my  duty  as  Mayor  to  defend  the 
public  interest.  This  observation  is  more  readily  applicable  to  the  case  at  hand,  for  any 
deficit  in  the  operation  of  the  elevated  must  be  met  by  the  cities  and  towns  which  it  serves. 


582  Electric  Railwav  Problem 

The  demands  of  the  carmen  cannot,  therefore.  I)e  considered  as  an  isolated  unit;  they  must 
rather  be  treated  as  only  a  part  of  a  question  in  its  relation  to  the  whole.  Increases  in  com- 
pensation to  motormen  and  conductors  in  the  elevated  system  at  the  present  time  will  cer- 
tainly react  most  unfavorably,  not  only  on  the  industrial  situation  in  Boston,  but  on  the 
citizens  as  a  unit." 

Mr.  Peters  makes  comparisons  between  the  wages  of  certain  employes  of  the 
City  of  Boston,  particularly  the  tiremen  and  policemen,  and  the  compensation  of 
motormen  and  conductors  on  the  Boston  Elevated  Railway  system.     He  says : 

"Both  in  the  police  and  fire  departments  privates  are  on  the  same  salary  basis.  They 
enter  tlie  service  at  $1,400  a  year  and  progress  $100  a  year  for  four  years  uiitil  they  reach 
the  ma.ximum  of  $1,800.  The  motormen  and  conductors,  on  the  other  hand,  need  work  only 
one  year  before  the  maximum  is  reached.  Therefore,  on  a  daily  wage  basis  we  find  the  salary 
schedule  over  a  period  of  four  years  as  follows : 

Police  and     Motormen  and 
Firemen  Conductors 

First  year   $,3.83  $4— $4.40 

Second  year   4. 1 1  4.80 

Third  year   4.38  4.80 

Fourth   year   4.66  4.80 

I"ifth  year  and  after 4.93  4.80 

"The  police  receive  one  day  off  in  eiglit  and  they  receive  no  overtime.  Firemen  receive 
one  day  off  in  three,  and  it  should  be  remembered  that  practically  all  of  the  two  days  they 
are  on  duty  must  be  spent  at  the  station  house.  Both  receive  two  weeks'  vacation  without 
loss  of  pay. 

"I  believe,  and  I  think  it  is  generally  admitted,  that  the  firemen  and  police  are  receiving 
a  fair  compensation  for  the  work  performed.  I  have  no  hesitation  in  stating  most  emphati- 
cally that  I  believe  it  is  the  opinion  of  the  majority  of  our  citizens,  and  1  Ix^lievc  this  opinion 
is  sound,  that  the  duties  and  the  responsibilities  of  the  firemen  and  police  are  greater  than 
those  of  the  motormen  and  condiirtors.  and  without  any  reflection  on  the  elevated's  carmen. 
I  think  it  may  fairly  Ix-  admitted  that  the  ixilicc  and  fire  departments  demand  a  higher  aver- 
age of  competency  than  is  rei|uired  of  the  motormen  ,nnd  conductors. 

"The  conclusion  is  obvious:  The  firemen  and  police  are  receiving  a  fair  compensation 
for  the  work  performed:  their  responsibilities  are  greater  than  those  of  the  conductors  and 
motormen,  the  police  and  fire  departments  recpiiring  a  higher  average  of  competency:  there- 
fore, any  increase  in  the  salary  of  carmen  which  would  automatically  yield  them  a  higher 
.salary  than  the  police  and  firemen  is  not  only  unwarranted,  but  it  would  work  an  injustice 
to  certain  municipal  employes." 

Mayor  Peters  goes  on  to  say  that  from  January,  1910.  to  July,  1919,  the 
hourly  wage  rate  of  motormen  and  conductors  was  increased  from  23  cents  to 
60  cents  and  states  that  "certainly  no  corresponding  increase  has  been  granted 
to  other  public  emiiloyes."  He  refers  to  the  financial  condition  of  the  Boston 
Elevated  Railway  system  and  intimates  that  the  conductors  and  motormen  have 
an  im|)ortant  part  to  play  in  increasing  the  earning  capacity  of  the  svstem.  On 
this  point  he  says: 

"The  Boston  Klevated  is  not  in  what  could  be  termed  a  prosperous  condition.  I  lielieve 
I  voice  the  sentiments  of  a  great  majority  of  our  citizens  when  1  say  that  it  would  be  most 
unmoral  to  grant  any  increa.se  to  the  employes  of  the  elevated,  were  such  an  increase  hv  anv 
possibility  to  cause  a  deficit  in  the  elevated's  finances,  L'nder  such  conditions  the  primate- 
consideration  is  the  great  public. 

"The  elevated  carmen  are  at  the  present  time  receiving  a  good  wage.  and.  I  say  this 
only  after  the  most  mature  deliberation,  they  should  not  receive  any  additional  compensation 
until  they  have  shown  themselves  worth  more  by  causing  the  elevated  to  show  increasal 
c.yning  capacity.  They  must  not  forget  that  they  are  part  and  parcel  of  the  ele\-ated  system 
They  have  it  in  their  power  to  increase  or  decrease  the  earning  capacity  of  the  companv 
through  an  improved  service  to  the  public.  I'ntil  they  give  the  public  a  ser\'ice  which  enables 
the  elevated  to  show  a  greater  earning  power,  they  are  not  entitled  to  a  higher  wage,  and 
not  until  that  time  should  ihcv  be  given  increased  compensation 

"This  is  a  doctrine  which  1  believe  has  licen  too  much  disregarded  in  the  pa.st,  and  it 
cannot  be  overestimated  at  the  present  time." 


Union  Labor  Program  583 

Mayor  Peters  takes  the  position  that  the  members  of  the  arbitration  board 
are  "invested  with  a  public  trust"  and  that  their  decision  will  be  made  "purely 
in  the  interest  of  the  public,  for  after  all,  the  best  interest  of  the  public  as  a 
whole  is  the  only  insurance  of  the  welfare  of  individual  groups  of  employes." 
Without  expressing  any  opinion  as  to  the  sufficiency  of  the  wages  paid  to  police- 
men and  firemen  in  the  City  of  Boston,  or  the  sufficiency  of  the  wages  paid  to 
the  Boston  Elevated  Railway  employes  under  the  1919  scale,  we  can  at  least  see 
that  Mayor  Peters'  protest  represents  a  serious  public  reaction  against  the  de- 
mands of  labor  in  the  electric  railway  industry  when  those  demands  become  so 
great  as  to  threaten  to  put  the  industry  itself  on  the  "charity  level"  or  the  "pauper 
level."  Mayor  Peters'  protest  does  not  solve  the  problem  of  the  living  wage,  but 
it  surely  is  a  signal  of  trouble  ahead  in  electric  railway  wage  disputes. 

The  Amalgamated  represents  primarily  the  motormen  and  conductors,  but, 
in  response  to  questions  by  Chairman  Elmquist,  Mr.  Lauck  made  it  clear  that  the 
principle  of  the  living  wage  as  advocated  by  the  Amalgamated  is  intended  to 
apply  to  all  classes  of  adult  labor  connected  with  the  industry.  At  page  1948 
of  the  Proceedings,  we  find  the  following: 

"The  Chairman  :  Would  you  have  that  wage  apply  to  organized  as  well  as  unorganized 
labor  in  the  railroad  service? 

"Mr.  Lauck:  We  are  speaking  in  this  case  of  motormen  and  conductors,  but  that  ought 
to  be  the  wage  applicable  to  any  man  or  woman  of  mature  years ;  of  course,  a  man  primarily, 
but  the  conception  of  a  living  wage  should  apply  to  any  class  of  employes  who  are  mature 
and  adult,  you  might  say.  in  the  employ  of  the  company. 

"The  Chairman :  Should  the  same  wage  be  paid  to  women  as  to  men  for  the  same 
class  of  work? 

"Mr.  Lauck ;  Yes,  that  is  a  supplemental  principle  which  is  generally  acknowledged  and 
has  been  during  the  war  and  has  been  embodied  in  the  Peace  Treaty  also,  of  equal  pay  for 
women  as  for  men." 

The  third  main  point  upon  which  Mr.  Lauck  laid  particular  einphasis  in 
presenting  the  case  for  the  Amalgamated  was  the  eight-hour  workday.  Here, 
again,  he  cited  the  Peace  Treaty  and  the  rules  applied  by  the  National  War  Labor 
Board.  The  Peace  Treaty  enumerates  among  the  methods  and  principles  deemed 
to  be  of  special  and  urgent  importance  "the  adoption  of  an  eight-hour  day  or  a 
forty-eight  hour  week  as  the  standard  to  be  aimed  at  where  it  has  not  already 
been  attained,"  and  the  industrial  principles  laid  down  by  the  Federal  govern- 
ment during  the  war  include  the  following: 

"The  basic  eight-hour  day  is  recognized  as  applying  in  all  cases  in  whicli  existing  law 
requires  it.  In  all  other  cases  the  question  of  hours  of  labor  shall  he  settled  with  due  regard 
to  governmental  necessities  and  the  welfare,  health  and  proper  comfort  of  the  workers." 

In  his  brief,  Mr.  Lauck  quotes  from  President  Wilson's  remarks  in  support 
of  the  Adamson  law  passed  in  1916  to  establish  the  eight-hour  day  on  the  steam 
railroads  of  the  country,  but  no  direct  testimony  was  oiifered  in  support  of  the 
eight-hour  day  except  the  testimony  of  Mr.  Lauck  himself,  who,  after  referring 
to  the  authorities  just  mentioned,  expressed,  at  page  1898  of  the  Proceedings, 
the  belief  of  the  employes  "that  it  is  a  measure  which  is  not  only  on  economic 
grounds  of  production,  but  also  on  the  larger  grounds  of  the  general  public  wel- 
fare, sanctioned  by  the  enlightened  opinion  of  the  world." 

Testimony  was  given  by  Mr.  Carey  Ferguson,  business  agent  of  the  Detroit 
local  division  of  the  Amalgamated,  and  by  Mr.  William  M.  Rea,  financial  secre- 


584  Electric  Railway  Problem 

tary  of  the  Cleveland  division  of  the  Amalgamated,  with  respect  to  the  working 
schedules  and  the  "spread"  of  the  trainman's  day  on  the  Detroit  and  Cleveland 
systems.  These  witnesses  brought  out  the  fact  that,  on  account  of  the  peculiar 
characteristics  of  the  street  railway  business  resulting  from  the  great  fluctuations 
in  the  volume  of  travel  at  ditiferent  hours  of  the  day  and  night,  conductors  and 
motormen.  in  many  cases,  have  to  be  on  call  for  a  much  larger  number  of  hours 
than  the  actual  hours  of  work  for  which  they  receive  compensation.  These 
witnesses  made  it  perfectly  clear  that  the  trainmen  have  a  vital  interest  in  the 
arrangement  of  the  schedules  and  "runs."  Mr.  Ferguson  explained  in  consider- 
able detail  the  distribution  of  the  nms  on  the  city  lines  of  the  Detroit  United 
Railway  as  presented  in  an  arbitration  proceeding  in  1917.  when  the  average 
time  for  which  the  platform  nu-n  received  pay  was  9  hours  and  28  minutes.  Out 
of  a  total  of  1.639,  there  were  605  straight  runs.  792  two-piece  runs,  and  242 
three-piece  runs.  In  discussing  street  railway  schedules,  the  outside  time  is  the 
time  within  which  an  employe  completes  his  day's  work.  In  the  case  of  a 
straight  run  the  outside  time  is  identical  with  the  p.iy  time,  but  in  the  case  of 
two-piece  and  three-piece  runs  the  outside  time  is  much  greater  than  the  pay  time. 
For  example,  a  man  may  start  a  run  at  6  o'clock  in  the  morning  and  work  until 
11  o'clock  in  the  forenoon,  and  then  go  on  again  at  2  o'clock  in  the  afternoon 
and  tinisli  his  day's  work  at  6:30  in  the  evening.  In  that  case  his  outside  time 
would  be  12^2  hours,  while  his  pay  time  would  be  9\i>  hours.  Mr.  Ferguson 
showed  that  on  1,035  of  the  1.639  Detroit  runs  the  day's  work  was  completed 
within  12'/o  hours;  269  runs  were  completed  in  between  12V-;  and  14  hours:  150 
nms  in  between  14  and  15  hours;  84  runs  in  between  15  and  16  hours:  54  runs 
in  between  16  and  17  hours;  46  runs  in  between  17  and  18  hours,  leaving  1  run 
that  was  completed  in  between  18  and  18|;,  hours.  Mr.  Ferguson  called  atten- 
tion to  cases  where  the  men  were  relieved  at  8:34,  8:39,  8:51  and  8:59  in  the 
morning  to  go  to  dinner.  At  page  1740  of  the  Proceedings  we  find  the  follow- 
ing testimony: 

"The  Chairman:  Is  it  possible  to  rearraiigc  your  schedule  so  that  all  the  men  can  be 
relieved  at  certain  times? 

"Mr.  Kergnson :  \Vc  do  not  expect  that  all  men  can  he  relieved  at  a  certain  time.  That 
is  ont  of  the  question.  Their  contention  in  that  respect  is  that  they  should  be  relieved — 
providing  they  arc  going  to  Ik-  compelled  to  o|K-rate  a  nin  In  which  a  dinner  hour  is  provided, 
that  is.  a  run  other  than  what  is  known  as  a  straight  run — that  the  diinicr  hour  should  t« 
somewhere  near  the  dinner  time." 

That  similar  conditions  prevail  in  Cleveland  was  brought  out  by  Mr.  Rca, 
who  testified  in  detail  as  to  the  arrangement  of  runs  on  the  princip.il  car  lines 
of  the  Cleveland  Railway  system.  For  example,  he  showed  that  on  the  St.  Clair 
Avenue  line,  in  effect  in  May.  1919,  there  were  6  night  carmen  who  completed 
their  day's  work  within  8  hours;  4  men  who  completed  their  day's  work  within 
from  9  to  10  hours;  1  within  12  hours;  26  within  from  12  to  12'-o  hours;  110 
from  12'/!.  to  14  hours;  22  within  froin  14  to  15  hours;  6  within  from  15  to  16 
hours;  12  within  from  17  to  18  hours,  and  16  within  from  18  to  19  hours.  Mr. 
Rea  explained  that  under  the  terms  of  the  trainmen's  contract  with  the  Cleveland 
Railway  Company  every  man  was  gtiaranteed  a  mininuim  of  5  hours  pay.  He 
pointed  out  that  on  the  Superior  .'\venue  schedule,  for  example,  there  were  22 


Union  Labor  Program  585 

men  working  for  5  hours  paj-  per  day,  or  a  total  of  110  hours  for  which  they 
received  compensation,  ahhough  it  took  them  an  aggregate  of  259  hours  to  com- 
plete their  day's  work.  Referring  to  the  Euclid  Avenue  schedule,  Mr.  Rea  tes- 
tified that  the  average  outside  time  required  by  the  men  for  the  completion  of 
their  day's  work  was  13  hours  and  15  minutes;  that  the  average  time  paid  for 
was  9  hours  and  39  minutes,  leaving  3  hours  and  36  minutes  as  the  average  time 
lost ;  while  on  the  Woodland  Avenue  line,  as  another  exan%ple,  the  average  time 
lost  per  man  was  4  hours  and  44  minutes. 

Commissioner  Mahon  stated  that  the  schedule  conditions  described  as  exist- 
ing in  Detroit  and  Cleveland  were  fairly  typical  of  conditions  generally  prevailing 
in  the  big  cities  other  than  Chicago  and  Boston,  where  the  eight-hour  day  has 
been  established.  It  is  also  worthy  of  note  that  the  municipal  railways  of  San 
Francisco  are  operated  on  the  basis  of  an  eight-hour  day.  With  respect  to  con- 
ditions in  Seattle,  Mr.  Thomas  F.  Murphine,  Superintendent  of  the  Department 
of  Public  Utilities  during  1919,  in  his  report  for  that  year,  makes  the  following 
statement  about  wages,  hours  and  conditions  of  work  on  the  Seattle  Municipal 
Railway  lines: 

"The  wages  of  the  railway  employes  have  been  increased  approximately  i3  per  cent, 
and  at  the  present  time  our  City  Railway  employes  are  being  paid  a  higher  wage  than  is 
paid  on  any  surface  street  railway  line  in  the  world.  Their  working  conditions  have  been 
improved  to  a  point  where  it  can  be  asserted,  without  fear  of  contradiction,  that  they  have 
the  best  working  conditions  of  any  railway  employes  in  the  world.  Their  working  day  has 
been  standardized  to  eight  hours,  and  while  we  pay  time  and  a  half  for  overtime,  the  over- 
time amounts  to  but  approximately  one  per  cent.  All  those  who  wish  it  are  allowed  one  day 
ofT  in  any  eight  days.  Fifteen  minutes'  time  is  allowed  and  paid  them  for  reporting  accidents. 
Fifty  cents  per  day  additional  is  allowed  trainmen  for  instructing  students.  Fifty-seven  per 
cent  of  the  runs  are  what  is  known  as  straight  runs." 

Clearly,  the  eight-hour  day  as  demanded  by  the  Amalgamated  has  signifi- 
cance in  two  directions :  First,  with  respect  to  the  economical  distribution  and 
use  of  labor  power ;  and  second,  with  respect  to  the  rate  of  wages  to  be  paid. 

The  problem  of  so  distributing  the  runs  that  the  service  will  be  taken  care 
of  properly  while  at  the  same  time  every  trainman  gets  an  eight-hour  workday 
without  loss  of  time  to  himself  or  waste  of  his  time  for  the  utility  is  by  no 
means  an  easy  one  under  the  operating  conditions  that  prevail  in  large  cities 
with  big  rush-hour  traffic. 

If  it  be  assumed  that  each  trainman  works  325  days  in  a  year — and  that  is 
the  figure  used  by  the  labor  witnesses — it  will  take  a  wage  of  $6.15  per  day  to 
produce  the  income  of  $2,000  per  year  required,  in  Professor  Ogburn's  opinion, 
for  the  minimum  comfort  budget.  This  means,  on  the  basis  of  an  eight-hour 
day,  an  hourly  wage  of  77  cents.  If,  on  the  other  hand,  a  man  works  9^4  hours 
a  day,  this  means  an  hourly  wage  of  only  65  cents.  It  will  be  seen,  therefore, 
that  the  adoption  of  the  eight-hour  workday,  coupled  with  the  living  wage,  means 
an  increase  of  12  cents  per  hour,  or  more  than  18  per  cent  in  the  labor  wage  rate 
as  compared  with  the  compensation  required  to  produce  a  living  wage  where  the 
length  of  the  working  day  is  approximately  identical  with  the  average  day  now 
worked  on  the  Detroit  and  Cleveland  lines.  Unless  it  can  be  shown  that  the 
efficiency  of  labor  in  the  production  of  street  railway  service  or  in  the  collection 
of  street  railway  revenues  will  be  increased  by  the  substitution  of  8  hours  for 
9V{>  hours  as  the  standard  or  average  working  day,  it  is  clear  that  the  general 


586  Electric  Railwav  Problem 

adoption  of  the  eight-hour  day  in  the  electric  railway  business  would  mean  a  very 
substantial  increase  in  the  labor  cost  of  local  transportation. 

At  pages  1591  and  1592  of  the  Proceedings,  Mr.  Lauck  reiterates  his  view 
that  the  principle  of  the  living  wage  should  apply  not  only  to  the  motomien  and 
conductors  but  to  all  street  railway  employes,  as  will  be  seen  from  the  following 
testimony : 

"The  Chairman  :  Then  you  believe  that  the  stenographers  and  the  clerks  and  all  the 
employes  in  the  street  railroad  service  of  mature  age  should  have  at  least  $166  a  month  tor 
an  eight-hour  day? 

"Mr.  Lauck:  I  think  that  is  a  fundamental  industrial  right  which  they  should  have,  and 
I  think  that  the  opinion  of  the  world,  the  universally  enlightened  opinion  of  the  world, 
would  support  that;  that,  growing  out  of  the  war.  has  come  the  conclusion  on  the  part  of  a 
large  part  of  the  public,  as  well  as  on  the  part  of  the  workers,  that  if  we  are  going  to  have 
any  measure  of  economic  democracy  at  all,  the  fundamental,  inalienable,  you  might  say  self- 
evident — to  use  a  principle  of  the  Declaration  of  Independence — right  of  the  worker  is  to  a 
living  wage;  and  if  any  industry  does  not  pay  a  living  wage,  it  is  parasitic  and  should  be 
eliminated.  In  other  words,  that  industr>-  exists  for  the  common  good  and  not  for  the 
deterioration  of  the  working  classes." 

Mr.  Lauck  stated  that  the  employes  were  "anxious  to  have  the  industry  re- 
habilitated and  made  prosperous,"  and  that  they  were  "desirous  of  having  the 
public  protected."  He  insisted,  however,  on  behalf  of  the  employes,  and  laid 
great  emphasis  upon  this  contention,  that  any  reconstructive  policy  undertaken 
for  the  rehabilitation  of  the  industry  "must  be  based  upon  and  accept,  as  a  funda- 
mental preliminary,  the  rights  of  labor,  as  accepted  by  all  civilized  and  leading 
industrial  nations  in  the  Treaty  of  Peace  with  Germany,  and  the  principles  which 
have  been  accepted  and  proclaimed  by  our  own  Government  as  those  which  should 
govern  the  relations  between  employers  and  employes."  In  addition  to  "union 
recognition,"  "the  payment  of  a  living  wage,"  and  "the  adoption  of  an  eight- 
hour  day,"  he  cited  four  additional  points  from  the  Treaty  of  Peace,  namely  ; 
First,  that  the  guiding  principle  in  the  relations  between  capital  and  labor  should 
be  that  "Labor  is  not  a  commodity";  second,  the  acceptance  of  a  weekly  rest 
period,  preferably  the  Sabbath  Day;  third,  the  abolition  of  child  labor  and  the 
imposition  of  such  restrictions  on  the  labor  of  women  and  minors  as  will  assure 
their  proper  physical  development ;  and  fourth,  equal  pay  for  equal  work  without 
discrintination  between  the  sexes.  He  maintained  that  the  recognition  of  this 
labor  program  should  go  along  />(ir»  f>assit  with  the  recognition  of  the  right  of 
capital  to  security  and  a  fair  return.  When  asked  whether  the  granting  of  the 
demands  of  labor  ntight  not  so  increase  the  cost  of  service  as  to  deter  people 
from  using  the  street  cars,  Mr.  Lauck  expressed  the  opinion  that  the  public  would 
be  willing  to  pay  what  the  service  cost,  either  through  the  fares  or  through  sub- 
sidies from  taxation.  His  testimony  on  this  point  is  found  at  page  1954  of  the 
Proceedings,  as  follows: 

"The  Chairman:  In  your  consideration  of  this  subject  has  it  occurred  to  you  that  the 
adoption  of  this  standard  might  so  greatly  increase  the  carfare  as  to  largely  reduce  the  riding 
hahit  and  thus  in  the  long  run  to  accoinplish  a  very  great  injury  to  men  employed  in  the 
service  ? 

"Mr,  Ijiuck :  I  do  not  see  how  that  could  work  out.  I  think  that  is  not  a  sound  con- 
cliision.  •  •  •  •  Our  i,|ca  is  that  the  public  interest  is  predominant,  and  the  public  is 
going  to  protect  fully  and  guarantee  the  rights  of  capital.  We  think  that  lalxir  has  certain 
fundamental  right>.  like  capital  has  the  right  to  a  fair  return  and  labor  has  the  right  to  a 
living  wage.  \\c  think  the  public  has  accepted  that  principle,  and  we  know  it  is  the  policy 
of  some  of  the  leading  nations  of  the  world  already  in  a  practical   way.     We  believe  what- 


Union  Labor  Program  587 

ever  the  cost  of  that  tnay  be  to  the  public,  whatever  it  might  be,  that  the  public  is  willing 
to  pay  lor  that.  And  if  it  would  result  in  an  excessive  fare,  the  public  might  meet  that  in 
the  way  of  car  riding  by  remission  of  taxes  or  by  granting  of  some  form  of  financial  relief 
or  otherwise  to  the  company. 

■'The  Chairman  :  \\'ell,  the  evidence  presented  here  seems  to  indicate  that  in  all  cases 
where  fares  are  increased  competition  from  jitney  service  and  other  sources  is  stimulated. 
Now.  if  the  fare  through  the  adoption  of  your  plan  should  be  largely  increased,  would  it  not 
have  a  tendency  to  greatly  increase  the  ainount  of  automobiles  used  in  jitney  service? 

"Mr.  Lauck:  I  think  so.  but  that  it  would  have  any  significance  I  do  not  think,  for  this 
reason,  that  the  public  supports  hospitals  and  the  patients  do  not  pay  for  the  cost  of  the 
maintenance  of  those  hospitals,  but  the  public  has  decided  that  the  well-being  of  the  commu- 
nity demands  that  certain  institutions  of  this  kind  be  maintained,  hospitals  and  similar  insti- 
tutions. Their  receipts  are  less  than  their  expenditures,  and  the  public  meets  the  deficit. 
The  public 

"The  Chairman :  Then  you  meet  the  situation  by  saying  that  a  street  car  fare  should 
be  one  to  encourage  the  riding  habit,  and  the  public  should  pay  the  deficit  out  of  taxation? 

"Mr.  Lauck:  Well,  my  point  of  view  is  that  the  public  will  consider  that:  if  it  thinks 
it  is  better  for  the  people  to  ride  and  they  will  not  ride  at  a  higher  fare,  the  public  will  take 
proper  measures  to  give  the  financial  assistance  necessary  to  let  them  ride." 

Mr.  Lauck  was  very  emphatic  in  the  opinion  that  labor  ought  not  to  "sacri- 
fice" itself  in  any  way  in  order  either  to  conserve  low  fares  or  to  keep  the  electric 
railway  industry  alive.     On  this  point  he  speaks  at  page  1955  of  the  Proceedings : 

"Commissioner  Mahon  :  Mr.  Lauck.  you  do  not  believe  that  labor  should  pay  a  sacrifice 
to  keep  street  cars  going,  do  you? 

"Mr.  Lauck :  No.  sir.  I  think  there  is  a  great  deal  too  much  tendency — that  is  what 
I  was  attempting  to  bring  out — to  lay  stress  upon  the  sacred  right  of  capital  to  a  fair  return. 
We  do  not  dispute  that,  of  course.  That  has  been  brought  up  to  a  condition  of  social  usage 
and  so  forth. 

"Commissioner  Meeker :     It  is  part  of  the  Constitution,  too. 

"Mr.  Lauck:  It  is  part  of  the  Constitution,  but  we  think  now  under  this  new  develop- 
ment, under  the  war,  that  we  are  going  to  have  industrial  democracy  in  the  right  sense  of 
the  words  that  there  are  certain  rights  of  labor,  and  one  of  those  is  the  right  to  a  living 
wage,  irrespective  of  what  the  cost  may  be  or  what  the  effect  may  be,  and  we  believe  the 
public  will  afTord  it, 

"Commissioner  Mahon :  You  do  not  believe  if  modern  inventions  come  along  and  dis- 
place the  street  railway  by  something  that  is  more  convenient  and  beneficial  to  the  public 
that  labor  should  sacrifice  in  the  way  of  a  low  wage  to  conserve  low-  fares  and  keep  this 
industn.-.  do  you? 

"^ir.  Lauck:  Absolutely  not.  and  I  do  not  think  the  public  would  expect  labor  to  do 
that." 

Further  on,  in  response  to  questions  by  Commissioner  Gadsden,  Mr.  Lauck 
admits  that  the  immediate  and  arbitrary  application  of  the  principles  for  which 
labor  contends  might  result  in  the  collapse  of  the  electric  railway  industry,  but 
takes  the  position  that  these  principles  are  to  be  embodied  as  a  fundamental  part 
of  the  permanent  policy  of  rehabilitation,  which  he  assumes  that  the  Commission 
will  recommend.  His  testimony  on  this  point  is  found  at  pages  1955  and  1956 
of  the  Proceedings : 

"Commissioner  Gadsden:  Mr.  Lauck.  if  I  get  your  position  correctly,  it  is  that  this 
standard  of  living  that  you  have  described  is  a  standard  which  you  think  the  public  should 
work  towards? 

"Mr.  Lauck:     \'es.  sir. 

"Commissioner  Gadsden :  Not  necessarily  that  it  is  going  to  be  adopted  tomorrow  or  the 
next  day  or  next  month,  but  you  think  it  ouglit  to  be  kept  in  view  and  adjustments  made 
from,  time  to  time  in  the  hope  of  reaching  that  standard  at  a  proper  time.  Is  tliat  about 
vour  thought? 

"Mr.  Lauck:  Well,  I  would  not  make  it  quite  that  indefinite.  I  should  think  it  ought  to 
be  immediately,  so  far  as  realizable,  put  into  effect.  I  have  distinctly  brought  out  the  point 
of  view,  in  speaking  and  in  our  brief,  that  we  wish  the  Commission  to  recommend  or  sanc- 
tion this  principle  and  the  definite  amount  would  be  worked  out  between  the  organization 
and  the  company  or  any  adjustment  agencies  that  would  be  created  as  the  result  of  your 
recommendations  or  other  agencies.     We  think  that 


588  Electric  Railway  Problem 

"Commissioner  Gadsden:  What  I  had  in  mind  was  this — that  it  the  standards  which 
you  are  advocating  were  put  into  effect  immediately  or  in  the  near  future  they  would  antici- 
pate perhaps  by  a  great  many  years  the  adjustments  of  the  relations  between  the  companies 
and  the  public,  because  we  can  hardly  suppose  that  the  relations  between  the  companies  and 
the  public  can  be  worked  out  in  a  year  or  two  years;  it  will  take  a  long  time.  Now,  if  these 
readjustments  of  the  labor  standards  are  put  into  effect  in  advance  of  that,  do  you  not  think 
that  you  are  going  to  precipitate  a  much  greater  crisis  in  the  industry  than  you  have  today  1 

"Mr.  Lauck :  I  think  if  you  arbitrarily  and  immediately  apply  them,  it  would  lead  to  a 
great  dislocation  and  the  utter  collapse,  ptrhaps.  of  the  industry. 

"Commissioner  Gadsden:  .And  probably  defeat  its  purpose,  because  some  roads  would 
have  to  go  out  of  business  and  labor  would  lose  its  employment. 

"Mr.  Lauck :  But  the  point  is  this.  We  have  assumed  that  the  Commission  would 
recommend  a  permanent  policy  to  rehabilitate  the  street  railways  and  to  work  out  these 
relations  with  the  public,  and  as  a  part  of  that  policy  there  should  be  the  sanction  of  these 
principles,  and  as  this  was  worked  out  these  principles  would  W  put  into  effect." 

Particular  attention  should,  perhaps,  be  given  to  Mr.  Lauck's  statement  at 

page  1894  of  the  Proceedings,  where  he  warns  against  measures  "for  iminediate 

relief"   that   do   not    take   into   consideration    a   complete   constructive    program. 

He  says: 

"We  think  that  any  measure  for  immediate  relief  should  be  conditioned  upon  whatever 
the  final  recommendations  of  the  Commission  would  be.  otherwise  it  might  devolve  to  the 
detriment  of  the  public  or  the  employes.  In  other  words,  if  there  were  temporary  relief  it 
might  perpetuate  the  past  evils  to  the  management  or  the  employes  or  the  public,  and  it  seems 
that  the  evidence  tends  to  show  that  there  should  be  a  complete  constructive  program  out- 
lined by  the  Commission." 

Mr.  Lauck  was  questioned  rather  closely  by  Commissioner  Wehle  as  to  the 
attitude  of  the  unions  in  the  electric  railway  industry  toward  bringing  about  "a 
greater  effectual ization  of  their  efforts  for  the  company,"  or,  in  other  words,  as 
to  the  interest  taken  by  them  in  their  own  productiveness.  In  Mr.  Lauck".^ 
opinion,  the  acceptance  of  the  princijjles  j)ut  forward  on  behalf  of  the  Amalga- 
mated would  be  the  very  thing  to  bring  about  the  desired  cooperation  and  m- 
creased  productiveness  of  labor.  Mis  testimony,  at  pages  1958  and  1959  of  the 
Proceedings,  is  as  follows: 

"Commissioner  Wehle:  Is  it  your  opiinon  that  in  general  in  organized  labor  the  workers 
should  be  brought  to  take  an  interest  in  their  own  productiveness? 

"Mr.  Lauck:     L'ndoubtedly. 

"Commissioner  Wehle:     How  would  you  propose  to  bring  that  alwut? 

"Mr.  Lauck  :  l-'undanientally.  I  would  bring  it  about  by  exactly  what  we  are  advocating 
here :  .\  basic  e<|uital)le  participation  in  the  output  of  the  industry  and  the  granting  of 
proper  hours  and  proiurr  conditions  of  work. 

"Commissioner  Wehle :  Now.  assuming  that  you  have  the  equitable  basis  and  proper 
hours  and  conditions  of  work  and  have  those  fundamental  conditions  that  you  say  are  a  pre- 
requisite to  bringing  alxiut  the  state  of  mind,  what  then  would  you  .say  as  to  the  methods 
or  proper  policy  or  the  principles  that  should  be  adopted  by  organized  lalxsr  with  reference 
to  the  effectiveness  of  its  own  efforts? 

"Mr.  Lauck:  1  think  there  should  lie  the  fullest  cooperation  on  the  jiart  of  organized 
labor  and  every  effort  on  the  part  of  the  managerial  end  of  the  business  to  reduce  costs  or 
increase  output  jx-r  dollar  <if  outlay  for  labor  and  the  fullest  cooperation.  I  think  you  would 
have  it.  Hut  you  have  a  situation  now  where  the  cooperation  of  lalior  will  result  in  the 
absorption  of  its  efficiency,  and  they  do  not  think  they  have  a  show  to  get  it." 

When  pressed  still  further  for  some  assurance  that  organized  labor  would, 
in  fact,  respond  to  the  need  for  greater  productiveness,  if  the  demands  of  the 
Amalgamated  were  fully  inet,  Mr.  l^iuck  says  at  page  1965  of  the  Proceedings: 

"I  have  only  stated  .so  far  that  I  think  it  would  realize  the  maximutri  effectiveness.  I 
think  I  could  probably  make  it  more  explicit  on  the  other  side  by  saving  that  the  manage 
mcnt  anil  thi-  public  would  have  evcr>-  right  to  cxixti  and  demand  nnd  insist  that  then- 
should  be  the  fullest  measure  of  production  and  cooperation   from  lalxir.     Would  that  answer 


i 


Union  Labor  Program  589 

it — that  it  would  be  an  essential  duty  and  responsihility  on  labor,  with  the  realization  of  its 
rights?  1  did  not  entirely  grasp  your  question  at  the  beginning,  but  I  think  it  would  be  an 
absolute  duty  of  labor  to  fulfill  its  obligations  by  realizing  maximum  production." 

With  respect  to  the  extent  to  which  the  productivity  of  labor  in  the  street 
railway  industry  hes,  so  to  speak,  within  the  discretion  of  the  employes,  Mr. 
Lauck  testifies  at  page  1967  of  the  Proceedings  in  response  to  questions  by  Com- 
missioner Sweet: 

"Commissioner  Sweet :  Laying  aside  other  industries,  is  it  a  fact  that  the  productivity, 
meaning  by  that  term  the  success,  to  a  certain  extent,  of  a  street  railroad  company  can  be 
influenced  for  good  or  ill  by  the  conduct  of  motormen  and  conductors? 

"Mr.  Lauck;     Oh,  absolutely;  1  should  think  so. 

"Commissioner  Sweet :  Could  a  motorman  or  conductor,  without  being  dishonest  or 
breaking  any  rules  that  would  necessitate  his  discharge — is  there  a  range  in  connection  with 
courtesy  and  efforts  to  get  business  and  all  that  sort  of  thing  within  which  by  extra  effort 
on  his  part  he  coulp  held  the  business? 

"Mr.  Lauck:     Undoubtedly,  to  a  very  great  extent. 

"Commissioner  Sweet :  Do  you  think  it  would  be  a  good  plan  to  give  him  the  benefit  of 
some  degree  of  benefits  of  that  kind  and  make  it  an  object  for  him  to  do  it? 

"Mr.  Lauck :  I  think  so.  I  think  it  would  stimulate  his  interest  and  productivity ;  in 
other  words,  he  would  have  the  welfare  of  the  institution  at  heart  and  would  strive,  as  is 
claimed  in  Philadelphia,  for  instance,  that 

"Commissioner  Sweet :  Then  I  take  it  that  your  position,  Mr.  Lauck,  is  that  a  man 
who  occupies  one  of  these  positions  as  motorman  or  conductor  on  a  street  railroad  company 
ought  to  receive  a  living  wage  anyway? 

"Mr.  Lauck :     Yes. 

"Commissioner  Sweet:     One  that  would  provide  ordinary  proper  comfort? 

"Mr.  Lauck :     Yes. 

"Commissioner  Sweet:  And  that  it  might  also  have  a  stimulating  effect  and  be  of  some 
value  to  let  him  participate  in  what,  over  and  above  that,  might  be  acquired  due  partly  at 
least  to  his  extra  efforts  in  the  direction  of  courtesy  and  business  ability? 

"Mr.  Lauck  :  Yes,  and  undoubtedly  it  would  be  very  advantageous  to  the  industry  and 
to  the  public,  and  if  you  could  work  that  out  so  it  could  be  a  joint  effort  on  the  part  of  the 
management  and  subordinates  and  bring  about  the  best  results,  it  would  be  the  ideal  condi- 
tion to  attain. 

"Commissioner  Sweet :  That  would  help  along  the  spirit  and  increase  the  spirit  of  co- 
operation. 

"Mr.  Lauck  :     L'udoubtedly.  yes.'' 

I  have  reviewed  the  Amalgamated's  positive  program  so  far  as  it  relates  to 
the  demands  of  labor.  Preliminary  to  the  presentation  of  this  program,  evidence 
was  introduced  on  behalf  of  the  employes  to  show,  first,  that  the  iticreases  in  the 
wages  of  motormen  and  conductors  during  the  war  period  up  to  1918  were  in 
no  degree  responsible  for  the  financial  difficulties  of  the  electric  railway  industry, 
and  second,  to  show  that  those  difficulties  were  directly  traceable  to  past  financial 
mismanagement. 

For  the  establishment  of  the  first  of  these  two  points  dependence  was  chiefly 
placed  upon  the  testimony  of  Mr.  Arthur  Sturgis.  to  whom  I  have  already  re- 
ferred. Mr.  Sturgis  found  that  the  increase  from  1902  to  1917  in  the  average 
yearly  wage  of  conductors  and  motorinen  amounted  to  54  per  cent,  as  compared 
with  increases  of  56  per  cent  in  the  average  yearly  salary  of  managers  and 
superintendents  and  78  per  cent  in  the  average  yearly  salary  of  general  officers. 
He  figured  out  that  if  the  trainmen  had  received  the  same  percentage  increase  as 
the  general  officers  their  wage  in  1917  would  have  been  $1,080  instead  of  $934, 
or  15  per  cent  more  than  they  actually  got.  He  also  figured  out  that  on  this  basis 
the  average  motorman  and  conductor  employed  continuously  from  1902  to  1917 
had  lost  in  the  aggregate  $1,805  as  compared  with  what  he  would  have  received 
if  his  wages  had  been  increased  from  time  to  time  in  the  same  proportion  as  the 


590  Electric  Railway  Problem 

general  officers'  salaries  were  increased.  Mr.  Sturgis  figured  that  the  electric 
railway  companies  had  saved  off  the  trainmen  during  this  period  of  15  years 
approximately  $200,000,000  in  the  way  indicated.  He  also  showed  that  the  num- 
ber of  conductors  and  motormen  employed  as  compared  with  the  total  number 
of  employes  decreased;  that  in  1917  only  136,000  trainmen  were  employed, 
whereas,  if  the  number  of  trainmen  had  kept  pace  with  the  number  of  other  em- 
ployes the  electric  railways  in  1917  would  have  had  209,000  motormen  and  con- 
ductors. He  did  not  contend  that  additional  conductors  and  motormen  should 
have  been  employed  or  that  other  employes  should  be  discharged  to  restore  the 
ratio  as  it  existed  in  1902.  Upon  this  point  his  testimony,  at  page  1777  of  the 
Proceedings,  is  as  follows: 

"I  do  not  say  that  either  of  those  two  is  possible  or  desirable.  It  is  not,  but  that  is  what 
would  have  to  be  done  in  order  to  restore  that  ratio. 

"That  curve  is  also  a  measure  of  efficiency,  not  direct,  not  absolute  efficiency,  but  relative 
efficiency,  because  the  conductors  and  motormen  in  1917,  as  compared  to  those  in  19112,  are 
doing  the  work  of  209,000  men  with  only  136.000  men.  In  other  words,  their  efficiency  has 
increased  54  i)er  cent  as  compared  to  the  otlicr  employes. 

"Mr.  Lauck :  You  would  be  willing  to  concede  there,  would  you  not,  to  be  perfectly 
frank,  that  this  may  be  brought  about  by  a  better  capital  equipment,  or  by  outlays  of  capital 
there  might  be  larger  cars,  or  a  larger  numlwr  of  passengers  per  car  mile  made  possible  by 
added  capital  investment,  to  be  perfectly  frank  about  it? 

"Mr.  Sturgis:     It  would  he  possible  also  by  addition  of  trailer  cars  and  one-man  cars. 

"Mr.  Lauck  :     Yes. 

"Mr.  Sturgis:  It  would  also  be  brought  about  this  way.  It  is  possible  that  the  com- 
panies have  felt  the  necessity  of  analyzing  their  costs  more  and  have  increased  the  number 
of  their  office  force,  as  they  have  very  largely,  their  clerks." 

Mr.  Sturgis  also  showed  that  the  number  of  revenue  passengers  handled  per 
car  crew  increased  from  118,000  in  1902  to  166,000  in  1917,  or  approximately 
40  per  cent,  notwithstanding  the  fact  that  the  average  number  of  hours  worked 
decreased  somewhat  during  that  period.  On  this  point,  in  response  to  questions 
from  Commissioner  Gadsden,  Mr.  Sturgis  admitted  that  the  figures  indicated 
an  increase  in  the  general  efficiency  of  electric  railway  management,  but  insisted 
that  this  increase  in  efficiency  resulted  from  the  increased  efficiency  of  the  train- 
men. The  testimony  on  this  point  is  found  at  pages  1782  and  1783  of  the  Pro- 
ceedings, as  follows: 

"Commissioner  Gadsden:  Mr.  Sturgis,  right  there,  without  reference  to  the  relative 
merits  of  this  chart  you  have  prepared  insofar  as  motormen  and  conductors  are  concerned, 
looking  at  the  industry  as  a  whole  from  the  standpoint  of  the  public,  this  chart  would  seem 
to  indicate  that  the  electric  railway  industry  had  increased  in  efficiency;  that  is,  handling 
more  passengers? 

"Mr.  Sturgis:     Handling  more  passengers  per  car? 

"Commissioner  Gadsden:     Yes,  at  a  lower  ratio  of  expense? 

"Mr.  Sturgis:     Well,  that  in  itself  would  lend  to  lower  the  ratio  of  expense,  yes. 

"Commissioner  Gadsden:  Yes.  Irrespective  of  what  quarrels  there  may  be  between  the 
management  as  to  the  division  of  that,  it  would  seem  to  prove  that  the  industry,  as  an  indus- 
try, has  been  working  out  for  itself  some  verj-  substantial  efficiencies,  would  it  not? 

"Mr.  Sturgis:  These  curves  show  essentially  the  same  thing  as  was  shown  by  the  curves 
introduced  by  Mr.  Welsh. 

"Commissioner  Ga<l>den  :  Yes.  I  wanted  to  bring  that  out  for  the  benefit  of  the  Com- 
mission. While  we  may  (|uarel  as  to  whether  one  class  got  their  proper  share,  as  an  industry 
these  charts  seem  to  go  a  long  way  toward  establishing  the  fact  that  we  have  been  increasing 
in  efficiency,  have  been  rendering  more  service  to  the  public;  isn't  that  true? 

"Mr.  Sturuis  :     Yes,  I  think  so. 

"Commissioner  Gadsden:  .'\nd,  of  course,  from  the  standpoint  of  this  Commission,  that 
is  a  v<r>-  important  fact,  because  what  we  arc  trying  l<i  bring  before  the  public  is,  if  this 
ind\istry  needs  relief,  we  must  be  able  to  .show  that  it  has  itself  been  endeavoring  to  work 
out  efficient  c)pcration. 


Union  Labor  Program  591 

"Mr.  Sturgis :  Yes.  I  am  trv'ing  to  bring  out  that  same  fact  tliat  Mr.  Welsh  brought 
out,  but  I  am  going  a  httle  bit  further  than  he  did  by  claiming  that  that  efficiency  is  the  result 
of  the  motormen  and  conductors. 

"Commissioner  Gadsden :     Yes,  I  appreciate  that. 

"Mr.  Sturgis :  1  do  not  mean  to  say  that  motormen  and  conductors  went  out  and 
drummed  up  trade  for  their  cars.  They  could  not  do  that,  but  their  increase,  the  increase  in 
the  efficiency  of  the  motormen  and  the  conductors,  resulted  in  an  increase  in  efficiency  of 
the  companies. 

"Mr.  Lauck :  You  are  willing  to  concede  further,  are  you  not,  Mr.  Sturgis,  that  this 
efficiency  might  have  been  made  possible  by  added  capital  investment  on  the  part  of  the 
company  in  heavier  equipment,  but  that  if  the  wages  were  increased  it  had  a  practical  effect 
in  not  increasing  labor  costs  on  the  part  of  the  company  for  motormen  and  conductors ;  in 
other  words,  your  main  idea  is  to  show,  is  it  not,  that  as  a  result  of  this  efficiency,  wherever 
emanating,  the  wage  increases  have  not  resulted  in  higher  labor  cost  to  the  company  com- 
mensurate with  the  increase  in  the  wage  rate? 

"Mr.  Sturgis:    Yes,  that  is  just  it,  Mr.  Lauck." 

Mr.  Sturgis  made  another  comparison  to  show  that  the  outlay  for  trainmen's 
wages  had  not  increased  as  rapidly  as  other  operating  expenses.  He  presented 
figures  showing  the  amount  left  from  the  average  revenue  per  revenue  passenger 
after  the  payment  of  trainmen's  wages,  and  also  the  amount  left  after  paying  all 
other  operating  expenses.  These  figures  are  given  at  page  1784  of  the  Proceed- 
ings.    They  are  as  follows: 

Amount  of  Revenue  Per  Revenue 
Passenger  Left  After  Paying 

Trainmen's  All  Operating 

Year  Wages  Expenses 

1902 4.22c  2.28c 

1907 4.40c  2.11c 

1912 4.70c  2.39c 

1917 4.S9c  203c 

1918 4.83c  1.74c 

Mr.  Sturgis  admitted  that  the  companies'  margin  of  safety  "has  decreased 
verj'  much,"  but  his  testimony  tended  to  show  that  this  decrease  was  not  due  to 
any  appreciable  extent  to  increases  in  trainmen's  wages.  With  respect  to  this  he 
testifies,  at  pages  1784  and  1785  of  the  Proceedings,  as  follows: 

"On  Chart  C-5  I  have  compared  the  wages  of  trainment  with  the  total  income  of  electric 
railways  from  all  sources,  including  in  the  total  income  items  which  have  nothing  to  do  with 
operation.^ 

"It  is  not  a  usual  comparison  to  make  by  any  means,  but  it  shows  that  the  ratio  of  train- 
men's wages  in  1918  was  essentially  the  same  as  it  was  in  1902. 

"In  other  words,  in  1902  the  companies  had  available  81  per  cent  of  their  total  income 
from  all  sources  with  which  to  pay  all  their  other  operating  expenses,  dividends  and  all  the 
interest. 

"In  1918  they  also  had  81  per  cent.  So,  as  far  as  net  income  is  concerned,  after  operat- 
ing expenses,  the  wages  of  trainmen  have  no  effect  upon  it.  The  increase  in  the  wages  of 
trainmen  has  had  no  effect  upon  it.  *  *  *  *  I  say  no  effect — of  course,  in  1902  the 
ratio  is  19.4  and  in  1919  the  ratio  is  19.8.     There  is  an  effect. 

"Mr.  Warren:     A  very  slight  effect? 

"Mr.  Sturgis :    Yes." 

On  the  basis  of  operating  revenue  collected  per  car  crew,  Mr.  Sturgis  showed 
an  increase  from  $6,180  in  1902  to  $9,550  in  1917,  or  approximately  54  per  cent, 
which  he  contended  was  another  indication  of  increased  efficiency  on  the  part 
of  the  trainmen. 

In  support  of  the  charge  that  overcapitalization  and  past  financial  mis- 
management are  primarily  responsible  for  the  present  plight  of  the  electric  rail- 
way industry,  the  testimony  of  Mr.  Stiles  P.  Jones,  of  Minneapolis,  was  offered 
on  behalf  of  the  employes.     Mr.  Jones,  a  former  newspaper  man  and  for  many 


592  Electric  Railwav  Problem 

years  the  secretary  of  the  Minneapolis  Voters  League,  and  later  secretary  of  the 
Central  Franchise  Committee  of  Minneapolis,  is  well  known  as  a  diligent  and 
incisive  student  of  public  utilities,  particularly  in  their  public  relations.  In  prepa- 
ration for  his  testimony  before  the  Commission  he  made  a  special  investigation, 
covering  several  weeks'  time,  into  the  records  of  overcapitalization  in  most  of 
the  urban  communities  where  some  sort  of  an  official  valuation  of  street  railway 
property  had  been  made  with  which  the  capitalization  could  be  checked.  The 
results  of  his  studies  were  submitted  in  the  fonu  of  an  elaborate  exhibit  under 
the  title  "Financial  Mismanagement  of  Street  Railways."* 

In  earlier  chapters  of  this  report  I  have  already  laid  considerable  emphasis 
upon  the  effect  of  overcapitalization  in  the  weakening  and  destruction  of  electric 
railway  credit,  and  have  pointed  out  the  importance  of  a  complete  reorganization 
of  the  financial  structure  of  the  industry,  if  its  credit  is  to  be  restored  and  the 
public  interests  properly  protected.  I  cite  Mr.  Jones'  testimony  at  this  point 
because  it  lays  the  foundation  for  the  claim  put  forward  by  the  employes  that 
they  too  have  suffered  as  a  result  of  overcapitalization  and  financial  mismanage- 
ment in  the  past,  and  that  they  will  not  consent  to  any  readjustment  of  electric 
railway  conditions  in  the  future  except  on  the  basis  of  a  sound  capitalization 
based  upon  a  thorough  financial  reorganization,  with  guaranties  that  the  industry 
shall  not  be  starved  and  their  share  in  the  fruits  of  production  diminished  by 
excessive  and  preferential  claims  on  the  part  of  capital.  .\t  pages  1S43  and  1844 
of  the  Proceedings.  Mr.  Jones  makes  the  following  summary  statement  of  his 
conclusions : 

"The  present  unfortunate  predicament  of  the  street  railway  industry  in  the  United 
States  is  one  in  large  part  of  its  own  making,  created  primarily  by  past  financial  mis- 
management over  which  the  public  had  no  control  and  for  which  in  this  issue  it  cannot 
justly  be  held  responsible. 

"A  study  of  the  financial  histor>-  of  many  representative  companies  discloses  an  amazing 
story  of  financial  manipulation  clear  through  the  life  of  the  proiJcrties.  the  results  of  which 
have  been  to  load  them  down  with  a  staggering  burden  of  overcapitalization  to  constitute  a 
pcnnancnt  charge  against  operating  revenue.  The  ingeiuiity  of  the  financial  management  in 
creating  new  sources  of  capitalization  lias  been  without  limit.  Nothing  has  been  overlooked 
u|)on  which  to  hang  new  issues  of  securities. 

"The  inevitable  result  is  seen  in  the  present  undennining  of  the  financial  structure  of 
street  railway  investments  in  this  countrj-.  The  credit  of  the  industry  is  so  impaired  that  it 
can  no  longer  finance  its  own  enteqirises  on  possible  terms.  It  is  facing  collapse  through  its 
own  devices. 

"The  methods  and  agencies  by  which  this  unfortunate  situation  has  been  brought  about 
frame  a  sonlid  lackground  of  ruthless  exploitation  of  a  great  public-serving  industry  to  make 
financial  killings  for  manipulating  insiders.  Unwarranted  promoters'  rewards,  excess  con- 
struction costs,  consnlidations,  mergers,  reorganiz.itions.  leases,  stock  bonuses,  have  all  been 
iTude  the  medium  for  capital  inflation.  I'ranchise  x-alues.  excess  eaniings,  prospective  future 
earning  capacity,  discounts  on  securities,  even  opcratitig  deficits,  have  l>een  capitalized  to 
further  add  to  the  liunlcn.  Kver>-  operating  improvement,  the  iiu-reascd  efficiency  of  em- 
ployes, the  growth  and  development  of  the  community  and  of  industry,  have  been  to  a  large 
extent  used  as  a  means  to  absorb  fictitious  issues.  .*\nd,  fitially.  let  us  not  forget  the  in- 
genious device  of  the  holding  company  to  still  further  complicate  a  before  complex  situation 
and  serve  as  another  means  to  pyramid  capitalization  and  exact  additional  toll  of  the  public. 

"Besides  destroying  the  fin.mcial  crx'dit  of  the  industry,  the  results  of  such  practices  are 
seen  in  nther  ways  atTectinc  public  interests,  as  follows: 

"1.  Impaireil  service  — To  meet  the  excess  exactments  of  capital,  service  has  had  to  suffer. 

"2.  Impaired  operating  eflTiciency— The  effort  to  protect  the  integrity  of  these  false  values 
has  absorU'd  the  efforts  and  resources  of  the  companies  to  such  an  extent  as  to  make  it 
impossible  for  them  to  fulfill  adequately  their  primary  function  as  public-serving  institutions. 
Prior  recognition  of  the  interests  of  the  investor  has  made  it  necessary  to  keep  down  wages 
and  labor  and  to  postpone  expenditures  calculated  to  improve  operating  efficiency. 

"3.  Maintenance  has  liecn  robbed  to  meet  fi.xcd  charges  and  pay  dividends. — The  interest 


Union  Labor  Program  593 

of  capital  has  been  put  ahead  of  the  upkeep  of  the  physical  property,  with  the  result  of 
diminished  operating  efficiency  and  the  piling  up  of  an  enormous  load  of  deferred  main- 
tenance, in  the  aggregate,  to  constitute  another  ultimate  burden  upon  the  public. 

"4.  The  public  attitude  toward  many  individual  companies  and  the  industry  in  general 
has  been  affected  to  such  a  point  that  amicable  settlements,  franchises,  fares  and  otherwise 
between  the  companies  and  tlie  communities  are  in  many  cases  well  nigh  impossible,  owing 
to  the  present  state  of  the  public  mind.  This  is  perhaps  the  most  discouraging  aspect  of 
the  present  situation  as  well  as  the  most  serious  indictment  of  the  past  methods  and  policies 
of  the  industry." 

During  the  course  of  Mr.  Jones'  testimony  the  question  was  raised  as  to 
whether  the  inevitable  effect  of  testimony  of  this  kind,  going  into  the  past  history 
of  the  industry,  would  not  be  to  "undermine  the  whole  structure  of  electric  rail- 
way rates  in  this  country  today?"  In  answer  to  that  Mr.  Lauck,  at  page  1847 
of  the  Proceedings,  says : 

"J  think  that  that  is  something  that  lias  already  been  done,  and  this  evidence  would  have 
no  effect  upon  it.  It  is  my  personal  opinion  that  the  past  financial  mismanagement  has  so 
impaired  the  credit  now  that  the  public  will  insist  that  there  be  some  basis  of  procedure  on 
the  basis  of  fair  valuation  or  some  reorganization  of  the  finances.  I  do  not  think  anything 
that  we  could  submit  here  would  furtlier  add  to  what  lias  been  done  in  that  regard." 

The  significance  of  overcapitalization,  so  far  as  the  employes  are  concerned, 
was  brought  out  by  the  testimony  of  Mr.  Jones  at  page  1853  of  the  Proceedings, 
as  follows : 

"Mr.  Lauck :  What  is  the  significance  of  all  of  this  overcapitalization  to  whatever 
extent  and  from  whatever  cause  it  may  arise  in  the  past,  as  bearing  on  the  question  of  the 
employes  of  the  company? 

"ilr.  Jones:  Overcapitalization,  of  course,  has  intimate  relation  with  many  of  the  aspects 
of  the  street  railway  situation,  but  especially  towards  that  of  labor. 

"With  excess  capitalization  the  interest  of  the  investor  always  in  mind,  the  question  of 
credit  uppermost  at  all  times,  with  the  absolute  necessity  of  squeezing  out  revenue  sufficient  to 
keep  up  credit  and  to  pay  dividends  on  this  capitalization  as  a  means  to  keep  up  credit, 
labor,  of  course,  has  suffered  during  all  times. 

"Mr.  Lauck:  In  other  words,  the  operating  results  being  hypothecated,  so  to  speak,  by 
fictitious  issues  of  capital,  if  that  capital  is  to  be  maintained  in  its  market  values,  that  means 
an  absorption  of  revenue  which  would  otherwise  be  available  for  the  payment  of  increased 
compensation,  does  it  not? 

"Mr.  Tones:     Exactly." 

\\"hen  Mr.  Lauck  himself  was  on  the  stand,  he  pointed  out  in  further  detail 
the  vital  connection  between  ancient  financial  history  and  the  present  and  future 
living  wage.     At  pages  1886  and  1887  he  says : 

"W'e  realize  that  the  statement  is  made  that  the  data  that  has  been  presented  as  to  the 
financial  practices  of  street  railway  corporations  in  the  past  has  been  criticised  on  the  ground 
that  this  is  academic  and  ancient  history  and  has  no  bearing  upon  the  present.  We  wish  to 
take  issue  with  that.  W'e  think  this  has  a  very  great  significance  at  the  present  time. 
and  as  a  matter  of  fact  is  of  paramount  significance  in  the  consideration  of  the  attitude  of 
the  employes  towards  the  industry  in  this  way :  That  we  *  *  *  *  do  not  wish  to  charge 
the  present  managements  with  responsibility  for  these  practices  and  the  evils  which  have 
developed  from  them,  but  we  consider  that  they  are  the  victims  along  with  the  employes. 
and  the  employes  and  the  management  and  the  public  are  all  victims  of  these  past  systems 
of  corporation  finance  which  the  street  railway  ind\istry  is  suflFering  from  at  the  present 
time;  or.  in  other  words,  the  practice  which  has  characterized  past  years  of  capitalizing 
income  that  has  Ix-en  developed  as  the  result  of  the  development  of  urban  communities  or 
the  application  of  new  equipment  or  the  increased  efficiency  of  employes.  Because  with  the 
extension  of  capitalization  in  this  way,  the  tendency  has  been  that  when  other  items  of 
operating  cost  have  increased,  such  as  materials  and  supplies  and  all  the  elements  going 
into  operating  expenses  and  maintenance  and  repair  of  equipment  which  has  been  installed 
bv  managements  for  the  purpose  of  securing  economies  in  operation — that  with  the  increase 
in  the  operating  ratio  and  these  securities  outstanding  which  have  been  issued  without  any 
commensurate  investinent  values  in  the  property  and  were  really  a  drain  upon  operating 
reveinies,  the  margin  of  safetv.  the  am.ount  of  revenue  left  after  fixed  charges  were  pnid 
and  remaining  to  meet  new  capital  issues,  has  been  gradually  and  gradually  declining  until 


594  Electric  Railway  Problem 

it  is  practically  nil  at  the  present  time,  and  therefore  the  street  railway  managers  have  not 
had  an  opportunity  or  any  basis  upon  which  to  secure  new  financing,  and  which  is  a  direct 
outgrowth  of  these  previous  practices. 

"V\c  think  the  employes  have  a  very  vital  interest  in  that,  as  Mr.  Jones  pointed  out  this 
morning,  or  as  came  out  in  the  course  of  his  testimony;  that  if  the  capital  investment  in 
the  properties  represented  an  actual  commitment  of  capital  the  returns  would  then  be  related 
to  the  actual  capital  investment,  and  it  would  be  evident  both  to  the  employes,  the  manage- 
ment and  the  public  as  to  the  legitimate  return  in  the  case  of  this  industry,  and  the  employes 
would  have  a  better  opportunity  not  only  to  demonstrate  their  equitable  participation  in  the 
earnings  of  these  properties,  but  also  to  secure  such  participation,  while  if  the  past  system 
of  corporate  management  would  continue  there  would  be  no  hope  lor  the  employe,  there 
would  l)e  no  hope  for  the  public,  and  there  would  be  no  hope  for  the  present  management, 
because  they  would  all  be  the  victims  of  the  financier  or  of  the  interests  which  were  floating 
these  securities  or  had  financial  control  of  the  property. 

"I  think  that  is  conceded  by  the  testimony  of  the  men  who  are  intimately  connected 
with  the  industry  and  who  are  practical  men  in  the  industry,  I  mean  as  to  overcapitalization 
and  the  evil  effects  of  it." 

Again,  at  pages  1887  and  1888  of  the  Proceedings,  Mr.  Lauck  summarizes 
the  conclusions  drawn  by  the  employes  in  regard  to  the  effect  of  financial  mis- 
management and  their  own  guiltlessness  of  the  threatened  ruin  of  the  industry, 
as  follows: 

"Our  general  conclusion  •  *  *  *  as  to  labor  and  the  present  (inimcial  plight  of 
street  railways  is  that  we  consider  that  the  extraordinary  gains  in  revenue  and  so  forth, 
arising  from  different  methods  of  operating,  from  unearned  increments  and  mechanical  equip- 
ment, as  well  as  from  managerial  ability  and  lalxjr  efficiency  in  the  past,  have  to  a  large 
extent  fx;en  absorbed  by  these  processes  of  cor])orate  financing  or  fictitious  capitalization, 
or  in  other  companies  have  been  actually  dissipated  by  improjier  and  misguided  financial 
mismanagement,  and  our  conclusion  is  that  the  present  deplorable  financial  condition  in 
which  the  street  railway  comjianies  find  themselves  has  not  Ixen  due  to  an  .idvance  in  o|icrat- 
ing  costs  arising  from  increasing  outlays  to  labor  but  has  primarily  arisen  from  past  mis- 
management of  the  finances  of  these  utilities,  in  the  way  I  have  just  indicated;  that  the 
present  managements,  having  inherited  the  results  of  past  mismanagement  in  the  times  of 
increasing  operating  costs,  the  costs  of  materials  and  supplies  and  so  forth,  have  seen  their 
margin  of  safety  disappear  and  their  credit  disappear,  and  the  company  is  placed  on  the 
verge  of  insolvency  due  to  these  past  financial  malpractices. 

"Payments  to  employes  of  the  industry  have  not  only  had  no  eflFect  upon  the  present 
finances  of  the  companies,  but  as  a  matter  of  fact  the  employes  have  not  had  an  equitable 
participation  in  the  results  of  their  own  labor.  Their  past  productive  efficiency  has  been 
absorbed  by  this  fictitious  capitalization,  and  if  the  past  methods  were  to  be  continued  into 
the  future  the  fruits  of  the  lalnir  of  employes  as  yet  unborn,  generations  yet  to  come  to 
work  upon  the  railroads  would  still  have  their  efficiency  absort)ed  and  would  not  have  a 
chance  for  a  fair  participation  in  the  revenues  of  this  industry.  .\nd  unless  the  present 
l>asis  of  financial  management  and  contn)l  is  changed  the  future  is  without  hope,  as  we 
claim,  to  the  employes  or  to  the  general  public  or  even  to  the  practical  managements  of  the 
companies  themselves  who  have  faced  the  actual  problems,  with  which  they  are  confronted 
at  the  present  time,  of  operation  and  making  the  companies  go  as  financial  concerns. 

"Those  are  our  two  main  negative  conclusions.  I  might  say,  that  have  been  developed  by 
Mr.  Slurgis'  lestimonv  and  by  the  testimony  of  Mr.  lones,  that  we  consider  that  labor  has 
not  l>een  responsible  for  increased  operating  costs  in  the  teniis  of  motornu-n  and  conductors, 
and  we  consider  that  the  present  financial  difficulties  of  the  railroads  arc  primarily  due  to 
past  financial  misnianaRcment.  And  we  agree  very  likely  on  the  question  of  bringing  up  the 
history  of  these  past  managements,  of  financing  these  corporations  with  Ex-President  Taft, 
who.  I  iK'licve.  testified  before  this  Conunission  that  they  were  not  of  any  significance  except 
it  liecame  necessary  to  take  judicial  notice  of  them,  and  we  think  from  our  own  standpoint 
if  is  necessary  for  the  Commission  in  relation  to  the  employes  to  take  judicial  notice  of 
those  facts  in  order  that  the  employes  may  have  an  opportunity  of  equitable  participation  in 
the  future  in  any  rccommeiulalinn  which  the  Commission  may  make." 

Once  more,  at  page  1928  of  the  Proceedings,  Mr.  Lauck  lays  emphasis  on 
the  present  significance  of  past  histon',  as  will  be  seen  from  the  following 
testimony : 

"The  Oiairman:  You  have  stressed  very  pointedly  the  financial  mismanagement  of 
these  companies? 

"Mr.  Lauck:     Yes. 


Union  Labor  Program  595 

"The  Chairman :  What  particular  point  do  you  desire  to  make  by  that  part  of  your 
argument  ? 

"Mr.  Laiick  :  The  point  we  had  specifically  in  mind  was,  in  the  first  place — or  rather 
speaking  generally — that  the  past  financial  mismanagement  of  these  companies  has  a  very 
vital  significance  at  the  present  time,  and  that  there  must  be  some  form  of  adjustment  to 
get  it  on  a  proper  basis  in  order  to  protect  the  interests  of  the  employes  as  well  as  the 
public,  and  that  your  recommendation  should  cover  the  prevention  of  similar  methods  in 
the  future  on  the  ground  that,  as  employes,  we  do  not  wish  to  see  the  productive  efficiency 
of  the  industry  absorbed  by  illegitimate  capital  issues." 

The  evidence  presented  by  the  organized  employes  and  the  program  sug- 
gested by  them  are  calculated  to  bring  sharply  into  consciousness  the  fact  that 
the  labor  problem  is  coordinate  with  the  problem  of  capital.  They  point  un- 
erringly to  the  conclusion  that  the  electric  railway  industry  cannot  be  rehabili- 
tated merely  upon  the  basis  of  a  readjustment  in  the  relations  between  the  public 
and  the  investors — that  labor  can  no  longer  be  treated  as  an  incidental  element  in 
the  cost  of  service  for  which  the  employing  companies  assume  undivided  respon- 
sibility. The  solution  of  the  local  transportation  problem  necessarily  involves 
the  completion  of  the  triangle  and  the  establishment  of  direct  relations  between 
the  employes  and  the  public  as  well  as  a  radical  change  in  the  relations  between 
the  investors  and  the  public.  This  tends  greatly  to  complicate  the  problem  of 
adequate  service  at  reasonable  cost,  at  least  under  private  operation,  for  it  in- 
evitably withdraws  from  the  realm  of  private  initiative  and  ultimate  private  re- 
sponsibility a  big  sector  of  operating  management.  I  do  not  mean  that  the  Amal- 
gamated itself  goes  so  far  as  to  draw  this  conclusion.  Its  policy  has  been  to  deal 
with  the  electric  railway  industry  as  it  finds  it,  namely,  under  private  operation. 
In  fact,  the  general  tendency  of  the  employes  has  been,  if  anything,  to  oppose 
a  change  to  public  ownership  and  operation.  The  established  policy  of  the 
Amalgamated  provides  for  the  organization  of  the  employes  into  local  unions 
with  the  right  of  collective  bargaining  between  them  and  the  employing  com- 
panies with  respect  to  wages,  hours  and  conditions  of  work.  Although  the  fun- 
damental rules  and  principles  of  the  Amalgamated  are  not  fully  set  forth  in  the 
Proceedings,  it  is  a  fair  inference,  from  the  testimony  offered,  that  the  organization 
considers  the  three  principles  of  tuiion  recognition,  the  living  wage  and  the  eight- 
hour  workday  as  not  properly  subjects  for  arbitration.  It  is  the  well-established 
and  well-known  policy  of  the  Amalgamated  to  submit  to  local  boards  of  arbitra- 
iton  all  differences  between  the  local  divisions  and  the  employing  companies 
that  cannot  be  ironed  out  by  negotiation,  except  with  respect  to  the  fundamental 
issues  that  are  not  regarded  as  arbitrable.  For  example,  the  Amalgamated  in- 
sists that  the  Commission  shall  recognize  the  principle  of  the  living  wage,  but  it 
does  not  ask  the  Commission  to  make  a  specific  finding  as  to  a  rate  of  wages, 
the  theory  being  that  the  establishment  of  specific  wages  will  be  left  to  local  nego- 
tiation or  arbitration  upon  the  basis  of  the  living  wage  principle. 

In  its  case  before  the  Commission  the  Amalgainjated  laid  emphasis  on  the 
contention  that  labor  is  not  to  be  treated  as  a  commodity,  and  that  wages,  hours 
and  conditions  of  work  are  not  to  be  determined  on  the  basis  of  the  law  of  supply 
and  demand.  At  the  sante  time,  it  "shies"  at  the  suggestion  of  participation  in 
management  or  any  recognition  of  responsibility  on  the  part  of  the  employes 
beyond  their  day's  work  and  their  yearly  contracts,  although  Mr.  Lauck  did  in- 


596  Electric  Railvvav  Problem 

tiniate  at  one  puiiit  in  his  testimony  that  if  a  proper  plan  could  be  worked  out  tor 
mutual  cooperation  between  the  management  and  the  employes,  with  the  latter 
participatinfj  in  the  profits  while  at  the  same  time  not  risking  any  reduction  of 
compensation  below  the  standard  living  wage,  the  results  might  be  mutually 
beneficial. 

It  is  one  of  the  rules  of  the  Amalgamated  that  its  local  divisions  must  keep 
their  contracts  with  the  companies,  and  it  appears  that,  on  the  whole,  the  record 
in  this  respect  is  very  good;  yet.  the  question  suggests  itself  as  to  whether  the 
traditional  policies  of  the  union  are  not  in  fact  based  upon  the  assumption  that 
labor  is  a  contmodity.  The  principle  of  the  living  wage  applied  to  electric  rail- 
way labor,  under  the  general  policies  of  the  Amalgamated,  seems  not  to  be  greatly 
different  in  theory  from  the  principle  underlying  the  action  of  the  government 
in  fixing  the  price  of  wheat  and  other  essential  commodities  during  the  war. 

The  Amalgamated  Association  was  organized  at  Indianapolis  in  September, 
1892.  It  holds  a  general  convention  every  second  year.  The  constitution  and 
general  laws  of  the  Association  now  in  force  are  as  revised,  amended,  and  adopted 
at  the  Sixteenth  Convention  held  in  Chicago  in  September,  1919.  The  general 
spirit  and  purposes  of  the  Association  are  shown  by  the  "Preamble."  the 
"Objects."  .111(1  "Our  Principles."  as  follows : 

••PRE.A.MBLE 

"W  c,  tlic  .\rnalgatnated  .Association  of  Street  and  Electric  Railway  Employes  of  .■\merica. 
this  day  and  date  assembled  in  convention,  in  order  to  secure  and  defend  our  rights.  ad\'ance 
our  interests  as  working  men.  create  an  authority  wliose  seal  shall  constitute  a  certificate  of 
character,  intelligence  and  skill,  build  up  an  orRanization  where  all  the  working  members 
of  our  craft  can  participate  in  the  discussion  of  those  practical  problems  upon  the  solution  of 
which  depends  our  welfare  and  prosperity,  to  encourage  the  principle  and  practice  of  con- 
ciliation and  arbitration  in  the  settlement  of  all  differences  iK-twecn  lal)<>r  and  capital,  establish 
order,  insure  harmony,  promote  the  general  cause  of  humanity  and  brotherly  love,  and  secure 
the  blessings  of  friendship,  ecpialitv  and  tnith.  do  ordain  and  establish  this  Constitution  and 
these  Laws,   for  the  govenmient  of  said  .\ssociation." 


"OBJECTS 


"To  place  our  organization  upon  a  higher  plane  of  intelligence,  efficiency  and  skill;  to 
encourage  the  lormalion  in  Division  .Associations  of  sick  and  death  iK-nefit  funds  in  order 
that  wc  may  proi>erly  care  for  our  sick  and  bury  our  dead;  to  establish  schools  of  instruction 
for  imparting  a  practical  knowledge  of  nnxlern  and  improved  methods  and  system  of  trans- 
portation and  tnulc  matters  generally:  to  encourage  the  settlement  of  all  disputes  Ix'twecn 
employes  and  employers  by  arbitration ;  to  secure  employment  and  ade(|uate  pay  for  our  work ; 
to  reduce  the  hours  of  labor  and  by  all  legal  and  pro|K-r  means  to  elevate  our  moral,  intel- 
lectual and   social  condition." 


"OL'R    PRIN'CIPLES 

"Resolved.  That  wc  hold  it  as  a  sacred  principle,  that  trades  utiion  men  above  all  other. 
should  set  a  gixxl  example  as  goixl  and  faithful  workmen,  performing  their  duties  to  their 
employers  with  honor  In  tlu•m^elvl■s  and  to  their  organization. 

"Resolved.  That  we  hold  a  reduction  of  hours  for  a  day's  work  increases  the  intelligence 
and  happiness  of  the  lalK)rer  and  also  increases  the  demands  for  labor  and  the  price  of  a  day's 
work. 

"Resolved.  That  we  hold  a  lilxTal  education  of  the  young  to  l>e  a  pre-eminent  preparatory 
(o  life's  social  and  industrial  work,  and  that  the  principles  and  puri'oses  of  organized  labor 
ficmand  free  and  itjmpulsory  education." 


Union  Labor  Program  597 

Every  local  division  is  required  to  pay  into  the  treasury  of  the  Association 
the  sum  of  65  cents  per  month  for  each  of  its  individual  members.  Of  this 
amount,  1 1  cents  is  to  be  used  to  pay  the  expenses  of  management ;  40  cents  to 
create  a  fund  for  the  payment  of  death,  disability  and  old  age  benefit  claims ; 
10  cents  to  create  a  defense  fund  for  the  protection  of  the  members  of  the  local 
divisions  in  the  event  of  lockouts  or  strikes,  and  4  cents  to  pay  the  expenses  of 
the  Association's  official  organ  "Motorman  and  Conductor."' 

The  association's  method  of  handling  disputes  between  the  employes  and  the 
companies  is  set  forth  in  several  sections,  of  which  the  following  are  the  most 
important : 

"Sec.  111.  When  any  difficulty  arises  between  the  members  of  any  Local  Division  of 
this  .\ssociation  and  their  employers,  regarding  wages,  hours  of  labor,  or  any  other  question 
that  may  result  in  a  strike  or  lockout,  the  dispute  shall  be  first  taken  up  by  the  executive  board 
of  the  Local  Division,  or  by  a  committee  appointed  by  the  Local  Division  for  that  purpose, 
and  they  shall  make  a  thorough  investigation  and  seek,  through  conferences  with  the  company, 
to  get  the  matter  satisfactorily  adjusted.  The  committee,  after  having  finished  the  work  of 
negotiation  with  the  company,  shall  submit  a  full  report  to  a  meeting  of  the  Local  Division. 

"Sec.  112.  If  by  compliance  with  Sec.  Ill,  the  committee  has  been  unable  to  secure  a 
settlement  of  the  matters  in  dispute  satisfactory  to  the  Local  Division,  and  the  Local 
Division  believe  that  the  matters  in  dispute  are  of  such  importance  that  a  strike  should  be 
ordered,  the  question  of  a  strike  shall  be  submitted  to  a  secret  ballot  vote  of  the  entire  mem- 
bership of  the  Local  Division.  If  necessary  to  reach  the  entire  membership  of  the  Local 
Division  the  ballot  shall  be  taken  by  referendum,  ballots  being  prepared  and  so  distributed  to 
give  every  member  an  opportunity  to  vote.  If  two-thirds  of  the  membership  voting  upon  the 
<|uestion  decide  in  favor  of  suspending  work,  the  Local  Division  shall  at  once  notify  the 
International  President.  The  International  President,  upon  receipt  of  such  notice,  shall  pro- 
ceed to  the  scene  of  dispute  in  person  or  by  deputy,  and  in  conjunction  with  the  committee  of 
the  Local  Division  shall  make  a  thorough  investigation  and  attempt  to  settle  the  matter  in 
dispute.  In  case  of  failure  thus  to  secure  a  settlement  he  shall  then,  in  conjunction  with  the 
Local  Committee,  prepare  propositions  of  arbitration  defining  the  points  in  dispute  and  the 
basis  upon  which  they  shall  be  arbitrated.  If  the  company  refuses  to  accept  arbitration  as 
tendered,  the  International  President  or  his  deputy  shall  then  conmuniicate  with  the  member- 
ship of  the  General  E.xecutive  Board  in  writing  or  by  telegram  and  obtain  the  consent  of  a 
majority  of  the  General  Executive  Board  before  endorsing  the  strike." 
******** 

"Sec.  116.  Local  Divisions  going  on  strike  without  the  consent  of  the  General  Executive 
Board  shall   forfeit  all  right  to  assistance  and  be  subject  to  expulsion   from  the  .Association." 


Chapter  XLVII 
LABOR'S    PARTICIPATION    IN    MANAGEMENT 

It  appears  from  the  year  book  of  the  Amalgamated  Association  of  Street 
and  Electric  Railway  Employes,  issued  January  1,  1920,  that  most  of  the  big 
city  systems  are  now  aftiliated  with  that  organization.  Of  the  62  principal  cities 
and  systems  listed  in  Tables  I,  II,  I\'  and  V  in  Chapter  XXVIII  of  this  report 
those  where  the  Amalgamated  does  not  have  local  divisions  are  Xew  York  (^  rapid 
transit  and  surface  lines  of  Maniiattan,  The  Bronx  and  Queens),  Philadelphia, 
Baltimore,  Milwaukee,  the  Twin  Cities,  the  Kansas  Cities,  Indianapolis,  the 
Lehigh  Valley  Transit  system  (Alltntown.  Bethlehem,  etc.),  Dallas,  Houston, 
Fort  Worth,  Harrisburg.  New  Bedford  and  Terre  Haute.' 

The  Amalgamated  did  not  inckule  participation  in  management  as  a  part  of 
the  labor  program  which  it  laid  before  the  Commission,  and  this  subject,  though 
frequently  referred  to  in  the  examination  of  the  witnesses,  was  not  fully  pre- 
sented to  the  Commission  in  its  broad  aspects.  But  a  great  deal  was  said  about 
the  Philadelphia  Cooperative  Plan,  and  Mr.  James  D.  Mortimer  also  explained 
the  labor  policy  of  the  Milwaukee  Electric  Railway  and  Light  Company  and  the 
other  companies  under  his  control. 

The  Cooperative  Plan  of  the  Philadelphia  Rapid  Transit  Company  was  put 
into  effect  in  1911  by  the  Stotesbury-Mitten  management.  It  has  commanded 
public  attention  to  an  unusual  degree  because  of  the  extraordinary  results  attrib- 
uted to  it.  In  fact.  Philadelphia  has  shared  with  Cleveland  through  the  war 
period  the  distinction  of  a  fair  degree  of  electric  railway  prosperity  on  the  basis 
of  the  5-cent  fare.  and.  next  to  the  Cleveland  service-at-cost  plan,  the  Phila- 
delphia Cooperative  Plan,  undoubtedly,  has  been  the  subject  of  more  favorable 
comment  than  any  other  local  experiment  in  street  railway  operation  in  recent 
years.  Not  only  has  the  Philadeli)hia  Rapid  Transit  Company  maintained  the 
5-cent  fare,  but  since  1917  it  has  paid  dividends  at  the  rate  of  5  per  cent  per 
annum  on  its  common  stock.  The  Mitten  management  in  Philadelphia  has  been 
held  up  to  the  country  as  a  shining  exam])le  of  what  can  be  done  through  efficiency 
and  cooperation  in  the  way  of  operating  economies  and  the  curtailment  of  the  cost 
of  service.  L'nquestionahly.  Mr.  Mitten's  management,  at  least  from  certain 
points  of  view,  has  been  plu-iiomenally  successful.  Xevertheless.  it  does  not 
meet  with  favor  from  the  .\malgamated.  as  it  does  not  carry  out  the  fundamental 
principle  of  the  labor  program,  namely,  union  recognition  and  collective  bargain- 
ing with  a  local  organization  of  employes  aftiliated  with  the  International.  The 
opinion  of  Mr.  Liuck.  si)caking  for  the  .Vmalgamated,  is  given  at  page  1936  of 
the  Proceedings,  as  follows: 

"I  think  that  the  Phil.nlrlphi.T  fdnii  of  oriniin^.ition  from  the  statulpoint  of  the  employes 
cannot  result  in  periniiiu-m  m»Kl  to  the  employes  unless  throuKh  the  eulightoncd  policy  ot  the 

598 


Participation  in  Management  599 

company  itself.  I  tliink  it  means  in  fact  the  same  thing  as  the  Standard  Oil  plan.  If  it  is 
pursued  under  an  enlightened  paternalistic  policy  it  may  work  for  a  time.  But  when  there 
comes  a  time  when  the  employes  attempt  to  secure  something  from  the  company,  I  think  the 
whole  organization  will  go  to  pieces.  I  think  it  is  not  effective  at  all  from  the  standpoint  of 
the  employes." 

On  the  other  hand,  the  Philadelphia  management  has  been  subjected  to 
severe  criticism  from  the  point  of  view  of  the  American  Electric  Railway  Asso- 
ciation because  of  the  fact  that  Mr.  Mitten,  through  the  war  period,  has  given 
wide  publicity  to  the  favorable  financial  results  achieved  in  Philadelphia  with  the 
5-cent  fare.  In  fact,  the  experience  of  the  Philadelphia  Rapid  Transit  Company 
under  its  present  management  has  proven  to  be  a  serious  stumbling  block  in  the 
campaign  carried  on  by  the  electric  railways  of  the  country  for  a  higher  fare 
as  a  necessary  remedy  for  their  present  financial  difficulties.  It  cannot  be  said 
that  the  Mitten  management  has  exhibited  any  tendency  to  hide  its  light  under  a 
bushel,  and  under  the  circumstances,  it  is  not  unnatural  that  the  attention  of 
both  organized  labor  and  organized  capital  should  be  focussed  upon  it.  It  is 
perfectly  clear  that  the  apparent  financial  success  of  the  Philadelphia  Rapid 
Transit  Company  during  the  present  electric  railway  crisis  is  a  fact  that  demands 
explanation. 

Mr.  Mortimer  was  produced  as  a  witness  by  the  American  Electric  Railway 
Association  to  challenge  the  low-fare  claims  of  both  Philadelphia  and  Cleveland 
on  the  score  that  certain  elements  of  cost  were  being  neglected  in  both  those  cities, 
which,  if  taken  care  of,  would  prove  that  the  fares  collected  have  been  less  than 
the  true  cost  of  the  service.  He  testified  on  the  basis  of  his  personal  studies 
and  also  on  the  basis  of  the  investigations  made  by  the  Bureau  of  Fare  Research 
of  the  American  Electric  Railway  Association  under  the  direction  of  the  Asso- 
ciation's Committee  on  Cost  of  Service,  of  which,  for  two  years,  he  was  chair- 
man. I  have  already  discussed,  in  Chapter  XI  of  this  report,  Mr.  Mortimer's 
claim  that  under  the  Tayler  plan  the  Cleveland  Railway  has  been  compelled  to 
neglect  making  any  provision  for  its  "liability  to  effect  future  replacements." 
With  respect  to  the  Philadelphia  situation  he  is  equally  emphatic,  as  will  be  seen 
from  his  testimony  at  pages  1993  to  1995  of  the  Proceedings,  as  follows : 

"It  it  be  assumed  that  the  fair  value  of  the  railway  property  of  the  Pliiladelphia  Com- 
pany is  four  times  the  gross  earnings  that  would  call  for,  we  will  say,  a  minimum  valuation 
of  $120,000,000.  It  is  generally  found  that,  in  recent  appraisals  where  property  has  been 
fairly  well  maintained,  the  liability  to  effect  future  replacements  is  measured  by  about  IS  per 
cent 'of  the  original  cost.  Now,  15  per  cent  of  $120,000,000  is  $1&000,000,  and  $18,000,000 
would  be  the  fair  measure  of  the  present  liability  of  the  Philadelpliia  Company  to  effect  future 
replacements  over  and  above  expenditures  made  for  current  maintenance. 

"It  has  a  reserve  of  about  $1,200,000,  so  that  there  is  a  deficit  in  its  depreciation  reserve 
of  $16,800,000  in  round  figures. 

"That  there  is  some  justification  for  figuring  adequate  reserves  in  the  case  of  the  Phila- 
delphia company  must  be  considered  in  the  light  of  the  leases  under  which  the  Philadelphia 
company  operates.  I  think  this  lease  is  probably  typical.  Section  21  of  the  Union  Traction 
Company  lease  to  the  Philadelphia  Rapid  Transit  Company,  which  refers  to  maintenance  and 
replacement  and  the  condition  of  the  property  when  it  shall  be  turned  back  to  the  Union 
Traction  Company,  which  I  will  read   for  the  record :     *     *     *     * 

"  'It  is  the  true  intent  and  meaning  of  this  agreement  that  the  railway  system  herein 
demised  bv  the  Union  Traction  Company  shall  be  at  all  times  kept  in  the  same  general  good 
repair  and  condition  in  which  the  same  now  is  or  will  be  upon  the  completion  of  the  con- 
templated improvement  and  fully  equipped  with  the  best  and  most  improved  equipment  for 
operating  the  same.  Rapid  Transit  Company  shall  at  the  expiration  or  other  termmation  of 
the  lease  render  to  the  Union  Company  all  the  property  and  premises  in  the  same  good  order 


600  Electric  Railway  Problem 

and  condition  in  which  they  now  are.  with  the  streets  upon  which  the  various  lines  of  railway 
are  laid  paved  in  the  same  good  condition.' 

"But  that  is  not  all. 

■■  "The  Transit  Company  accepts  the  premises  as  being  in  all  respects  fully  equipped  in  a 
modern  manner  as  a  first  class  street  railway  system  with  all  the  proper  and  necessary  rail- 
ways, machinery  and  so  forth,  and  the  Transit  Company  shall  on  the  termination  of  the  lease 
deliver  to  the  Union  Company  the  entire  system  fully  equipjied  and  in  a  thoroughly  first  class 
manner  in  all  respects  with  all  improvements  which  may  be  then  in  general  use  on  similar 
first  class  street  railways  of  like  extent,  and  in  case  the  Union  Company  shall  object  as  to 
the  class  of  property  that  is  being  turned  ever  or  any  part  of  it  as  not  Ix-ing  in  first  class 
condition  or  that  they  are  not  equipped  as  provided  for  or  intended  to  be  provided  for  by  the 
lease,  then  any  question  of  dispute  shall  be  detennincd  by  arbitrators  and  if  said  arbitrators 
find  in  favor  of  the  Union  Company  an  award  shall  be  made  in  favor  of  the  Union  for  such 
an  amount  of  money  as  shall  enable  the  Union  to  properly  equip  such  system  in  accordance 
with  the  true  intent  and  meaning  thereof.' 

"Those  provisions  contain  a  very  heavy  contingent  liability,  because  the  cost  to  the  Phila- 
delphia company  of  settling  under  these  leases  may  var>'  over  a  substantial  range  depending 
upon  the  extent  to  which  the  art  may  have  changed  previously  to  the  termination  of  the 
leases. 

"Now,  if  we  fake  the  income  account  of  the  Philadelphia  Rapid  Transit  Company  for  the 
year  1918  and  reconstruct  it  by  making  a  depreciation  allowance  of  say  2'A  per  cent  on 
S120,00il.000  property  value,  $3.00(1,000  per  annum,  we  would  have  substantially  a  further 
deduction  of  $3,(XX).'lXK).  or  more  accurately  $2,7(:0.000  from  the  net  income  of  the  Phila- 
delphia company  in  order  to  place  it  upon  the  same  basis  of  comixirison  as  we  have  made  the 
analyses  of  costs  of  Milwaukee  and  Cleveland.  If  that  $2.70(1,(KK)  is  deducted  from  the  net 
income  they  would  have  had  net  earnings  insufficient  to  pay  the  interest  .-ind  rentals  by  about 
5;i,000,0(K)  a  year,  and  instead  of  caniing  a  dividend  of  5  per  cent  on  the  capital  stock,  they 
would  have  incurred  a  deficit  of  about  4  per  cent  on  the  capital  stock. 

"Now,  it  may  be  objected  that  the  valuation  of  $120,000,(100  is  a  purely  gratuitous  offering 
on  my  part.  But  that  was  placed  at  a  minimum  figure  for  the  purpo.se  of  minimizing  the 
computations  to  lie  made  from  depreciation.  Now,  if  the  property  be  valued  we  will  say  at 
$1S2,000,(M10,  which  is  considerably  in  excess  of  the  net  jiar  value  of  all  the  securities  out- 
standing, including  the  stock  and  Imnds  of  the  Philadelphia  Rapid  Transit  Company,  that  is  an 
amount  equiN-alcnt  to  4i4  times  the  gross  earnings,  then  the  allowance  for  depreciation  becomes 
$3,800,000.  instead  of  $3,000,000.  The  deficit  is  more  largely  increased  and  the  rate  of  return 
on  the  $1.^2.000.000  Ix-comcs  5  per  cent  instead  of  the  former  7  i>er  cent  return  on  $120.0(».000. 
These  returns  have  been  computed  on  the  basis  of  maintenance  expenditures  of  14'^  per  cent 
for  the  year  1918.  Cleveland  expended  20  per  cent  and  Milwaukee  expended  nearly  17  per 
cent  for  maintenance,  and  we  under-exiH-nded. 

"If  Philadelphia  current  maintenance  expenses  were  increased  by  roughly  5  per  cent, 
there  wi>uld  have  In'on  an  increase  in  o|)crating  expenses  of  alxiut  one  and  a  half  million 
dollars  or  some  figure  comparable  with  what  can  properly  be  saved  by  our  rerouting  and  the 
elimination  of  duplicate  service  and  things  like  that  in  the  operation  of  the  Philadelphia 
Railway. 

"Now.  it  is  interesting  to  note  that.  I  do  not  believe  that  there  is  anyone  that  feels  that 
a  .^-cent  cash  fare  is  ade<iuate  for  the  operation  of  the  Philadelphia  street  railway  system,  if 
measured  from  the  standards  with  which  the  cost  of  service  is  usually  approached  The 
actual  receipts  were  ."i6  cents  per  revenue  passenger.  If  there  be  added  to  the  cost  of  ser\Hce 
the  minimum  amoimt  of  depreciation,  namely.  $,1.fHX).000  or  $2.7O0.O(X).  rather,  and  the  amount 
required  to  pay  the  dividend  upon  the  capital  stock  of  the  Philadelphia  Rapid  Transit  Com- 
pany, all  of  which  has  lieen  i>aid  in  evidently,  the  cost  per  passenger  instead  of  lieing  5.6  cents 
goes  up  to  6.2.1  cents  per  revenue  passenger.  .\nd  if  the  maintenance  expenses  were  further 
increased  bv  an  additional  S  per  cent  of  the  operating  revenue,  the  cost  per  passenger  would 
go  up  to  6..S.'>  cents  per  revenue  passenger,  thus  obtaining  figures  with  which  we  are  generally 
familiar  in  the  study  of  electric  railway  costs  in   I^^IS  conditions." 

The  Philadelphia  Rapid  Transit  report  to  the  stockholders  for  1919  shows 
that  the  appropriation  for  maintenance  and  renewals,  formerly  15  per  cent  of 
gross  earnings,  was  increased  in  1919  to  16  per  cent.  This  report  also  shows  tiiat 
the  net  paid-in  capital  stock  of  all  the  companies  in  the  system,  plus  the  funded 
debt,  amounted  to  $129,106,906.84,  upfin  which  rentals,  interest  and  dividends 
were  paid  in  the  apgre^'ate  sum  of  $11,114,941.51,  or  the  equivalent  of  8.6  per 
cent  on  all  paid-in  cajMlal.  The  surplus  for  the  year,  after  payment  of  divi- 
dends, was  $216,586.80.  The  company  refers  to  the  average  fare  paid  as  3.98 
cents,  but  iti  arriving  at  this  figure  it  uses  the  total  inimbcr  of  revcinie  and  trans- 


Participation  in  Management  601 

fer  passengers  and  the  earnings  from  passenger  service  only,  while  Mr.  Mor- 
timer's figure  of  5.6  cents  for  the  year  1918,  described  by  him  at  page  1989  of 
the  Proceedings  as  the  "average  receipts  per  revenue  passenger"  is  evidently 
computed  on  some  other  basis.  If  he  had  used  revenue  passengers  exclusive 
of  the  3-cent  exchange  tickets  and  the  gross  revenues  from  all  sources,  he  would 
have  gotten  5.4  cents,  which  would  seem  to  be  the  maximum  figure  to  be  derived 
by  any  method  of  computation,  and  that  includes  revenues  from  freight  service 
and  non-operating  income  as  well  as  passenger  revenue.  The  Electric  Railway 
Association's  challenge  of  the  facts  claimed  by  the  Philadelphia  Rapid  Transit 
Company  is  not  very  convincing.  It  still  leaves  a  great  deal  about  the  financial 
results  of  the  5-cent  fare  to  be  explained. 

One  possible  explanation  was  brought  out  in  the  cross-examination  of  Mr. 
Mortimer,  beginning  at  page  1995  of  the  Proceedings,  where  we  find  the  fol- 
lowing : 

"Commissioner  Beall :  Mr.  Mortimer,  can  you  tel!  us  anything  about  tlie  distribution 
of  population  in  Philadelphia  compared  to  certain  other  cities?  Is  it  not  a  little  more 
favorable   for  the  loading  of  street  railway  cars? 

"Mr.  Mortimer:  Well,  it  is  generally  recognized  that  Philadelphia  has  a  peculiar  dis- 
tribution of  population.  I  first  heard  about  that  in  1907  when  it  was  said  that  all  the  people 
who  worked  downtown  lived  outside  and  all  the  people  who  lived  downtown  worked  outside, 
so  that  it  resulted  in  rather  favorable  conditions  from  a  traffic  standpoint.  It  gave  loaded 
cars  both  ways.  That  is  evidently  still  the  condition.  Philadelphia's  remarkable  industrial 
development  in  the  last  four  or  five  years — people  who  have  seen  the  service  and  watched  it 
carefully  say  that  the  rush  hour  cars  are  loaded  both  ways,  in  other  words,  the  amount  of 
empty  car  mileage  which  has  to  be  made  is  at  a  minimum,  due  to  the  peculiar  relative  dis- 
tribution of  population  and  industries." 

Still,  Philadelphia  was  Philadelphia  in  1910,  and  the  company  was  "on  the 
rocks"  then,  in  spite  of  the  3-cent  exchange  tickets  and  in  spite  of  the  low  wages 
and  pre-war  prices.  The  company's  relative  prosperity  under  the  five-cent  fare 
in  these  troublous  times  still  demands  an  explanation.  Beyond  doubt,  it  is  not 
due  to  an  absence  of  overcapitalization  or  to  the  conservatism  of  fixed  charges ; 
for  it  is  notorious  that  the  Philadelphia  Rapid  Transit  Company  has  been  strug- 
gling along  ever  since  it  came  into  existence  in  1902  under  a  tremendous  burden 
of  rentals  to  the  underlying  constituent  companies.  This  fact  was  made  clear 
to  the  Commission  by  the  testimony  of  more  than  one  witness.  It  is  practically 
acknowledged  by  Mr.  Mitten  himself,  but  he  places  the  blame  for  the  over- 
capitalization upon  the  public  as  will  be  seen  from  the  following  extract  from 
his  annual  report  to  the  stockholders  for  the  year  1919 : 

"The  Philadelphia  Rapid  Transit  Company  was  formed  in  1902  to  take  over  the  lease- 
holds and  property  of  the  Union  Traction  and  underlying  companies  and  to  provide  money 
with  which  to  acquire  and  develop  the  franchises  shortly  theretofore  passed  in  favor  of 
certain  interests  which  threatened  to  destroy  the  then  existing  street  railway  system. 

"The  General  .Assembly  had  in  the  early  '60s  made  legislative  grants  to  a  large  number 
of  separate  companies,  each  entitled  to  charge  a  separate  fare.  To  this  mistaken  policy  of 
establishing  competition,  where  economic  law  says  no  real  and  permanent  competition  can 
e.\ist.  many  of  today's  difficulties  may  be  traced.  These  numerous  companies,  which  had  been 
separately  financed,  were  brought  together,  at  great  cost,  in  order  to  offset  the  work  of  the 
Genera!  .Assembly,  so  that  a  street  car  ride  might  be  possible  over  all  lines  for  a  single  fare. 

"In  order  to  bring  together  the  properties  now  operated  by  the  Philadelphia  Rapid 
Transit  Company,  the  prospective  profits  of  the  original  grantees  had  to  be  paid,  and  the 
franchises  and  property  of  the  Omnibus  Company,  General,  purchased.  These  were  all 
necessary  and  conserjuently  legitimate  charges,  now  represented  in  one  form  or  another  in 
the  sum  which  goes  to  make  up  the  total  investment  upon  which  charges  are  paid  in  interest 
and  rentals  to  underlying  companies. 


602  Electric  Railway  Problem 

"In  1892  the  substitution  of  electric  traction  for  horse  power  made  further  consolidation 
necessary.     At  this  time  additional  paving  requirements  were  exacted  by  the  city. 

"Philadelphia's  first  modern  pavement  oi  consequence  was  provided  at  the  expense  of  the 
street  car  system.  Paving  costs,  including  interest  payments  on  the  original  cost,  and  main- 
tenance and  renewal  |)ayments  under  19»l7  asreement.  now  represent  $1.750.IKX)  per  annum 
(equal  to  b'A  on  almost  $30,000,000),  all  of  which  are  included  in  P.  R.  T.  charges  and 
consequently  borne  by  the  car  riders  of  today,  as  their  yearly  contribution  to  street  paving— 
not  a  proper  cost  of  the  transportation  of  passengers  on  electric  cars." 

Mr.  Mitten  ascribes  the  relative  prosperity  of  the  Philadelphia  Rapid  Tran- 
sit Company  to  the  effective  cooperation  of  labor  with  the  management.  In 
short,  he  advances  the  cooperative  plan  as  a  solution  of  the  labor  problem.  In 
his  letter  of  October  2  to  Chairman  Elmquist,  he  says: 

"Cooperative  eflfort.  with  a  force  of  well-trained  employes,  of  which  85%  receive  the 
ma.ximum  rate  and  5S'Tc  are  more  than  .i  yoars  in  senice.  is  here  found  adequate  to  overcome 
obstacles  seemingly  insurmountable  elsewhere.'' 

In  his  1919  report,  he  says: 

"Cooperation  between  men  and  management,  so  much  to  be  desired  and  so  seldom  secured, 
has  here  proven  to  be  the  keystone  of  accomplishment  in  establishing  confidence  and  con- 
tentment and  overcoming  increased  costs  by  greater  efficiency  and  increased  production." 

When  the  stockholders  of  the  Philadelphia  Rapid  Transit  Company  appealed 
to  Mr.  E.  T.  Stotesbury  ten  years  ago  to  take  hold  of  the  company  and  see  what 
could  be  done  to  pull  it  out  of  a  desperate  situation,  he  called  Mr.  Mitten  from 
Chicago  to  undertake  the  active  management.  The  Philadelphia  situation  was 
undoubtedly  acute.  In  Mr.  Mitten's  statement  before  the  United  States  Com- 
mission on  Industrial  Relations  at  its  public  hearings  in  Philadelphia  in  June, 
1914,  he  said: 

"In  1910  a  situation  developed  in  Philadelphia  that  was  most  serious.  There  had  been 
a  strike  in  1909,  followed  by  one  in  the  spring  of  1910.  These  strikes  had  been  attended  by 
riot  and  bloodshed  and  cost  the  Company  and  the  City  millions  of  dollars,  while  the  motor- 
men  and  conductors  lost  more  than  a  half  million  dollars  in  wages  alone  The  street  car  ser\-ice 
was  demoralized,  due  largely  to  the  bitterness  of  feeling  between  the  rival  factions  into  which 
the  motormen  and  conductors  were  divided. 

"The  discipline  was  lax  and  the  factional  feeling  lictween  the  members  of  the  ri\-al  organi- 
zations which  then  had  a  large  memlK-rship  here  had  served  to  increase  the  accidents.  The 
schedules  were  interrupted  because  of  the  strikes  and  these  general  bad  conditions,  and  the 
cars  were  in  a  deplorable  condition.  In  fact,  I  can  think  of  no  situation  worse  than  that  which 
existed  early  in  1910  when  1  was  asked  to  come  here  to  see  what,  it  anything,  I  thought  could 
be  done  with  the  situation. 

******** 

"The  Company's  credit  was  seriously  impaired  because  of  these  ver>-  bad  conditions,  and 
its  most  serious  problem  perhaps  was  the  providing  of  funds  necessary  for  the  rehabilitation 
of  the  property,  which,  as  I  said,  was  in  deplorable  condition.  The  financial  part  was  ar- 
ranged so  that  new  cars  might  t)c  purchased  and  the  property  rehabilitated :  and  then  the 
new  Management  took  hold  of  the  property  with  the  understanding  that  within  five  years 
it  would  produce  an  adequate  system  of  surface  transportation  to  the  Public  and  such  in- 
crease<l  wages  and  improved  working  conditions  for  the  men  as  cooperative  eflfort  might  make 
possible :  but  to  the  stockholders  it  promised  nothing  in  the  way  of  returns  until  both  of  the 
other  questions  had  been  s.itisfactorily  disjxised  of. 

"Then,  of  course,  the  purchase  of  cars  and  the  bringing  of  the  system  up  to  a  state  of 
operaliiiK  cflficirncy,  so  f.ir  as  physical  conditions  were  concerned,  having  been  provided  for, 
the  wages  of  the  men  and  the  handling  of  labor  were  my  problem. 

"I  found  that  the  men  were  then  receiving  2\.Sl'7r  of  the  gross  passenger  receipts  in  pay- 
ment of  wages  and  death  tx-nefils  and  such  things  as  were  done  for  the  men  in  wages  and 
that  which  corrrsp<indi-d  to  remuneration  for  services.  I  recognized  that  there  were  great 
possibilities  in  that  peRxntage  of  the  gross,  if  I  could  secure  the  cooperation  of  the  men  so 
that  we  might  together  strivT  to  a  comtTHin  end  instead  of  working  in  opposite  directions. 
T  knew  that  by  the  purchase  of  cars  perhaps  twice  as  large  as  those  which  were  then  being 
operated,  the  time-table  cost  must  necessarily  drop  as  compared  with  the  earnings.     I  knew 


Participation  in  Management  603 

that  we  were  pretty  sleepy,  and  that  with  proper  help  from  the  men,  the  cars  could  be  speeded 
up  to  the  advantage  ol  the  Public  and  certainly  to  the  advantage  of  the  men,  because  of  the 
possibilities  of  the  wage  scale  which  existed  in  this  percentage  of  the  earnings. 

"So  1  worked  oiit  a  plan  which  contemplated  the  puttmg  of  22'k  of  the  gross  passenger 
receipts  into  a  fund  from  which  wages  should  be  paid — wages  and  all  other  items  which  went 
to  the  men  in  the  way  of  compensation;  and  then  I  planned  to  have  a  Cooperative  Committee, 
choosing  that  instead  of  a  grievance  committee,  because  I  hoped,  as  has  proved  to  be  the 
case,  to  avoid  the  grievance  by  removing  the  cause  of  a  trouble  before  it  became  a  grievance. 

"I  developed  the  Cooperative  Plan,  setting  up  that  22%  of  the  gross  passenger  receipts 
should  be  placed  in  this  fund,  and  providing  for  the  establishment  of  a  Cooperative  Com- 
mittee composed  of  a  representative  of  the  men  from  each  depot,  together  with  the  superin- 
tendent of  each  depot.  The  situation  at  that  time  was  that,  so  far  as  I  could  learn,  about 
one-half  of  our  men  were  members  of  the  Amalgamated  Association  with  which  1  had  had  con- 
tractual relations  in  the  City  of  Chicago.  The  remainder  seemed  to  be  about  equally  divided 
between  the  members  of  a  local  organization  called  the  Keystone,  and  those  who  did  not  seem 
to  be  affiliated  with  any  organization.  Here  was  a  situation  that  was  the  source  of  a  great 
deal  of  disturbance  in  the  force.  The  members  of  the  rival  organizations  were  knocking  each 
other,  and  I  determined  that  nothing  really  could  be  accomplished  unless  I  could  get  unity 
of  effort.  Having  had  some  success  with  that  in  the  past,  I  was  quite  certain  that  I  could 
get  the  same  thing  here. 

"In  order  that  the  attitude  of  the  company,  in  view  of  this  very  mixed  situation,  should 
not  be  in  any  way  misunderstood,  1  stated  in  the  Cooperative  Plan  Booklet  (issued  in  August, 
19n )  that  the  Management  did  not  take  a  position  either  for  or  against  organized  labor. 
I  did  say  that  the  condition  then  existing  could  not  go  on  with  any  hope  of  satisfactory  results 
to  the  Public,  to  the  men,  or  to  the  Company,  and  I  set  forth  a  plan  in  this  booklet  by  which, 
if  two-thirds  of  the  men  by  secret  ballot  determined  that  a  contract  should  be  made  by  the 
Company  with  organized  labor  on  the  basis  of  the  Cooperative  Plan,  the  Company  would 
make  such  a  contract;  but  while  it  could  not  require  any  of  its  men  to  belong  to  a  labor 
organization,  it  could,  if  so  large  a  majority  as  two-thirds  of  its  men  desired  that  a  contract 
be  made  with  a  labor  organization,  pay  from  the  12%  Fund  the  sum  of  the  dues  of  every 
man.  My  thought,  as  then  expressed,  was  that  by  so  doing  we  would  eliminate  the  continual 
trouble  caused  by  the  collectors  of  dues  at  the  stations,  of  organizing  upon  the  cars,  and 
would  eliminate  absolutely  the  necessity  of  wearing  union  buttons.  This  condition  was  causing 
a  great  deal  of  difficulty  because  in  one  section  the  men  would  wear  the  button  of  one 
organization  and  the  men  in  another  section  would  wear  the  button  of  another  organization, 
and  very  often  we  would  get  two  men  on  the  same  car  wearing  different  buttons  and  both 
working  at  cross  purposes. 

"The  representatives  of  both  the  Amalgamated  and  the  Keystone  organizations  agreed 
to  the  Cooperative  Plan ;  and  I  had  said  in  the  booklet  that  at  the  request  of  either  one  of 
the  organizations  such  a  vote  would  be  taken.  At  the  request  of  the  .Amalgamated  such  a 
vote  was  taken  at  Horticultural  Hall,  November  2,  1911.  The  result  was  signed  by  the 
Judges  and  everybody  was  satisfied  as  to  its  being  a  secret  and  fair  vote.  The  affirmative 
vote  was  not  quite  two-thirds,  but  was  353  votes  short  of  polling  the  required  two-thirds. 
But  before  any  move  was  made  beyond  the  taking  of  the  vote,  a  split-up  occurred  in  the 
Amalgamated  Association  here  locally,  so  that  I  had  a  condition  to  deal  with  where  there 
were  three  sorts  of  buttons  being  worn  by  the  men — the  Amalgamated,  the  Keystone,  and 
the  buttons  worn  by  the  split-ofT  organization,  which  followed  a  local  leader  here,  Mr.  Pratt. 
In  none  of  these  factions  did  there  seem  to  be  259?-  of  the  total,  while  a  number  equal  perhaps 
to  about  40%  were  wearing  no  buttons  at  all. 

"I  then  notified  the  men  that  the  vote  being  as  it  w^as  and  the  situation  as  it  was,  we 
would  deal  with  the  men  as  individuals,  the  plan  providing  that  at  any  time  should  one-third 
of  the  men  by  petition  so  request,  another  vote  would  he  taken,  that  being,  to  my  mind,  a 
precaution  that  the  men  should  have  as  against  unfair  dealing  on  the  part  of  the  Management. 
or  a  change  in  the  Management. 

"The  plan  was  put  into  efTect,  and,  at  the  outset  there  was  so  much  bitter  feeling  between 
the  men  that  it  was  very  difficult  to  know  just  how  to  get  representatives  from  the  depots  to 
act  upon  the  Cooperative  Committee.  -As  a  start  I  had  them  selected  by  the  superintendents. 
Then  in  .\pril.  1912,  I  had  the  men  themselves  suggest  the  names  nf  those  whom  thev  desired 
to  represent  them,  bv  signing  their  names.  -At  that  time  about  87%  of  the  men  signed  their 
names,  but  the  division  followed  almost  tlie  division  of  the  original  leadership,  which  gave  me 
such  a  situation  that  to  have  selected  the  first  man  or  the  man  having  the  highest  vote  at 
each  depot  would  not  have  given  a  fair  representation.  In  other  words,  the  Cooperative 
Committeeman  would  have  been  the  representative  of  one  lot  of  men  and  not  of  the  other. 
So  I  took  the  men  that  had  the  highest,  and  also  the  next  highest  number  of  signatures  at 
each  depot.  Then  some  months  later  we  adopted  a  voting  machine  by  which  each  man  could 
vote  by  secret  ballot ;  and  still  continued  the  plan  of  selecting  the  first  and  second  Cooperative 
Committeeman  from  each  of  the  depots.  This  method  has  gone  along  to  the  place  where 
now  it  is  our  plan  to  take  such  a  vote  at  each  depot  as  nearly  once  a  year  as  possible,  giving 
the  men  the  opportunity  of  recall. 


604  Electric  Railway  Problem 

"Of  our  14  depots,  12  have  had  elections  for  Cooperative  Committeemen  within  the  past 
12  months,  two  more  remaining  to  be  taken.  As  showing  the  interest  of  the  men  in  the  se- 
lection of  the  Cooperative  Committee,  approximately  98'/<-  of  the  men  vote.  Something  over 
80%  of  the  men  in  the  12  depots  who  have  voted,  have  voted  for  the  men  who  have  been 
elected." 

At  the  original  election  of  November  2,  1911,  to  which  Mr.  Mitten  referred, 
the  vote  was  4.276  in  favor  of  a  contract  with  the  Anialganiated  and  2.366  against 
it.  All  but  302  of  the  men  qualified  to  vote  participated  in  the  election.  In  this 
case,  the  majority  did  not  rule,  as  the  company  had  stipulated  a  two-thirds  affirm- 
ative vote  as  a  condition  precedent  to  its  recognition  of  the  union. 

As  a  part  of  this  same  testimony  before  the  Industrial  Relations  Commis- 
sion, Mr.  Mitten  explained  the  system  of  discipline  and  discharges  under  the 
Cooperative  Plan  as  follows: 

"The  basic  principle  of  discipline  under  the  Cooperative  Plan  is  that  the  penalty  for  the 
infraction  of  any  rule  shall  be  no  more  severe  than  is  found  by  cxiiericnce  to  be  necessary  to 
insure  proper  service  to  the  public  and  the  maintenance  of  proper  discipline.  One  of  the 
first  things  in  that  regard  which  we  found  necessary  to  change  was  to  do  away  with  the 
practice  of  requiring  motomicn  or  conductors  to  make  apology  in  person.  This  was  quite  a 
favorite  way  of  punishing  the  men  in  the  old  days,  and  perhaps  a  very  unfair  attitude  to  take. 
That  has  never  been  done  under  the  C(x>|)erative  Flan,  and  has  never  needt-d  to  be  nsortcd  to. 
The  old  practice  of  discharging  men  as  a  punishment  and  thereafter  reinstating  them  through 
the  influenc  of  others,  irrespective  ul  tlie  merits  of  their  case,  is  not  now  permitted.  I'ormerly 
it  was  not  so  much  a  (|uestion  of  whether  a  man  was  properly  discharged,  but  of  how  in- 
fluential his  friends  were  in  getting  him  back.  It  became  very  difficult  to  have  the  men  under- 
stand, under  the  new  i)lan.  that  a  discharged  man  was  discharged,  and  that  it  did  not  mean 
merely  a  susjicnsion.  Under  the  Cf>f)perativi-  Plan,  discharge  is  resorted  to  only  as  the  last 
resort,  the  Cooperative  Committee  l>einR  most  effective  in  preventing  the  di.scharge  of  motor- 
men  and  conductors  by  advising  them  to  mend  their  ways  and  assisting  in  presenting  all  the 
facts  to  the  Superintendent  of  Trans|X)rtation  in  order  to  insure  a  thorough  understanding 
of  the  true  merits  of  the  case. 

".■\fter  all,  in  considering  a  method  of  discipline,  the  character  of  the  service  to  the 
public,  namely,  the  decreased  accidents,  greater  care  in  the  operation  of  cars,  and  more 
courtesy  to  the  public  on  the  one  hand,  and  the  few  discharges  on  the  other,  constitute  per- 
haps the  fairest  and  best  analysis.  Cooperative  Committeemen  do  not  so  much  get  a  man 
returned  to  duty  alter  the  man  has  Imjcu  discharged,  because  we  do  not  discharge  the  man 
until  sure  that  he  must  lie  discharged:  but  they  do  prove  most  effective  in  correcting  by  sug- 
gestion to  the  men  those  things  which  must  lead  to  discharge  if  continued.  The  result  of 
this  plan  and  the  work  of  the  Cooperative  Committee  is  perhaps  best  evidenced,  as  I  say, 
by  the  quality  of  the  discipline  now  maintained,  which  I  think  must  be  agreed  by  everybody 
to  be  far  superior  to  that  ever  attained  here  before,  as  against  the  number  of  men  whom  we 
find  it  necessary  to  discharge  in  maintaining  that  standard  of  discipline. 

"In  1911,  1,V)3.S  men  were  dismissed.  That  was  1  in  every  5.  In  1912.  8,^5  were  dismissed, 
being  1  out  of  8.  In  191.^  SM>  were  dismissed,  or  1  out  of  every  12.  In  1914,  334  were  dis- 
missed, or  I   out  of  20. 

"As  liearing  uixm  the  worth-whilcncss  of  the  job,  the  resignations  are  significant:  In 
1911.  1..190  men  resigned:  in  1912.  913;  in  191.1.  9.';6:  in  1914,  337. 

"With  the  aid  of  the  Cooperative  Committee,  a  book  of  niles  was  prepared  on  the  lines 
that  I  have  descrilx-d,  this  I  think  being  the  first  instance  where  rules  for  the  government  of 
the  men  have  been  prepared  by  the  officers  and  the  men's  representatives  jointly." 

Mr.  Mitten  also  explained  that  the  "runs"  were  distributed  and  the  hours 
of  service  fixed  largely  by  the  men  themselves,  as  will  be  seeti  from  the  following: 

"Under  the  Cooperative  Plan,  the  make-up  of  the  runs  or  hours  of  service  is  handled 
practically  by  the  men  themselves.  You  have  on  the  one  hand  22*^  of  your  gross  passenger 
receipts  which  represents  that  sum  which  you  have  agreed  to  pay  for  the  .service.  On  the 
other  hand,  you  have  a  rniuireil  mmilH-r  of  cars  on  the  street  at  the  hours  necessary  to  prop- 
erly serve  the  Public  Those  two  facts  In-ing  established,  you  may  largely  leave  it  to  the  men 
as  to  how  the  runs  shall  l>c  made.  In  the  street  railway  business,  to  properly  care  for  the 
needs  of  the  Public,  you  must  cover  a  peak  load  in  the  morning  and  a  peak  load  in  the  evening. 
To  cover  those  two  peaks  in  Philadelphia  re(|uires  a  space  of  from  13  to  14  hours.  There- 
fore, to  economicaltv  use  the  22'^'  1  iind.  .i  cnnsidcralile  miuuIht  of  ibe  runs  must  havi'  .t  hole 
in  them,  as  the  men  say;  that  is.  cover  the  morning  peak,  a  rest,  and  cover  the  evening  peak 


Participation  in  Management  605 

"When  \vc  came  here,  quite  a  number  of  the  runs  covered  a  i)eriod  of  16  hours  over  all. 
\Ve  determined  that  that  could  be  done  in  14  as  a  maximum.  They  were  operating  an  in- 
sufficient number  of  cars  in  the  evening  hours.  It.  therefore,  became  necessary,  in  order  to 
serve  the  Public,  that  we  materially  increase  tlie  number  of  cars  in  the  morning  and  in  the 
evening.  We  have  increased  the  rush  hour  service  in  car-seating  capacity  50%  as  compared 
with  that  operated  when  we  came  here.  Then,  as  I  say,  determining  what  service  we  must 
give  to  the  Public,  there  being  no  question  of  what  we  are  to  pay  for  it,  there  is  no  reason 
why  the  Cooperative  Committeemen  should  not  have  pretty  much  the  voice  as  to  how  the 
division  of  runs  is  to  be  made.  If  there  is  lost  motion,  or  we  have  to  pay  for  work  not 
performed,  that  must  naturally  be  reflected  in  the  rate  of  wage  the  ll'"r  Fund  will  pay.  So 
that  the  Superintendent  of  Time  Tables,  determining  from  his  traffic  checks  the  service  re- 
quired, puts  the  cars  upon  tlie  street.  The  Cooperative  Committeemen  from  the  depot,  from 
which  those  cars  will  be  operated,  then  come  in  and  go  over  the  division  of  the  runs,  and  that 
is  the  decision  made  in  each  instance.  So  that  if  you  will  be  sure  in  the  first  instance  that  the 
men.  through  the  desire  to  make  a  large  wage,  be  not  permitted  to  run  such  hours  as  inter- 
fere with  their  effectiveness  in  avoiding  accidents,  and  if,  on  the  other  hand,  the  runs  are  not 
made  to  allow  so  few  hours  of  service  as  to  make  the  men's  wage  inadequate,  the  Company's 
or  the  Management's  end  of  it  is  practically  covered.  In  that  way.  we  pay  not  less  than  9 
hours  minimum  for  a  regular  week-day  run.  No  man  is  required  to  work  a  run  that  covers 
more  than  the  14  hours  over  all,  in  which  there  would  be  a  large  hole  in  the  middle." 

In  April,  1910,  under  the  old  management,  and  as  a  part  of  the  strike  settle- 
ment, the  company  promised  to  pay  the  men  during  the  five  years  beginning  July 
1,  1910,  a  scale  of  wages  ranging  from  a  fixed  minimum  of  22  cents  per  hour 
for  the  first  year  of  employment  up  to  a  variable  maximum  ranging  from  23 
cents  in  1910  to  25  cents  in  1914.  In  announcing  the  Cooperative  Plan  in 
August,  1911,  based  upon  the  establishment  of  a  fund  of  22  per  cent  of  the  gross 
passenger  earnings  out  of  which  trainmen's  wages  would  be  paid,  the  manage- 
ment said : 

"Cooperation  on  the  part  of  motormen  and  conductors  by  taking  a  personal  interest  in 
raising  blockades,  maintaining  schedules,  careful  collection  and  accounting  of  fares,  avoidance 
of  accidents  and  observance  of  the  Company's  rules,  together  with  the  introduction  of  im- 
proved operating  methods  and  of  a  large  proportion  of  cars  having  almost  double  the  seating 
capacity  of  those  displaced,  will,  it  is  confidently  expected,  make  possible  such  an  increasing 
wage  over  that  contained  in  the  Company's  published  promise,  as  will  result  in  a  maximum 
wage  of  28  cents  per  hour  in  the  year  beginning  July  1.  1915. 

"The  graded  scale  of  wages  as  set  forth  in  the  Company's  published  promise  of  April, 
1910.  will  be  extended  as  soon  as  the  maximum  wage  therein  provided  for  has  been  accom- 
plished. 

"The  old  argument  against  the  graded  scale,  by  which  it  was  contended  that  the  Company's 
interest  was  to  dismiss  the  older  and  higher  priced  men  to  make  room  for  the  lower  priced 
new  employes,  has  not  to  be  here  considered,  as  the  Company  cannot  reduce  its  cost  by  any 
change  in  the  scale  of  wages  paid,  it  being  distinctly  obligated  to.  and  actually  is.  commencing 
July  1.  1911.  setting  aside  in  a  separate  fund  22%  of  its  gross  passenger  earnings.  All  pay- 
ments to  motormen  and  conductors  will  be  made  from  this  fund,  and  the  sum  accumulated 
therein  will  be  added  to  that  increased  wage  which  was  promised  in  the  Company's  published 
notice  of  April.  1910." 

As  a  matter  of  fact,  the  22  per  cent  fund  raised  the  maximum  wage  rate 
to  31  cents  on  July  1,  1915,  instead  of  the  28  cents  forecasted  in  the  company's 
1911  announcement,  and  the  wage  was  further  increased  to  43  cents  as  of  July 
15,  1918.  At  this  point  the  scheme  broke  down,  as  the  22  per  cent  fund  was  no 
longer  sufficient  to  meet  the  wage  advances  inade  necessary  by  the  increase  in  the 
cost  of  living.  A  number  of  the  employes  struck  in  1918.  and  the  company  was 
brought  before  the  National  War  Labor  Board.  The  company's  story  of  what 
happened  is  contained  in  its  booklet  entitled  "The  Co-operative  Plan — 1911-1918," 
as  follows : 

"Tlie  principle  of  the  Cooperative  Plan,  as  originally  established,  i.e..  that  employes  may 
belong  to  any  union  or  other  organization  without  'let  or  hindrance.'  has  proven  to  be  the 
rock  of  its  dependence  and  the  disarming  of  its  opponents.     Of  the  two  attempted  strikes. 


606  Electric  Railway  Problem 

neither  proved  effective  in  causing  serious  interruption  to  service.  The  attempt  in  the  present 
year  was  so  timed  as  to  take  full  advantage  of  the  depleted  force  occasioned  by  the  Draft  re- 
quirements of  the  Government.  It  afforded  the  most  striking  demonstration  of  the  effectiveness 
of  cooperative  effort  txtween  the  Company  and  employes,  in  that  the  cars  necessary  to  provide 
the  extra  service  to  war  workers  were  at  once  manned  and  operated  for  several  weeks  by 
volunteers  from  all  departments  of  the  Company  so  effectively  that  when  called  upon  to 
answer  the  complaint  made  to  the  War  Labor  Board  at  Washington,  the  Management  was  able 
to  prove  by  the  representatives  of  the  shipyards,  arsenals,  etc..  that  service  had  not  been 
internipted  and  was  being  adequately  supplied,  .^s  a  consequence,  the  War  Labor  Board 
dismissed  the  complaint,  following  our  voluntarily  undertaking  to  adopt  the  wage  scale  then 
being  established  by  the  War  Labor  Board  to  govern  the  cities  of  Chicago,  Cleveland,  Detroit 
and  Buffalo,  and  our  further  undertaking  to  give  the  objecting  employes  opportunity  of  con- 
tinuous employment  during  good  behavior." 

The  elimination  of  the  22  per  cent  fund  in  the  Philadelphia  Cooperative  Plan 
as  revised  in  1918,  and  the  adoption  in  place  of  it  of  a  wage  standard  dependent 
entirely  upon  the  wage  achievements  of  the  organized  employes  in  four  other 
cities,  seems  like  the  complete  abandonment  of  the  incentive  upon  which  the  orig- 
inal plan  of  1911  was  built  and  as  a  result  of  which  it  achieved  its  notable  suc- 
cesses. The  Cooperative  Plan,  as  it  now  stands,  provides  the  machinery  for  co- 
operation, but  apparently  leaves  the  distinctive  motive  for  it  out.  The  procedure 
is  as  follows : 

The  business  of  the  company  is  divided  into  classes  or  departments,  and  each 
department  is  sub-divided  into  "contact  groups"  or  "branches."  Differences  be- 
tween employe  and  employer  are  settled  through  the  medium  of  (1)  branch 
committees,  (2)  department  comnxittees.  {^)  general  committees,  and  (4)  boards 
of  arbitration.  The  rule  is  laid  down  that  "the  workers  shall  have  a  free  and 
indei)endent  vote  for  representatives  for  proper  collective  bargaining."  At  each 
depot  station  or  division  two  branch  committeemen  are  elected  by  the  workers. 
Each  worker  votes  for  only  one  candidate  and  the  candidates  receiving  the 
highest  and  the  next  highest  number  of  votes,  respectively,  are  declared  elected. 
The  employer  also  appoints  two  representatives  for  each  depot,  station  or  divi- 
sion. The  committeenTeii  elected  by  the  workers  constitute  the  Branch  Commit- 
tee for  Employes  and  those  appointed  by  the  company  constitute  the  Branch 
Committee  for  Employer.  The  cominitteemen  representing  the  employes  are 
elected  to  serve  for  the  period  of  one  year.  It  is  declared  that  "it  shall  be  their 
duty  well  and  truly  to  represent  their  fellow  employes  and  to  give  all  matters 
under  consideration  or  discussion  their  best  thought  and  the  benefit  of  their 
knowledge  and  experience."  At  least  once  in  every  three  months  there  is  an 
opportunity  for  a  meeting  of  workers  at  each  branch,  when  reports  are  made  by 
the  local  committmnen.  The  dates  for  elections  and  the  hours  when  the  polls 
will  be  opened  are  so  arranged  as  to  give  every  qualified  voter  at  the  local  depot, 
station  or  division  an  opjiortunity  to  vote,  but  the  different  election  dates  are 
arranged  in  such  order  and  sequence  as  to  provide  always  on  the  several  com- 
mittees for  a  working  majority  of  members  who  are  familiar  with  the  nature  and 
routine  of  the  business  transacted.  Notice  of  any  branch  election  must  be  posted 
conspicuously  in  the  local  branch  21  days  in  advance  of  the  election  date.  Elec- 
tions for  committeemen  are  by  .secret  Australian  ballot  under  the  supervision  of 
an  election  conmiittee  of  three  members  chosen  by  and  from  the  Department 
Committee  for  Employes.  To  qualify  as  a  voter  an  employe  must  have  been 
six  months  in  the  company's  service,  must  be  regularly  assigned  to  duty  and  may 


Participation  in  Management  607 

not  occupy  an  official  position  of  any  character  with  the  company.  In  order  to 
be  eligible  to  selection  as  a  committeeman  an  employe  must  be  regularly  assigned 
to  duty  and  must  have  been  continuously  in  the  employ  of  the  company  for  not 
less  than  two  years.  Candidates  for  election  as  committeemen  must  file  with 
the  secretary  of  the  general  committees,  not  less  than  13  days  in  advance  of  the 
election,  official  nomination  papers  signed  by  not  less  than  7  workers  qualified 
to  vote  at  the  branch.  A  worker  is  not  expected  to  sign  more  than  one  nomina- 
tion petition  at  any  election,  and  no  employe  who  may  properly  be  said  to  repre- 
sent the  employer  is  to  be  chosen  as  a  representative  of  the  workers. 

The  business  of  the  company  is  divided  into  5  departments,  namely :  Trans- 
portation, rolling  stock  and  buildings,  electrical,  way,  and  general  offices.  Each 
department  is  to  have  a  Department  Committee  for  Employes  and  a  Department 
Committee  for  Employer.  The  committee  for  employes  consists  of  all  of  the 
branch  committeemen  elected  by  the  workers  at  the  several  depots,  stations  or 
divisions  of  the  department.  An  equal  number  of  persons  appointed  by  the 
company  in  each  department  constitutes  the  committee  for  the  employer.  The 
department  committee  for  employes  and  the  department  committee  for  employer 
each  elects  a  chairman,  but  the  secretary  for  the  general  committees  or  his  author- 
ized representative  acts  as  secretary  for  the  several  department  committees  with- 
out vote.  Stated  meetings  of  each  department  committee  are  held  in  alternate 
months  throughout  the  year  and  special  meetings  may  be  held  at  the  call  of  the 
secretary  or  upon  the  request  of  5  members  submitted  in  writing  to  the  secretary. 
No  less  than  two-thirds  of  the  members  of  any  department  committee  shall  con- 
stitute a  quorum  for  the  transaction  of  business  at  any  regular  or  special  meeting 
of  that  committee. 

The  members  of  each  Department  Committee  for  Employes  annually  elect 
two  of  their  number  to  represent  the  department  on  the  General  Committee  for 
Employes.  An  equal  number  of  representatives  appointed  by  the  president  of 
the  company  constitute  the  General  Committee  for  Employer. 

Any  point  of  difiference  between  employer  and  employes  originating  at  a 
local  branch  is  first  taken  up  by  the  branch  committees;  if  not  settled  by  them  it 
is  taken  to  the  department  committees ;  and  if  not  settled  there  it  is  taken  to 
the  general  committees.  The  powers  and  duties  of  the  general  committees  are 
set  forth  as  follows : 

"It  shall  be  the  duty  of  the  General  Committees  to  devise  ways  and  means  for  furthering 
the  efforts  of  the  various  Department  Committees  for  the  greatest  possible  good,  to  promote 
harmony  and  good  fellowship  among  all  employes  of  the  Company,  to  formulate  plans  for  sub- 
mission to  the  several  Department  Committees,  and  to  render  ever>-  assistance  within  their 
power  toward  advancement  of  the  interests  of  the  employes  and  the  betterment  of  the  service. 

"Further,  the  General  Committees  shall  possess  the  power  to  review,  modify  or  reverse  any 
findings  or  decision  of  the  Department  Committees,  and  may,  in  their  judgment,  change  any 
portion  of  this  Plan  or  any  modification  thereof  or  the  composition  of  any  of  the  Committees, 
or  any  of  their  various  respective  functions, 

"The  scope  and  authority  of  the  General  Committees  shall  be  superior  to  that  of  the  De- 
partment Committees  and  their  decisions  in  all  matters  shall  be  final  and  binding,  except  as 
hereinafter  provided.'' 

Each  of  the  general  committees  elects  its  own  chairman,  but  the  secretary 
for  the  general  committees  is  appointed  by  the  president  of  the  company.  It  is 
the  secretary's  duty  to  keep  accurate  minutes  of  the  meetings  of  all  committees 


608  Electric  Railway  Problem 

and  for  this  purpose  an  assistant  secretary  is  to  be  employed.  Regular  meet- 
ings of  the  general  committees  are  held  on  the  third  Tuesday  of  each  month  and 
special  meetings  may  be  held  at  the  request  of  the  chairman  of  either  of  the 
general  committees.  Here,  also,  two-thirds  of  the  members  of  each  general  com- 
mittee are  required  for  a  quorum  for  the  transaction  of  business.  All  com- 
mittees, whether  representing  the  employer  or  the  employes,  vote  as  a  imit. 
Upon  this  point  the  plan  makes  the  following  provision : 

"In  the  discussions  of  the  Department  Committees  and  of  the  General  Committees  it  is 
intended  that  Employes  shall  sit  on  one  side  of  the  table,  so  to  speak,  and  Employer  on  the 
other  side,  throughout  the  collective  targaining  contemplated  by  this   Plan. 

"Ihe  majority  of  any  Committee  of  Employes  shall  be  the  voice  of  that  Committee. 

"The  majority  of  any  Committee  of  Employer  shall  be  the  voice  of  that  Committee. 

"Whenever  the  minds  of  the  majorities  of  any  Committees  meet,  the  controversy  shall  be 
settled. 

"While  it  is  intended  that  there  shall  be  full  and  free  discussion  in  order  to  arrive  at  an 
amicable  understanding  and  settlement  of  controversies,  whenever  it  is  necessary  to  take  a 
vote  to  ascertain  the  voice  of  any  Committee,  the  Committees  for  the  Employes  and  for  the 
Emplo\er  shall  have  the  right  to  retire  and  cast  their  vote  in  secret  caucus.  In  such  secret 
caucus  all  such  votes  shall  be  taken  by  secret  ballot,  .said  ballots  to  be  returned  unopened  to 
the  Secretary  for  the  Committees.  The  Secretary  shall  count  the  ballots  under  the  observa- 
tion of  both  Committees  and  announce  the  result  in  open  meeting." 

In  case  a  grievance  cannot  be  settled  through  the  general  committees,  a 
board  of  arbitration  is  established  consisting  of  one  arbitrator  chosen  by  each  of 
the  general  conmiittees  and  a  third  by  the  two  so  chosen ;  but  in  case  they  are 
unable  to  agree  upon  the  third  arbitrator  then  the  Provost  of  the  University  of 
Pennsylvania,  the  Chairman  of  the  Public  Service  Commission  and  the  President 
of  the  Chamber  of  Commerce  are  requested  to  serve  as  additional  arbitrators  or 
to  appoint  their  own  personal  representatives  to  act  as  such  additional  arbitrators. 
In  any  case  a  decision  of  a  majority  of  the  members  of  the  board  of  arbitration 
is  binding. 

Separate  from  the  machinery  of  collective  bargaining  an  organization  is 
established  known  as  the  Cooperative  Welfare  Association,  membership  in  which 
is  open  to  employes  over  16  years  of  age  who  have  been  in  the  service  of  the 
company  for  at  least  one  year.  There  is  no  initiation  fee  but  one  dollar  per 
month  is  deducted  from  the  pay  of  each  member  as  dues,  which  will  entitle  the 
members  to  life  insurance,  sick  benefits  and  pension.  Prior  to  1918  the  com- 
pany paid  approximately  $yO,0(X)  a  year  into  the  various  funds  representing  sick 
benefits,  pensions,  death  benefits,  and  other  benefactions.  Under  the  new  plan  the 
Cooperative  Welfare  .Association  takes  care  of  all  these  things  and  the  company 
contributes  a  lump  sum  of  $10,000  per  month  to  the  cost  of  carrying  on  the  Associa- 
tion's activities.  In  case  the  income  derived  from  the  membership  fee  of  one  dollar 
per  month  and  the  company's  contribution  of  $10.0iX)  \wr  month  proves  to  be  insuf- 
ficient to  meet  the  .Association's  c.xiienditures,  the  menibershii)  dues  are  to  be  in- 
creased sufficiently  to  prevent  a  deficit,  but  there  will  be  no  increase  in  the  amount 
paid  by  the  company  until  the  total  amount  paid  monthly  by  the  members  equals  the 
company's  contribution.  After  that,  all  increases  are  to  be  borne  equally  by  the 
company  and  the  employes.  A  blanket  policy  has  been  isstied  by  the  Metropolitan 
Life  Insurance  Compatiy  insuring  the  lives  of  those  employes  who  desire  to  avail 
themselves  of  this  protection  through  the  Cooperative  Welfare  Association.  A 
certificate  of  insurance  in  the  sum  of  $1,000  is  given  to  every  member  of  the 


Participation  in  Management  609 

Association  and  this  certificate  remains  in  effect  so  long  as  the  member  continues 
in  the  employ  of  the  company  and  retains  membership  in  the  Association.  A 
special  feature  of  this  insurance  is  a  provision  that,  in  case  of  total  and  perma- 
nent disability  occurring  before  the  member  has  attained  sixty  years  of  age  from 
causes  arising  after  the  certificate  of  insurance  was  issued,  the  insured  will  be 
entitled  to  receive  the  $1,000  covered  by  the  policy  in  monthly  or  yearly  install- 
ments. The  plan  also  provides  for  sick  benefits  payable  at  the  rate  of  $1.50 
per  day  commencing  with  the  eighth  day's  illness  and  continuing  for  a  period 
not  exceeding  100  days  in  any  consecutive  12  months.  Pensions  of  $40  per 
month  are  payable  to  incapacitated  employes  who  have  reached  65  years  of  age 
and  have  been  continuously  in  the  service  for  25  years,  but  meritorious  cases  of 
long  service  falling  short  of  these  requirements  are  to  be  given  special  con- 
sideration. 

The  affairs  of  the  Cooperative  Welfare  Association  are  administered  by  a 
cooperative  council  consisting  of  the  combined  membership  of  the  two  general 
committees  for  collective  bargaining,  but  the  administration  of  the  Association 
is  to  be  entirely  separate  and  distinct  from  the  function  of  collective  bargaining. 
The  council  acts  as  trustees  of  insurance  for  the  Association  and  authorizes  the 
expenditures  of  all  moneys,  including  payment  of  sick  benefits.  It  also  passes 
upon  the  issuance  of  insurance  certificates  and  the  validity  and  merit  of  all  appli- 
cations for  pensions.  The  president  of  the  Association,  who  also  acts  as  chair- 
man of  the  cooperative  council,  is  elected  annually  from  the  membership  of  the 
Association  by  majority  vote  of  all  the  members  of  the  several  department  com- 
mittees for  employes.  The  secretary-treasurer  of  the  council  and  his  assistant 
are  appointed  by  the  president  of  the  company. 

The  new  Cooperative  Plan  as  above  outlined  was  accepted  by  the  company's 
employes.  On  December  1,  1918,  out  of  9,073  employes  eligible  for  membership 
in  the  new  Cooperative  Welfare  Association,  the  applications  of  8,399,  or  more 
than  92  per  cent,  were  on  file. 

In  his  annual  report  for  the  year  1919,  Mr.  Mitten's  enthusiasm  for  the  Co- 
operative Plan  and  his  confidence  in  its  results  show  no  signs  of  flagging.  He 
states  that  with  a  maximum  rate  of  58  cents  per  hour  the  wages  of  trainmen  in 
Philadelphia  averaged  $5.51  per  day  as  against  $5.00  per  day  in  Cleveland  and 
$5.10  per  day  in  Detroit  where  the  maximum  rate  was  at  that  time  60  cents  per 
hour.  He  explains  that  this  result  "has  been  possible  of  accomplishment  by  close 
cooperation  between  men  and  management  in  time-table  making,  and  in  better 
spacing  of  cars — thus  giving  improved  service  to  the  public  and  minimizing  waste 
in  schedules."  Then  he  adds :  "Salesmanship  is  here  demonstrated  by  the  efforts 
of  motormen  to  pick  up  all  the  fares,  and  by  the  alertness  and  courtesy  of  con- 
ductors who  endeavor  to  make  the  car  ride  a  more  agreeable  experience."  It 
would  appear,  nevertheless,  that  the  higher  average  daily  wage  with  a  lower 
maximum  hourly  wage  could  be  attained  only  by  the  employes  working  longer 
hours,  or  else  by  a  larger  proportion  of  them  drawing  the  maximum  rate  of  pay 
than  in  the  other  cities  mentioned.  As  a  matter  of  fact,  the  average  pay  time 
in  Philadelphia  and  Detroit  is  approximately  9%  hours.  In  the  supplementary 
statement  addressed  to  Chairman  Elmquist  under  date  of  October  2,  1919,  and 


610  Electric  Railway  Problem 

spread  upon  the  Proceedings  at  page  2003,  Mr.  Mitten  makes  the  following  com- 
parison between  Detroit  and  Philadelphia  with  respect  to  the  working  hours  of 
motormen  and  conductors: 

"Philadelphia's  surface  lines  have  no  three-piece  nins. 

"The  system  comiirises  2,473  regular  runs,  of  which  1,323,  equalling  53.5%,  are  straight 
runs  and  1,150,  equalling  46.5'(,  are  two-piece  runs. 

"The  average  over-all   time   per   nni    is 11  hours,  33  minutes 

The  average  pay-time   is    9  hours,  30  minutes 

The  average  lost   time   is 2  hours,    3  minutes 

The  pay-time  is  divided  as  follows : 

Hours  per  Day  .\'o.  of  Runs  Percentage 

8-9  611  24.7 

9-10  1285  S1.9 

10-11  530  21.4 

11-12  47  2.0 

Avg.  9.5  hrs.  ^l  100.0 

"Ninety-seven  per  cent  of  all  car  operating  time  is  worked  as  a  part  of  regular  runs, 
leaving  only  three  per  cent  to  be  assigned  as  trippers.  The  average  pay-time  on  regular  runs 
is  9.5  hours,  re(|uiring  307  days'  work  per  annum  to  earn  the  system  average  for  motormen 
and  conductors  of  $1,690  per  year. 

".'\ccording  to  the  tigurcs  taken  from  Wednesday's  testimony  for  Detroit  in  1917.  therein 
stated  to  he  slightly  improved  for  1919.  the  comparison  of  over-all  time  at  Detroit  and  Phila- 
delphia is  as  follows,  the  average  pay-time  of  both  cities  being  9.5  hours : 

Dktroit  Philadelphia 

Coinf<li-lcd 

within  \o.  Runs  Per  Cent  Xo.  Runs  Per  Cent 

13  hours  865  62.5  1808  73.1 

14  "  195  14.2  513  20.7 

15  "  147  10.6  135  5.5 

16  "  77  5.7  17  .7 

17  "  51  3.7  None  None 

18  "  46  3.3  None  None 

19  "  1  ...  None  None 

1382  100.0  2473  100.0" 


The  available  evidence  with  respect  to  the  practical  workings  of  the  Phila- 
delphia Cooperative  Plan  seems  to  prove  beyond  reasonable  doubt  that,  at  least 
for  the  time  being,  the  results  obtained  have  been  beneficial  to  both  capital  and 
labor,  and  that  the  public  also  has  received  benefits.  The  Philadelphia  Rapid 
Transit  L'ompaiiy,  after  fourteen  lean  years  for  its  stockholders,  tinaliy  began  to 
pay  dividends  in  1916,  and,  in  spite  of  Mr.  Mortimer's  testiiuony,  I  think  the 
weight  of  evidence  is  clearly  to  the  effect  that  the  Philadelphia  property  is  in 
much  better  condition  with  respect  to  its  capital  account  than  it  was  in  at  the 
time  when  the  new  management  took  hold  in  1911.  That  the  condition  of  the 
men  has  been  greatly  improved  in  that  period  can  hardly  be  doubted.  Wages 
have  been  increased  approximately  150  per  cent,  and  the  evidence  submitted 
with  respect  to  labor  turn-over  clearly  indicates  that  the  men  are  much  better  satis- 
fied than  they  were  in  the  old  days. 

So  far  as  the  public  is  concerned,  it  is  still  enjoying,  in  the  post-war  period, 
the  benefit  of  pre-war  fares,  and  it  has  also  enjoyed  substantial  continuity  of 
service  luider  the  present  management.  However,  it  is  ajiparent  that  a  critical 
situation  exists  in  Philadelphia  today  as  between  the  company  and  the  city  with 


Particitation  in  Management  611 

respect  to  tlie  construction  and  utilization  of  additional  rapid  transit  facilities. 
The  city  has  pledged  itself  to  an  expensive  program  of  elevated  and  subway  con- 
struction and  the  company,  wary  as  a  result  of  its  own  experience  and  the  experi- 
ence in  other  large  cities  with  rapid  transit  lines,  is  not  disposed  to  assume  the 
capital  burdens  of  the  new  construction  upon  terms  that  satisfy  the  city.  There 
is  undoubted  evidence  that  the  traffic  situation  is  getting  out  of  hand  in  Phila- 
delphia, and  it  is  not  at  all  clear  what  the  future  developments  may  be  with  re- 
spect to  fares  and  service. 

Mr.  Mitten's  job  has  been  that  of  many  an  imported  street  railway  manager, 
namely,  to  make  the  common  stock  pay  dividends.  In  undertaking  this  he  has 
had  the  advantage  of  the  public  knowledge  that  in  Philadelphia  the  common  stock 
represents  actual  cash  put  into  the  property  by  the  stockholders.  Mr.  Mitten's 
fundamental  job  at  Philadelphia  has  been  to  build  up  the  property  and  the  busi- 
ness so  that  the  Philadelphia  Rapid  Transit  Company  would  be  able  to  meet  its 
obligations  to  the  underlying  companies  and  still  earn  a  return  upon  its  own 
superimposed  investment.  That  from  this  point  of  view  he  has  pursued  a  wise 
policy  and  has  been  an  efficient  and  successful  electric  railway  manager  cannot 
be  doubted. 

W'e  cannot  blink  at  the  fact,  however,  that  from  the  points  of  view  of  both 
labor  and  the  public,  Mr.  Mitten's  management  has  been  successful  only  to  the 
extent  that  the  furtherance  of  the  employes'  welfare  and  the  improvement  of  the 
service  to  the  public  have  been  necessary  to  the  welfare  of  the  capital  which  Mr. 
Mitten  represents.  The  Philadelphia  plan  is  based  upon  the  theory  of  coopera- 
tion and  the  glossing  over  of  the  antagonism  between  capital  and  labor  and  be- 
tween capital  and  the  public  in  the  electric  railway  industry.  So  far  as  the 
public  is  concerned,  the  Philadelphia  plan  does  not  have  the  merit  of  the  Cleve- 
land plan,  which  was  based  upon  a  conservative  determination  and  specific  limi- 
tation of  the  demands  of  capital.  From  the  standpoint  of  labor  it  does  not  have 
the  merit  of  the  free  and  coordinate  exercise  of  power  that  is  enjoyed  by  the  local 
divisions  of  the  Amalgamated  on  systems  that  are  fully  organized.  With  the 
elimination  of  the  wage  fund  scheme  for  enlisting  the  effective  cooperation  of 
the  employes  there  seems  to  be  no  special  guaranty  of  the  continuation  of  labor 
efficiency  except  as  it  is  brought  about  by  the  momentum  of  the  past,  continued 
skill  in  management,  and  the  avoidance  of  friction  through  the  cooperative  com- 
mittee system.  The  long-existing  deadlock  between  the  company  and  the  city 
with  respect  to  the  construction  and  operation  of  much-needed  rapid  transit 
facilities,  unless  it  is  broken  soon,  is  likely  to  undermine  the  Cooperative  Plan 
and  destroy,  or  at  least  greatly  diminish,  its  benefits.  In  other  words,  Phila- 
delphia has  not  yet  solved  the  traction  problem. 

It  will  be  noted  that  under  the  Cooperative  Plan  as  worked  out  in  Phila- 
delphia the  employes  have  what  might  be  termed  a  near-share  in  the  management, 
but  this  is  a  long  way  from  the  participation  for  which  the  railroad  brotherhoods 
are  striving.  In  Philadelphia  everything  emanates  from  the  representatives  of 
capital  and  so  long  as  labor's  mind  goes  along  with  the  management's  mind  both 
parties  are  happy  and  cooperation  is  effective. 

Another  plan  which  theoretically  calls  for  a  greater  degree  of  participation 


612  Electric  Rmlwav  Problem 

in  management  is  that  w  liich  has  been  put  into  effect  by  the  companies  subsidiary 
to  the  North  American  Company,  as  described  by  Mr.  Mortimer.  It  will  be 
remembered  that  when  the  Milwaukee  street  railway  employes  demanded  higher 
wages  the  Milwaukee  Electric  Railway  &  Light  Company  called  their  attention 
to  the  rates  of  fare  prescribed  by  public  authority  and  suggested  that  they  lay 
their  claims  directly  before  the  state  railroad  commission,  with  the  result  that 
capital  and  labor  made  common  cause  to  force  the  hand  of  the  public  to  pay 
higher  fares.  The  Milwaukee  employes  are  not  affiliated  with  the  Amalgamated 
but  have  a  union  of  their  own  with  branches  in  the  several  companies  of  the 
North  American  group.  Mr.  Mortimer  describes  the  Milwaukee  labor  organiza- 
tion at  page  1999  of  the  Proceedings,  as  follows: 

"We  have  no  local  of  the  .Xmalgamafed  .Vssociatioii  in  Milwaukee.  The  company  has  a 
general  labor  contract  with  the  Employes  Mutual  Benefit  Association,  which  gives  to  that 
association  all  the  powers  of  collective  bargaining  that  would  pertain  to  any  contract  with  the 
.Vmalgamatcd  .\ssociation,  and  while  U.  iireMini;il)ly.  is  desigr.ed  to  avoid  :i  strike,  it  ha>  n'>t 
been  etTcctivc  in  preventing  a  strike.  We  had  a  strike  of  the  employes  on  January  1st  of  this 
year. 

"The  union  embraces  all  crafts  and  all  the  employes  of  the  Milwaukee  Electric  Railway 
&  Light  Company  and  its  associate  companies  *  •  «  ♦  operating  in  the  southeastern 
section  of  Wisconsin.  The  parent  chapter  has  also  issued  charters  to  otlier  companies  in  which 
the  same  interests  are  financially  interested.  So  that  whatever  advantage  that  interstate 
support  may  be.  they  have  this  support." 

Mr.  Mortimer  looks  upon  the  labor  problem  as  a  very  serious  one.  He  has 
noted  the  spirit  of  unrest  that  makes  it  hard  even  for  the  national  otticials  of  the 
union  to  hold  the  locals  in  check.  He  sees  the  need  for  a  keener  sense  of  respon- 
sibility on  the  part  of  the  employes.  At  pages  1786  and  1787  of  the  Proceedings, 
he  says: 

".\sidc  from  the  problem  of  increased  revcnui>.  one  of  the  most  pressing  problems  con- 
fronting the  railway  is  that  of  labor.  It  has  been  the  experience  in  the  last  few  years  that 
the  strikes  on  electric  railways  have  been  frei|uent  and  of  vaning  duration.  Their  causes 
have  been  numerous.  Ihiring  the  last  four  or  live  months  it  has  Ix'en  increasingly  difficult 
for  the  international  officers  of  the  unions  to  control  the  local  unions,  and  there  have  been  a 
numlier  of  street  railways  that  have  had  sporadic  strikes  and  outbreaks  and  threats  from 
the  national  officers  to  rule  the  locals  out  of  the  national  unions  because  of  failure  to  adhere 
to  their  labor  contracts.  That  spirit  or  feeling  is  fairly  general  throughout  lalwr,  prompted 
partly  by  the  increa.'ie  in  the  co.st  ot  living  and  partly  by  some  ol  the  spirit  of  unrest  that  has 
apparently  been  wafted  across  the  ocean.  The  rises  in  hourly  rates  for  the  same  number  of 
hours  per  day  worked  resulting  from  some  of  these  recent  wage  aw^irds  have  Ix-on  larger 
than  the  cost  of  living  exjierienced  since  the  award  of  tlie  National  War  L.ibor  Hoard.  Some 
of  these  hourly  increased  rates  of  wages  may  be  justified  on  the  shorter  number  of  hours 
worked  a  day  and  tlie  fewer  days  |ht  month,  but  as  a  general  pro|Hisition  I  think  most  students 
of  the  latvir  prolilem  will  indicate  that  soincthing  different  from  the  present  day  scheme  of 
arbitration  will  have  to  In-  develoiH-d.  And  1  know  in  the  electric  railway  business  that  we 
need  a  much  keener  responsibility  on  the  part  of  the  workmen  in  their  duties  to  the  employer 
and  in  their  duties  to  the  public,  to  the  end  that  service  may  be  maintained  at  a  minimum 
cost  and  that  it  may  be  o|Hnited  with  miiiinunn  interruptions,  that  the  convenience  of  the 
public  may  not  Ix-  disturbed." 

He  also  suggests  the  idea  that  wages  should  be  based  upon  the  productivity 
of  the  employe.  This  thought  is  elaborated  at  pages  1787  and  1788  of  the  Pro- 
ceedings, where  he  says: 

"It  is  also  desirable  as  far  as  possible  to  incorporate  the  element  of  productivity  as  a 
basis  of  wages.  That  looks  as  though  it  might  l)c  difficult  in  the  railway  business,  but  it  is 
not  as  difficult  as  it  might  appear  at  first  glance.  The  Iniiiunen  forming  a  part  of  the  employes 
making  up  the  principal  group  have  primary  control  over  the  regularity  of  speed  and  the 
ability  to  maintain  fast  schedules  and  thus  influence  the  cost  of  platform  labor  per  car  mile. 
U.sually  they  are  l>aid  on  the  lasis  of  hours,  that  is  a  rate  per  hour,  and  the   faster  the  cars 


Participation  in  Management  613 

are  operated  the  less  will  be  the  expense  of  producing  the  service.  They  also  have  control 
over  the  power  consumption  through  care  in  operating  the  car,  care  in  braking,  care  in  starting 
and  care  in  shutting  otf  power  when  the  same  is  not  required  in  order  to  make  its  schedule. 
It  is  conceivable  that  the  schedule-makers  could  design  a  time  schedule  that  would  appreciably 
reduce  the  cost  of  platform  labor  per  car  mile,  but  would  require  the  cars  to  operate  so  fast 
that  they  would  not  have  time  to  stop  for  passengers.  That  that  is  not  an  exaggeration  is 
disclosed  by  the  experience  of  the  old  St.  Louis  Transit  Company  under  the  operation  of  the 
late  Mr.  A.  B.  duPont.  He  was  pressed,  because  of  his  increase  in  operating  expenses,  by 
the  management ;  and  he  concluded,  of  course,  that  the  way  to  reduce  operating  expenses 
for  giving  the  same  car  mileage  was  to  run  the  cars  faster.  So  he  ran  the  cars  so  fast  that 
they  did  not  have  time  to  pick  up  any  passengers  and  the  result  was  that  the  passengers 
usually  went  to  the  street  intersection  with  a  brick  in  their  hand  and  if  the  car  did  not  stop 
for  them  they  threw  the  brick  at  the  car.  The  damage  to  equipment  was  considerable,  and 
it  finally  resulted  in  the  imposition  of  a  license  tax  on  the  system,  a  gross  receipts  tax  of  2%. 
It  was  thought  that  by  imposing  that  tax  it  would  require  the  cars  to  stop  and  it  also  would 
placate  somewhat  public  opinion  at  the  outrages  that  had  been  committed  on  them. 

"Another  element  in  which  the  trainmen  are  primarily  interested  is  the  revenues  per 
car  mile.  So  a  productivity  system  of  wages  can  be  arranged  whereby  an  agreed  hourly  rate, 
graduated,  if  you  please,  can  be  provided  as  a  minimum,  and  in  addition  thereto  a  system  of 
participation  in  the  savings  which  the  employe  may  effect,  first  by  reason  of  decrease  in  in- 
juries and  damages;  second,  by  the  saving  in  power  consumption;  third,  by  increasing  the 
schedule  speed ;  fourth,  by  the  maintenance  of  equipment  over  which  the  trainmen  have  con- 
trol, and  fifth,  through  increased  revenues  per  car  mile.  Such  a  system  when  extended  can 
be  made  to  develop  one  for  the  administration  of  discipline,  .^n  employe  may  start  out  at  the 
beginning  of  the  month  with  1.000  points  to  his  credit,  and  for  each  infraction  of  rules  or 
justified  complaints  on  the  part  of  the  public  deductions  can  be  arranged  so  that  his  participa- 
tion in  the  aggregate  profits  for  the  month,  profits  resulting  from  the  savings  under  these 
standards,  will  be  reduced,  but  his  saving,  that  is,  the  money  that  is  taken  from  him  should  go 
to  the  other  employes  of  the  group  so  that  it  cannot  be  said  that  the  employer  is  disciplining 
the  men  for  the  purpose  of  increasing  his  net  earnings. 

"It  is  also  possible  to  put  all  accounting  work  on  a  productivity  basis,  and  there  are  some 
psychological  aspects  to  that.  Fundamentally  and  individually,  workmen,  be  they  male  or 
female,  are  desirous  of  being  placed  on  an  individual  basis  of  compensation.  Now,  that  is 
strongly  urged  against  by  certain  classes  of  organized  labor.  But  it  has  been  our  experience 
that  where  there  has  been  this  gain-sharing  plan  in  certain  departments  we  have  had  detnands 
from  other  departments — from  the  employes  of  those  departments — that  they  be  installed.  In 
other  words,  my  actual  experience  with  operations  of  that  kind  is  different  from  the  general 
published  results. 

"I  am  not  suggesting  that  this  will  fundamentally  take  care  of  increases  in  wages,  because 
there  are  no  economies  which  employes  can  effect,  at  least  in  sufficient  magnitude,  to  com- 
pensate them  for  the  increased  cost  of  living,  either  actual  or  imagined.  But  they  are  small 
elements  which  tend  to  develop  care  on  the  part  of  workmen  and  which  in  turn  have  their 
influence  in  adding  to  the  life  of  the  physical  property  under  their  jurisdiction  and  tend 
to  develop  a  certain  amount  of  individual  pride  and  individuality. 

"Commissioner  Sweet :  That  would  stabilize  the  labor  market  to  a  certam  extent,  or 
have  a  tendency  in  that  direction? 

"Mr.  Mortimer:  Yes.  it  does  tend  to  stabilize  the  market.  It  holds  out  to  employes  first 
a  certain  return  for  the  month  in  the  way  of  wace  compensation  and  in  addition  it  offers  to 
them  a  speculation,  and  desire  to  speculate  is  inherent 

"Commissioner  Sweet:     A  reward  for  extra  good  conduct? 

"Mr.  Mortimer :  W'ell,  it  is  a  reward  for  extra  good  conduct,  but  it  *  *  *  * 
originates  from  that  same  brain  cell  that  causes  men  to  go  into  the  desert  for  the  discoverv 
of  gold  mines.  There  is  an  intense  curiosity  invariably  displayed  as  to  what  the  results  of 
the  earnings  from  the  gain-sharing  plans  are  going  to  be  for  that  particular  month;  and  it 
has  the  further  advantage  that  through  the  operation  of  the  plan  you  can  disclose  some  of  the 
most  intimate  details  of  operation  to  the  employes  and  show  to  them  the  influence  of  changes 
in  conditions  and  of  their  own  conduct  upon  the  results  for  the  month." 

Although  he  does  not  say  so  in  so  many  words,  it  is  evident  that  Mr.  Mor- 
timer is  describing  methods  which  have  been  employed  in  connection  with  the 
companies  over  which  he  has  had  charge.  Even  representation  on  the  boards  of 
directors  has  been  conceded  to  labor,  as  will  appear  from  Mr.  Mortimer's  further 
testimony  at  pages  788  and  789  of  the  Proceedings: 

"Commissioner  Meeker :  Would  you  extend  the  sharing  plan  to  a  share  in  the  manage- 
ment of  the  industry? 

"Mr.  Mortimer:     Yes.     VVe  have  done  that  in  most  of  our  companies.     We  have  provided 


614  Electric  Railway  Problem 

for  the  election  of  a  representative  of  labor  to  the  board  of  directors.  *  *  *  *  We  first 
provided  in  our  group  lor  the  election  by  the  Employes'  Mutual  benefit  Association  of  a 
representative  on  the  board  of  directors  of  the  Union  Electric  Light  &  Power  Company, 
the  electric  utility  in  St.  Louis.  The  by-laws  provide  for  seven  directors.  One  of  those 
directors  is  now  a  direct  representative  of  the  Employes'  Mutual  Benefit  Association.  The 
Employes'  Mutual  Henctit  .\ss(xiation  first  asked  tor  representation  upon  the  board  of  direc- 
tors and  we  acceded  to  that  rc(|uest. 

"Commissioner  Meeker :     How  long  has  that  plan  Iteen  in  operation  ? 

"Mr.  Mortimer:  That  election  took  place,  I  think,  in  March  of  the  current  calendar 
year.  The  employe  was  chosen  by  a  process  of  primary  nominations  at  which  two  were 
selected  to  run  for  the  election,  and  then  an  election  was  had  to  eliminate  one  or  the  other 
and  the  man  chosen  to  represent  the  Employes'  Mutual  Benefit  .\ssociation  on  the  board  of 
directors  is  one  of  the  watch  euRineers  in  the  .-Kshley  Street  power  station,  and  he  sits  in  at 
each  of  the  monthly  txiard  meetings.  The  same  thing  is  now  in  process  of  working  out  in 
the  Wisconsin  Gas  &   Electric  Company. 

"Commissioner  Meeker:  Does  this  employes'  representative  have  the  same  power  as 
other  directors? 

"Mr.  Mortimer:  .Absolutely.  He  has  absolutely  the  same  powers,  the  right  to  vote  and 
the  right  to  discuss  questions  of  all  kinds. 

"Commissioner  Meeker:  Does  he  have  to  have  a  share  in  the  capital  of  the  industry, 
or 

"Mr.  Mortimer:  Yes.  the  law  requires  that  the  directors  be  shareholders  in  the  states  in 
which  we  operate.  That  is  not  true  of  all  states.  .And  in  this  case  he  was  qualified  by  the 
company  transferring  one  share  of  stock  to  his  name,  so  that  he  is  legally  entitled  to  sit  as  a 
member  of  the  board  of  directors.  It  is  all  being  worked  out  in  the  case  of  the  Wisconsin 
Gas  &  Electric  Company,  and  in  the  case  of  the  Milwaukee  Electric  Light  Comjiany  certain 
changes  of  our  articles  of  incorporation  will  have  to  be  ntade,  but  that  will  be  done,  I  hope. 

"Commissioner  Meeker:  This  employes'  representative  was  chosen  by  the  Employes' 
Mutual   Benefit  .Association? 

"Mr.  Mortimer:  Chosen  by  the  memlnTs  of  the  Employes'  Mutual  Benefit  .Association, 
which  embraces  all  of  the  employes  of  the  company." 

Mr.  Mortimer  tlicn  describes  more  fully  the  functions  of  the  Employes' 
Mutual  Benefit  Association  and  its  relation  to  the  company.  .\t  page  789  of  the 
Proceedings,  he  says: 

"It  is  an  organization  that  has  two  principal  purposes  in  life:  one  is  to  administer  sick 
bi'nefits  and  death  iK'netits,  provide  medical  and  surgical  attendance  for  the  employes,  and 
also  to  provide  additional  insurance  of  Ik^iIi  life  and  sickness  and  accidents.  ofl:'-duty  types. 
In  respect  to  certain  of  its  insurance  benefits  where  the  rate  is  flat  and  that  business  does 
not  carry  itself,  the  premiums  are  not  sufficiently  high,  it  is  necessary  for  the  cniiipanv  to  ma^e 
contributions.  Its  other  principal  function  is  that  of  collective  bargaining,  and  in  that  respect, 
of  course,  it  needs  no  contributions  by  the  company. 

"Commissioner  Meeker:  By  collective  bargaining,  you  mean  settling  upon  the  wage  and 
hours  ? 

Mr.  Mortimer:     .\nd  conditions  of  laWir,  yes." 

The  effect  of  the  profit-sharing  features  of  the  Milwaukee  plan  is  described 
more  fully  at  page  790  of  the  Proceedings,  as  will  be  seen  from  the  following 
extract : 

"Commissionor  Meeker:  Before  you  leave  the  question  of  labor  relations,  I  would  like 
to  ask  a  little  bit  further  alM)UI  this  gain-sharing  plan  that  you  have.  Do  the  employes 
actually   have  an  appreciable  control  over  accident   prevention? 

".\lr.  Mortimer:     They  do. 

"Cummissioncr  Meeker:     Do  you  think  you  have  statistical   demonstration  of  that? 

"Mr.    Mortimer:     \'es,   we  think   we  have. 

"Commissioner  Meeker:  Your  actual  rate  has  Ixen  cut  down  since  this  plan  was  put 
into  operation? 

"Sir.  Mortimer:  Our  actual  disbursements  for  injuries  and  damages  have  been  mate- 
rially less  since  this  plan  was  effected. 

"Commissioner  Meeker:     How  long  has  this  plan  been  effective? 

"Mr.  Mortimer:  This  plati  applicable  to  trans|x<rtation  in  conjunction  with  our  employes 
has  l>een  applicable  since  June,   1915,  a  period  of   four  years. 

"Commissioner  Meeker:  Have  you  statistics  which  would  boar  upon  this  subject?  Of 
course,  other  causes  have  been  operating  to  cut  down  the  accident   rates;   the  general  safety 


Participation  in  Management  615 

movement  and  the  workmen's  compensation  movement  and  other  movements.  Do  you  think 
your  experience  is  Ijetter  than  the  experience  of  other  companies  in  a  similar  line  of  business? 

"Mr.  Mortimer:  I  know  in  many  cases  the  electric  railways  have  experienced  an  increase 
in  the  cost  of  injury  and  damage  settlements. 

"Commissioner  Meeker :  However,  that  verges  on  quite  another  question,  the  compe- 
tence of  administration  of  compensation  laws  and  increases  in  rates  which  have  been  quite 
general   in  all   the  compensation   states   and   various  other  matters. 

"Mr.  Mortimer:  But,  Mr.  Commissioner,  the  injuries  and  damages  to  which  I  refer 
and  upon  which  these  calculations  are  based  relate  to  injuries  and  damages  to  the  public  and 
have  no  relation  to  workmen's  industrial   injury  compensation." 

Mr.  Mortimer  frankly  states  that,  in  his  opinion,  most  public  utility  operators 
would  like  to  appro.ximate  the  labor  standards  set  up  by  the  Amalgamated,  if  they 
could  only  see  their  way  clear  to  get  the  necessary  revenues,  and  that  under  state 
regulation  or  a  service-at-cost  plan,  there  ought  to  be  no  real  trouble  between 
the  companies  and  their  employes.  At  pages  1999  and  2000  of  the  Proceedings, 
he  says : 

"Our  view  of  that  angle  of  the  business  is  relatively  simple.  In  the  administration  of 
a  public  utility,  there  never  ought  to  be  any  opportunity  for  any  substantial  dispute  between 
the  employer  and  the  employe  affecting  hours,  wages  or  working  conditions.  That  ought 
to  be  the  case  where  state  regulation  administers  rates  and  service  and  controls  security 
issues,  or  under  a  cost-of-service  plan.  State  regulation  is  only  another  expression  for  cost 
of  ser%-ice ;  our  so-called  cost-of-ser\'ice  plan  being  automatic  rate  regulation. 

"The  employe  is.  of  course,  entitled  to  adequate  compensation,  and  that  can  be  measured 
from  a  number  of  different  viewpoints.  I  think  that  most  public  utility  opsrators.  if  they 
could  see  their  way  of  collecting  the  revenues  from  the  public  would  be  favorable  towards 
very  closely  approximating  the  standards  which  have  been  submitted  to  this  commission  by 
the  representatives  of  the  Amalgamated  Association." 

He  then  describes  the  new  Wisconsin  law  that  grew  out  of  the  Milwaukee 
strike  of  January  1,  1919.  On  this  point  his  testimony  is  found  at  page  2000 
of  the  Proceedings: 

"Fundamentally,  in  public  utilities,  the  question  of  wages,  hours  and  working  conditions 
is  a  public  problem.  The  way  the  law  stands  in  Wisconsin  at  the  present  time,  it  ought  to  be 
practically  impossible  to  have  a  strike  if  both  parties  will  follow  the  procedure  that  is  laid  down. 

".■\s  a  part  of  the  Governor's  reconstruction  plan,  he  created  the  Board  of  Conciliation, 
consisting  of  three  men,  selected  in  the  usual  way — one  representing  the  employers,  one 
representing  the  employes,  and  one  representing  the  public. 

"Commissioner  Sweet:     How  was  that  last  one  selected  or  appointed? 

"Mr.  Mortimer :  These  men  are  nominated  by  the  Governor  and  confirmed  by  the 
Senate :   but  they  are  chosen   from  these   respective   groups. 

"Mr.  Warren:     It  is  a  permanent  board,  is  it? 

"Mr.  Mortimer:  Yes,  it  is  a  permanent  board.  *  *  *  *  With  respect  to  ordinary 
industrial  disputes,  other  than  public  service  corporations,  the  Board  of  Conciliation  may 
assume  jurisdiction  upon  the  request  of  either  party.  That  takes  the  place  of  the  former 
arbitration  provision  under  the  Wisconsin  industrial  commission  law,  which  perinitted  arbi- 
tration by  the  industrial  commission  only  w'ith  the  consent  of  both  parties. 

"With  respect  to  public  service  corporations,  however,  the  law  requires  that  the  Board 
of  Conciliation  take  jurisdiction  and  then  it  shall  rnake  its  findings  and  immediately  certify 
them  to  the  Railroad  Commission.  The  Railroad  Commission  reviews  such  findings,  and 
modifies  or  confirms  them  and  makes  its  determination.  If  it  finds  that  the  public  service 
corporation  can  pay  the  increased  wages,  and  earn  a  reasonable  return,  then  it  shall  order 
such  wages  effective  and  that  order  is  binding  upon  the  public  service  corporation. 

"If  it  finds  that  the  public  service  corporation  is  unable  to  pay  these  increased  wages 
without  causing  it  to  earn  less  than  a  reasonable  return,  then  the  Railroad  Commission  shall, 
by  order,  fix  such  rates  or  charges  as  shall  permit  the  corj'oration  to  earn  the  increased 
wages  and  produce  a   reasonable   return. 

"That  is  intended  to  avoid   industrial  disputes  among  public   service   corporations." 

It  is  not  entirely  clear  what  effect  this  new  conciliation  law  will  have  upon 
the  relations  between  the  company  and  its  employes  in  Milwaukee.  Apparently, 
however,  the  law  has  been  worked  out  in  such  a  way  as  to  create  a  solidarity  of 
interest  between  them,  or  at  least  to  weaken   the  motives  of   both  capital   and 


616  Electric  Railway  Problem 

labor  to  resist  each  other's  demands.  Under  these  circumstances,  a  fine  spirit 
of  cooperation  for  mutual  self-help  ought  to  be  exhibited,  but  it  is  doubtful 
whether  the  public  can  find  protection  in  this  harmony  of  purpose.  In  Phila- 
delphia the  public  still  has  the  protection  of  the  five-cent  fare,  but  in  Milwaukee 
there  is  no  limit  except  the  company's  need  as  interpreted  by  the  Railroad 
Commission. 

Neither  the  Mitten  plan  nor  the  Mortimer  plan  goes  very  far  toward  effec- 
tive and  responsible  participation  in  management,  except  in  minor  details  that 
primarily  affect  the  interests  of  the  employes.  Neither  plan  has  assimilated  the 
thought  behind  the  Plumb  Plan.  The  latter  has  been  severely  criticized  because 
it  would  make  the  employes  predominant  in  the  management  of  the  railroads. 
It  would  not  be  so  much  a  participation  of  the  employes  in  management  as  a  con- 
cession by  the  employes  of  a  right  to  the  public  to  participate  in  a  minor  way  in 
the  management  for  which  the  employes  themselves  were  primarily  responsible. 
Up  to  this  time  capital  has  been  primarily  responsible  for  street  railway  manage- 
ment. 

The  Amalgamated  program  recognizes  the  fundamental  divergence  of  in- 
terests between  capital  and  labor,  and  jirovides  for  the  establishment  of  an  equi- 
librium through  the  exercise  of  organized  power  on  either  side.  It  does  not  over- 
look the  antagonism,  but  it  prescribes  rules  under  which  the  fight  is  to  be  carried 
on.  It  adniits  that  the  two  contending  forces  have  a  common  interest  in  the 
continuance  and  prosperity  of  the  business,  but  it  recognizes  the  conflict  between 
them  when  it  comes  to  a  division  of  the  fruits  of  production.  It  recognizes 
capital,  and  in  turn  demands  recognition  for  labor,  on  the  theory  that  two  great 
powers  equally  disciplined  and  equally  strong  can  in  the  long  run  get  on  better 
with  each  other  than  they  could  if  one  was  maintained  on  a  military  basis  and 
the  other  not.  Tlie  .Xmalgamated  not  only  recognizes  the  conflict  of  interests 
between  labor  and  capital,  but  also  recognizes  a  pretty  clear-cut  division  of  func- 
tions, and  aims  to  preserve  to  each  of  the  parties  freedom  of  action  in  its  own 
part  of  the  field. 

The  Philadelphia  plan  and,  to  a  certain  extent,  the  Milwaukee  plan  assume 
that  the  fundamental  and  i)rimary  interest  in  the  electric  railway  business  is  the 
interest  of  capital,  and  the  cooperation  of  labor  is  sought  and  the  right  of  par- 
ticipation in  management  is  given,  so  far  as  it  is  given,  primarily  as  a  means  of 
inducing  labor  to  yield  itself  efficiently  to  exploitation  for  the  benefit  of  capital. 
The  idea  back  of  the  riunib  I'lan  is  that  capital  is  an  inert  thing,  and  that  the 
primary  interest  in  the  business  is  the  interest  of  the  workers  themselves,  who 
produce  the  service  as  a  means  of  gaining  a  livelihood.  The  Plumb  Plan  points 
to  the  socialization  of  capital  and  the  concentration  of  responsibility  for  manage- 
ment of  industry  in  the  producers.  Labor  is  regarded  as  the  dominant  factor 
in  the  situation,  and  if  this  idea  were  accepted  and  practically  applied  in  the 
electric  railway  industry,  capital  and  labor  would  exchange  places.  Capital 
would  work  for  labor  and  would  be  paid  a  wage  determined  by  the  law  of  supply 
and  demand,  or  else  by  some  more  or  less  arbitrary  etiuitable  standard  based 
upon  the  theory  of  a  fair  return  which  corresiionds  in  a  general  way  to  the  prin- 
ciple of  the  living  wage. 


Participation  in  Management  617 

"Participation"  in  management  appears  to  assume  an  identity  of  interest 
and  it  is  doubtful  whether  the  results  aimed  at,  from  the  point  of  view  of  labor, 
when  participation  in  management  is  suggested  as  a  method  of  solving  the  labor 
problem,  can  be  realized  unless  participation  becomes  control.  This  is  analogous 
to  the  relation  between  capital  and  the  public  where  we  hear  so  frequently  the 
gospel  of  cooperation  preached.  This  idea  is  often  carried  so  far  as  to  suggest 
that  the  city  should  be  represented  on  the  board  of  directors  of  the  local  electric 
railway  company.  The  inherent  weakness  of  this  plan  is  the  fact  that  a  funda- 
mental and  irreconcilable  conflict  of  interest  exists  as  between  the  companies 
and  the  public,  and  that  minority  representation  in  the  management  is  based 
upon  the  theory  of  partnership  and  community  of  interest,  which  is  a  super- 
ficial view  of  the  relations  of  the  two  parties.  The  inevitable  result  is  either 
discord  and  partial  paralysis  in  management,  where  unity  should  prevail,  or  else 
the  surrender  by  the  city's  representatives  of  the  public  point  of  view  and  the 
acceptance  of  the  fundamental  aims  and  purposes  of  capital  as  the  dominating 
interest  to  which  both  parties  become  subservient.  Of  course,  it  would  be  foolish 
to  deny  that  between  capital  and  the  public,  and  also  between  capital  and  labor, 
there  are  rather  wide  fields  for  cooperation ;  but  in  either  case,  the  giving  to  an 
opposing  interest  of  a  share  in  the  innermost  councils  of  the  company  and  a 
partial  and  subordinate  responsibility  for  its  policies  is  not  calculated  to  bring 
beneficial  results.  Probably  great  good  can  be  accomplished  by  cooperation  be- 
tween employers  and  employes  in  the  formulation  of  rules,  the  handling  of  dis- 
ciplinary problems  and  the  layout  of  operating  schedules,  and,  of  course,  in  this 
industry,  as  in  every  other,  as  Mr.  Morris  L.  Cooke  suggests,  the  initiative  of 
the  employes  should  be  enlisted  for  the  improvement  of  operating  methods.  But 
participation  in  management  in  the  larger  affairs  is  more  likely  to  emphasize  the 
underlying  antagonisms  or  else  to  create  an  artificial  and  one-sided  unity  of 
policy.  If  the  time  comes  when  labor  takes  control  of  industry,  it  will  then  have 
responsibility  for  management,  and  capital  will  have  to  take  a  back  seat.  If 
government  assumes  complete  control  of  the  electric  railways,  both  labor  and 
capital  will  have  to  accommodate  themselves  to  public  management,  with  such 
degree  of  participation  as  may  prove  to  be  feasible  and  compatible  with  the  public 
interest. 


Chapter  XL\'III 
ELECTRIC    RAILWAY    EMPLOYES    AS    CIVIL    SERVANTS 

Public  regulation  of  wages,  hours  and  conditions  of  labor,  without  the  as- 
sumption of  a  coordinate  public  responsibility  for  revenue  resources,  is  theoreti- 
cally unsound  and  practically  impossible  as  a  permanent  policy.  Public  resrula- 
lation  of  rates,  unless  the  public  has  authority  to  question  the  essential  validity 
of  operating  costs,  including  the  wages  paid,  is  an  "optical  delusion."  .A  ser%-ice- 
at-cost  plan  that  automatically  passes  wage  increases  on  to  the  public  in  increased 
fares  or  in  deficits  to  be  made  up  out  of  taxes  is  a  cost-plus  scheme  to  which 
the  public  cannot  afford  to  consent.  It  the  public  insists  on  having  its  dealings 
with  the  management,  under  a  contract  specifying  the  rates  for  service,  and 
leaving  capital  to  handle  labor  as  best  it  can.  then  the  public  service  is  subjected 
to  the  vicissitudes  of  private  industrial  warfare,  and  an  intolerable  condition 
arises.  If  government  prohibits  and  penalizes  the  strike  under  private  manage- 
ment, it  nms  counter  to  the  deeply-ingrained  prejudices  of  labor  which  sees  a 
condition  of  involuntary  servitude  come  in  when  the  right  to  strike  goes  out. 
Under  the  new  conditions  of  rising  costs  and  corporate  poverty,  the  labor  problem 
under  private  management  becomes  knottier  than  ever.  The  obvious  necessity 
of  establishing  direct  public  relations  with  labor  suggests  public  ownership  and 
operation  of  tlie  electric  railways  as  the  solution  of  the  labor  i)roblem  as  well  as 
of  the  problem  of  credit.  Why  not  cut  the  Ciordian  knot  by  making  tlie  electric 
railway  employes  civil  servants? 

Unhap])ily,  this  program  does  not  in  itself  insure  the  effective  cooperation 
of  labor  on  ideal  terms.  It  does  not  necessarily  assure  the  employes  the  living 
wage,  for  many  classes  of  public  employes  are  notoriously  underpaid,  especially 
in  times  like  these  when  living  costs  go  up  rapidly  while  public  salaries  and 
wages  lag  far  behind.  This  program  does  not  in  itself  insure  efticiency  in  the 
application  of  Iabor-i)ower  to  the  production  of  transportation  service,  which  is 
now  so  imperative  a  need;  for  examples  of  inefficient  labor  on  public  work  are 
by  no  means  intro(|U(.iu.  It  does  not  even  guarantee  the  continuity  of  service 
so  important  to  the  public  in  the  electric  railway  industry,  for  even  policemen 
have  been  known  to  strike  and  soldiers  to  mutiny.  Yet.  under  public  ownership 
and  ojieration.  properly  administered,  the  labor  problem  could  be  attacked  di- 
rectly, instead  of  in  a  round-about  way  through  the  companies,  or  as  a  companion 
of  the  problem  of  credit.  Once  numicipal  ownership  and  operation  were  achieved, 
capital  would  no  longer  enter  iiUo  the  situation  as  a  private  problem,  and  atten- 
tion could  be  focussed  directly  on  labor  relations.  It  is  to  be  presumed  that  if 
the  better  day  for  labor  which  Mr.  I.auck  depicted  as  growing  out  of  the  war  and 
the   world   ui)heaval    is   realized,  government   will   become   more   democratic   and 

618 


Labor  Under  Civil  Service  619 

more  responsive  to  the  Just  demands  of  the  workers.  More  and  more,  the  evils  of 
governmental  inefficiency,  indifference  and  oppression  will  disappear.  At  least  we 
must  all  hope  so.  Furthermore,  we  thus  far  have  the  example  of  the  San  Fran- 
cisco and  Seattle  municipal  railways  upon  which  labor  appears  to  have  been  re- 
ceiving good  pay  and  working  efficiently  under  satisfactory  conditions  and  with 
the  eight-hour  workday. 

The  labor  problem  is  not  solved  by  service-at-cost  or  by  state  regulation.  It 
is  not  solved  by  the  Philadelphia  Cooperative  Plan,  nor  by  the  Amalgamated 
program  alone.  Civil  service  rules,  as  ordinarily  administered,  can  hardly  be  said 
to  offer  a  solution  of  the  problem ;  yet,  with  modifications  to  suit  the  exigencies 
of  transportation  service,  they  may  be  very  helpful  in  solving  it  under  public 
management.  In  this  connection,  reference  may  be  made  to  the  provisions  of  the 
Fowler  municipal  ownership  bill,  introduced  in  the  New  York  legislature  by 
Senator  Fowler  in  March,  1920.  This  bill  was  a  revision  of  a  bill  drafted  in 
1918  by  a  committee  appointed  by  the  New  York  State  Conference  of  Mayors 
and  Other  City  Officials.  It  did  not  become  law.  Nevertheless,  its  provisions 
with  respect  to  responsibility  for  management  and  discipline  are  of  considerable 
interest.  Provision  is  made  that  for  every  utility  publicly  owned  and  operated 
a  municipal  utility  director  shall  be  appointed  or  designated  by  the  municipal 
governing  board.  The  director's  powers  with  respect  to  the  personnel  of  the 
utility  force  and  the  character  of  the  rules  to  be  prescribed  by  the  governing 
board  are  set  forth  as  follows: 

"The  municipal  utility  director  shall  have  full  authority  to  appoint,  promote,  discipline, 
remove  or  discharge  any  or  all  officers  and  employes  engaged  in  the  supervision,  acquisition, 
establishment,  construction,  enlargement,  maintenance  or  operation  of  any  municipal  utility 
under  the  control  of  such  director,  subject  to  rules  and  regulations  as  to  the  manner  of 
employment,  training,  competence,  discipline,  working  conditions  and  compensation,  including 
pensions  of  such  officers  and  employes.  Such  rules  and  regulations  shall  be  adopted  by  the 
municipal  board  and  may  be  modified  or  changed  from  time  to  time.  Such  rules  and  regu- 
lations shall  be  consistent  with  law  governing  officers  and  employes  of  a  utility  of  the  same 
kind  and  class  as  the  municipal  utility,  and  with  the  provisions  of  the  civil  service  law 
and  rules,  except  as  to  removal  or  discharge;  but  no  such  officer  or  employe  shall  be 
removed  or  discharged  for  political  reasons,  nor  without  written  charges  and  a  public 
hearing,  to  be  held  upon  reasonable  notice.  Such  rules  and  regulations  shall  provide  means 
for  the  adjustment  of  disputes  between  the  employes  and  the  management  without  interrup- 
tion of  the  utility  service.  They  may  provide  for  the  creation  of  representative  committees 
of  employes  to  act  with  the  management  in  matters  relating  to  the  appointment,  discipline 
and  discharge  of  employes  and  with  respect  to  the  efficient  operation  of  the  utility  with 
due  regard  to  the  public  welfare  in  the  matter  of  service  and  the  cost  of  service.  Such 
rules  and  regulations  shall  provide  for  the  payment  of  just  and  reasonable  compensation 
for  the  services  rendered  by  the  employes  and  officers  of  the  utility,  and  may  provide  for 
collective  bargaining  between  the  employes  and  the  municipal  utility  director  with  respect 
to    wages,   hours  of   labor,   and   other  conditions   of    work." 

It  cannot  be  said  that  the  labor  problem  has  been  sohed  in  any  final  way 
in  connection  with  municipally  operated  utilities  in  the  United  States,  but  un- 
doubtedly it  could  be  solved  by  a  direct  concentration  of  public  attention  upon  it. 
Thus  far  it  has  attracted  comparatively  little  notice  and  no  concerted  effort 
has  been  made  to  work  out  a  solution  along  other  than  traditional  lines.  Organ- 
ized labor  sometimes  takes  the  position  that  the  municipality  under  public  opera- 
tion is  not  much  different  from  any  other  employer.  This  attitude  ignores  the 
fact  that  under  public  ownership  the  demands  of  capital  are  largely  subordinated. 
Of  course,  the  fare-paying  public  is  interested  in  getting  service  as  cheaply  as 


620  Electric  Railway  Problem 

possible,  and  for  that  reason  desires  to  hold  both  labor  cost  and  capital  cost  down. 
However,  the  farepayers  do  not  constitute  the  governmental  public,  whose  fun- 
damental interest  at  all  times,  even  though  it  is  not  always  clearly  recognized,  is 
to  see  that  justice  is  done  and  the  conditions  of  a  sound,  economic,  social  and 
political  life  maintained. 

In  view  of  the  inevitable  importance  of  public  ownership  and  operation  as 
a  potential  remedy  for  the  existing  ills  of  the  electric  railway  industry,  it  is  un- 
fortunate, perhaps,  that  the  Commission  was  not  able  to  make  a  thorough  in- 
quiry into  the  problem  of  labor  relations  on  publicly  operated  utilities. 


Chapter  XLIX 
SERVICE    VERSUS    PROFITS 

We  have  now  surveyed  the  two  great  coordinate  problems  in  the  electric  rail- 
way industry — the  problem  of  securing  capital  through  credit,  and  the  problem 
of  securing  labor  through  cooperation.  Neither  of  these  problems  can  be  solved 
by  itself.  Unless  the  capital  funds  required  for  the  construction  and  expansion 
of  electric  railway  facilities  can  be  secured,  labor  has  no  chance  either  to  serve  or 
to  be  rewarded  in  the  operation  of  electric  railways.  On  the  other  hand,  unless 
the  cooperation  of  labor  can  be  enlisted  in  rendering  efficient  service  at  reason- 
able cost  the  capital  already  invested  in  electric  railway  facilities  will  be  starved 
and  ultimately  lost  and  new  capital  cannot  be  secured  for  the  expansion  of  facil- 
ities which  the  growth  of  population  and  the  increase  of  traffic  demand. 

It  has  been  demonstrated  from  every  point  of  view  that  the  electric  railways 
perform  an  essential  public  function  and  that  they  exist  primarily  for  public 
service.  It  is  an  axiom  oft  repeated  by  those  who  speak  for  all  the  parties  con- 
cerned— capital,  labor,  and  the  public— that  the  full  necessary  cost  of  electric  rail- 
way service,  of  the  amount  and  quality  which  the  public  interest  demands  and 
secures,  must  be  paid  by  those  who  use  the  service  or  by  the  general  public  on 
whose  behalf  it  is  rendered.  Heretofore,  in  the  initiation  of  street  railway  en- 
terprises capital  has  taken  the  lead.  Funds  are  put  up  before  work  begins  and 
labor  entering  into  construction  is  capitalized  before  operation  starts  and  revenues 
begin  to  come  in.  Although  chronologically  capital  comes  first  as  a  matter  of 
practical  necessity,  its  reward,  under  the  procedure  thus  far  followed,  comes 
last.  It  is  the  farepayers'  residuary  legatee.  Out  of  operating  revenues  the 
costs  of  operation,  including  the  wages  of  labor,  are  paid  first  and  capital  has 
taken  what  is  left.  The  position  of  capital  in  the  enterprise,  therefore,  has 
been  a  speculative  one.  The  representatives  of  capital,  having  the  management 
in  their  own  hands,  have  necessarily  adopted  a  policy  of  keeping  the  reward  of 
labor  for  its  share  in  the  production  of  service  down  to  the  lowest  practicable 
limit,  and  also  of  keeping  the  quantity  and  quality  of  service  rendered  to  the 
public  as  far  within  the  cost  of  the  service  as  possible.  Capital  has  enjoyed  the 
advantage  of  constitutional  guaranties  enforced  by  the  courts,  except  as  it  may 
have  limited  its  potential  revenues  by  voluntary  contract.  It  has  never  accepted 
"the  fair  return"  as  the  full  measure  of  the  profits  it  seeks.  It  wants  this,  plus 
something  more.  Even  under  these  modem  service-at-cost  arrangements,  it  de- 
mands a  fixed  return,  and  a  chance  for  speculative  profit  too.  Theoretically, 
capital's  constitutional  guaranty  of  the  right  to  charge  rates  that  will  yield  it  a 
fair  return  while  it  is  devoted  to  public  service  is  offset  by  the  right  of  the  public 
through  the  police  power,  to  require  that  service  shall  be  rendered  at  reasonable 

621 


622  Electric  Rmlway  Problem 

rates,  with  not  only  the  cost  of  the  service  but  the  value  of  the  service  to  those 
who  make  use  of  it  taken  into  consideration.  In  the  electric  railway  industry 
labor  has  undoubtedly  been  treated  as  a  commodity,  and  when  purchased  and 
paid  for  its  claims  have,  for  the  most  part,  been  regarded  as  completely  liqui- 
dated. Capital  claims  the  right  to  make  up  past  losses,  but  labor  has  no  way 
of  being  recouped  for  insufticient  wages  which  in  the  past  it  may  have  im- 
prudently accepted.  Back  pay,  where  it  is  awarded  in  labor  settlements,  does 
not  ante-date  the  tiling  of  the  claim  for  advanced  wages. 

Labor  now  demands  that  it  shall  be  put  on  a  par  with  capital  to  the  extent 
that  "the  living  wage"  shall  be  given  at  least  the  same  consideration  as  "the  fair 
return"  in  all  electric  railway  settlements.  It  is  a  fact  of  tremendous  signifi- 
cance in  this  entire  problem  that  a  great  body  of  law  and  precedents  has  been 
built  up  in  support  of  "the  fair  return"  on  the  basis  of  capital's  constitutional 
guaranties,  while,  on  the  other  hand,  laws  and  precedents  in  support  of  "the  living 
wage"  have  to  fight  their  way  to  recognition  without  the  support  of  the  consti- 
tution. From  the  point  of  view  of  economic  theory,  social  justice,  and  political 
expediency,  however,  it  seems  clear  that  labor's  claim  to  the  living  wage  must 
be  fully  recognized.  If  this  be  admitted,  we  have  two  fundamental  elements 
in  the  cost  of  street  railway  service,  namely,  the  cost  of  labor  on  the  basis  of  the 
living  wage,  and  the  cost  of  capital  on  the  basis  of  the  fair  return,  and  the  public, 
for  whom  the  service  is  rendered,  must  count  upon  paying  for  the  service  a  sum 
sufficient  fully  to  cover  both  of  these  elements  of  cost. 

Nevertheless,  it  is  true  that  local  transportation  is  a  public  ser\'ice.  The 
cars  are  not  run  primarily  for  the  purpose  of  enabling  capital  to  make  a  profit 
or  labor  to  make  a  living.  Neither  capital  nor  labor  has  any  right  in  the  electric 
railway  business  except  as  it  is  rendering  public  service.  The  electric  railway 
problem,  obviously,  cannot  be  solved  except  on  the  basis  of  public  service,  and  the 
public  cannot  expect  to  get  the  service  without  providing  for  the  adequate  reward 
of  both  capital  and  labor.  I'luler  |)rivatc  management,  capital  will  continue  to 
claim  something  more  than  a  lair  return,  and  labor  may  properly  demand  a  living 
wage,  and,  if  it  assumes  a  share  in  the  responsibility  of  the  industry  to  the  public, 
it  may  demand  something  more.  But  it  is  always  to  be  kept  in  mind  that,  in 
the  very  nature  of  the  case,  transportation  or  any  other  public  service  must  be 
rendered  at  the  lowest  practicable  cost ;  and,  therefore,  under  public  management 
"the  fair  return"  and  "the  living  wage"  will  he  the  measures  of  the  cost  of  capital 
and  labor,  respectively.  The  public  nature  of  the  business  and  the  exigencies 
of  the  present  period  of  high  costs  combine  to  suggest  that  transportation  service, 
to  be  cheap,  must  be  rendered  on  the  basis  of  community  self-help,  rather  than 
community  dependence  upon  private  initiative. 


Chapter  L 

THE    FOUR    CHOICES 

In  seeking  a  solution  of  the  general  problem  of  electric  railway  transporta- 
tion, it  seems  clear  from  the  standpoint  of  the  public  that  the  first  thing  to  be 
determined  is  the  character  of  the  public  relations  of  the  industry.  Four  courses 
are  open  to  us :  First,  we  may  abandon  the  theory  of  public  interest  in  the  in-  / 
dustry  and  slip  the  leash  of  public  control,  leaving  the  electric  railways  to  go 
their  way  as  a  private  industry  and  work  out  their  own  salvation  as  a  speculative 
business  enterprise.  Second,  we  may  continue  and  perfect  the  theory  and  prac-  O- 
tice  of  public  regulation  under  the  police  power  by  giving  the  regulatory  com- 
missions a  free  hand,  with  contractual  obstacles  and  statutory  limitations  of  juris- 
diction removed,  at  least  so  far  as  they  relate  to  the  value  of  the  property,  the 
rate  of  return  to  capital,  the  wages,  hours  and  working  conditions  of  labor,  the 
extent  and  quality  of  the  service  to  be  rendered,  and  the  rates  to  be  paid  therefor. 
Third,  we  may  establish  a  more  intimate  contractual  relation  between  the  com-  i 
panics  and  the  public,  based  upon  some  type  of  service-at-cost  arrangement,  with 
the  public  in  control  oi  the  quantity  and  quality  of  the  service,  and  with  the  fares 
to  be  paid  by  the  car  riders  or  the  deficits  to  be  made  up  by  the  taxpayers  deter- 
mined from  time  to  time  by  some  automatic  or  semi-automatic  plan  without  the 
intervention  of  the  discretionary  power  of  public  regulatory  bodies.  Fourth,  we 
may  reject  entirely  the  policy  of  private  ownership  and  operation  and  proceed 
to  pay  oS  the  investors  who  have  loaned  their  money  in  aid  of  public  credit  and 
to  assume  full  and  direct  public  responsibility  for  the  production  of  the  service. 
True,  this  fourth  and  last  course  is  subject  to  two  possible  modifications.  We 
might  provide  for  the  solution  of  the  problem  of  capital  through  public  owner- 
ship, while  maintaining  private  operation  to  wrestle  with  the  problem  of  labor; 
or,  on  the  other  hand,  we  might  assume  responsibility  for  the  solution  of  the  labor 
problem  through  public  operation,  leaving  private  ownership  to  wrestle  in  a  limited 
way  with  the  problem  of  capital.  Obviously,  each  of  these  several  courses  is 
subject  to  almost  infinite  variation  in  the  details,  but  it  is  safe  to  say  that  any 
general  solution  of  the  problem  based  upon  evidence  presented  to  the  Commis- 
sion will  have  to  follow  the  thought  underlying  one  or  another  of  these  four 
main  courses;  and  it  may  be  that  differences  in  local  conditions,  physical,  eco- 
nomic, legal  and  political,  will  justify  the  adoption  of  different  courses  in  dif- 
ferent communities. 


623 


Chapter  LI 
ABANDONMENT  OF  THE  PUBLIC  INTEREST  NO  REMEDY 

Some  of  the  witnesses  before  the  Commission  raised  a  doubt  as  to  the  future 
of  the  electric  railway  industry  and  suggested  that  the  electric  railways  may 
even  now  be  getting  obsolete  as  public  utilities.  It  was  even  suggested  that  all 
the  special  burdins  now  levied  upon  the  electric  railways  because  of  their  privi- 
leged status  in  the  public  streets  be  removed,  and  that  the  regulation  of  their 
rates  by  public  authority  be  abandoned  in  order  that  they  may  be  in  a  position 
to  gird  themselves  for  the  battle  to  the  death  with  their  new  competitor,  the 
automobile.  It  was  suggested  that  only  in  this  way  will  it  be  possible  for  the 
electric  railways  to  prove  whether  or  not,  in  the  economy  of  modern  society, 
they  have  a  right  to  survive.  It  will  no  doubt  be  universally  admitted  that  a 
policy  of  public  regulation  or  public  ownership  that  would  retain  in  perpetuity, 
or  for  a  long  period  of  time,  an  instrument  of  service  after  it  had  become  obso- 
lete and  relatively  unserviceable  or  relatively  uneconomical,  would  be  most  un- 
fortunate. However,  the  overwhelming  weight  of  evidence  before  the  Commis- 
sion is  to  the  effect  that  the  electric  railway  is  still  the  most  economical  and  effi- 
cient agency  for  local  transportation  ser\-ice  and  that  no  rival  transportation 
agency  is  yet  in  sight  that  could  even  hope  to  supplant  the  electric  railway  com- 
pletely. While  it  may  be  that  the  electric  railway  is  becoming  obsolete  in  cer- 
tain locations  and  for  certain  types  of  transportation  service,  the  enormous  aiul 
increasing  volume  of  the  service  that  it  actually  renders,  and  the  vast  and  in- 
creasing sum  that  the  public  is  willing  to  pay  for  the  service  it  renders,  arc  sufli- 
cient  proof  of  the  claim  to  continued  recognition  as  a  public  utility. 

To  most  of  the  witnesses  who  appeared  before  the  Commission  it  would  be 
unthinkable  that  the  public  should  now  "wash  its  hands  of"  the  electric  railwavs 
and  relegate  them  to  the  status  of  a  purely  private  industry.  This  course  woul<i 
withdraw  from  capital  the  promise  of  a  fair  return  and  would  withhold  from 
labor  the  hope  of  a  living  wage;  and  so  far  as  the  public  is  concerned,  it  would 
leave  its  vital  transportation  interests  subject  to  the  caprice  of  economic  fortune- 
and  the  uncertaiiUy  of  private  industrial  struggle.  The  policy  of  "hands  oft" 
is  clearly  impossible  so  long  as  the  rails  and  the  wires  occupy  the  highways, 
unless  we  are  willing  also  to  give  up  the  predominance  of  the  public  interest  in 
the  streets  themselves.  It  does  not  follow  from  this  conclusion  that  no  public 
burdens  now  laid  upon  the  electric  railways  should  be  removed,  or  that  no  equal 
ization  of  the  restrictions  of  regulation  shall  be  effected  as  between  the  electric 
railways  and  their  c(>m|H-titors.  The  fact  that  we  cannot  afford  to  withdraw 
the  strung  hand  of  governmental  control  does  not  mean  tlKit  we  must  hold  the 
electric  railways  by  the  throat  while  their  competitors  rob  them.     But  the  logic 

624 


Abandonment  of  Control  625 

of  the  situation  demands  that  public  policy  go  forward,  not  backward;  that  the 
electric  railways,  instead  of  being  relieved  of  public  regulation,  be  brought  more 
and  more  closel}-  under  supervision.  The  need  now  is  that  the  public,  having 
grasped  the  function  of  regulation,  shall  not  stop  with  interference  and  the 
paralysis  of  private  initiative,  but  shall  go  forward  to  the  acceptance  of  public 
responsibility.  It  is  not  less  public  regulation,  but  more  public  initiative  that  is 
needed. 


I  Chapter  LIl 

COMMISSION    REGULATION    NOT    ADEQUATE    AS    A 
SOLUTION    OF    THE    PROBLEM 

The  second  course  open  to  vis  in  seeking  a  general  solution  of  the  electric 
railway  problem  is  along  the  lines  which  have  already  been  developed  to  a  con- 
siderable extent  by  the  exercise  of  the  police  power  through  permanent  regula- 
tory commissions.  In  Chapter  XLVI  of  this  report  I  reviewed  the  state  regu- 
lation movement  and  its  successes  and  failures  as  shown  by  the  evidence  pre- 
sented to  the  Commission. 

Dependence  upon  the  police  power  as  a  means  of  solving  the  electric  rail- 
way problem  does  not  necessarily  mean  unrestricted  state  regulation,  but  under 
certain  conditions  it  might  lake  the  form  of  local  regulation,  and  under  certain 
other  conditions  it  might  take  the  form  of  a  combination  of  local  and  state  regu- 
lation through  cooperative  governmental  action.  Thus  far,  however,  the  gen- 
eral regulatory  movement  in  recent  years  has  been  mainly  in  the  direction  of 
exclusive  state  regulation,  and  when  the  regulatory  method  is  put  forward  as 
the  solution  of  the  problem,  it  is  ordinarily  understood  to  mean  regulation  by 
state  commissions  unrestricted  by  the  terms  of  local  franchise  contracts.  In 
attempting  to  assess  the  availability  of  this  remedy  we  are  compelled  to  make 
answer  to  these  questions:  How  does  it  safeguard  the  interests  of  capital? 
How  does  it  safeguard  the  interests  of  labor?  How  does  it  safeguard  the  in- 
terests of  the  public? 

From  the  point  of  view  of  capital,  unrestricted  state  regulation  can  offer 
no  guaranty  except  the  right  to  charge  just  and  reasonable  rates,  coupled  with 
the  obligation  to  render  adequate  service,  in  the  hope  that  under  these  condi- 
tions the  electric  railway  industry  may  be  able  to  rihahilitate  itself  and  reestab- 
lish its  credit.  Capital  may  demand  the  right  to  earn  a  fair  return  upon  the  fair 
value  of  the  pro])erty  devoted  to  the  public  service,  always  subject  to  the  funda- 
mental limitation  recognized  in  the  law  that  rates  shall  be  reasonable  also  from 
the  point  of  view  of  the  public.  There  is  considerable  discord  among  the  voices 
representing  capital  with  respect  to  the  benefits  derived  from  our  .systems  of  state 
regulation  up  to  the  present  time,  but  the  undercurrent  of  thought  among  the 
company  representatives  seems  to  be  that  state  regulation  is  the  lesser  of  two 
evils,  and  that  on  account  of  the  recognized  public  nature  of  the  business,  the 
legal  precedents  already  cstabli.shed,  and  the  political  temper  of  the  times,  some 
sort  of  public  regulation  nnist  be  accepted,  and,  if  so,  state  regulation  is  much 
preferable  to  local  regulation. 

To  answer  the  demands  of  capital  in  the  present  status  of  the  industry, 
and  to  solve  the  problem  of  electric  railway  credit,   state   regulation   would  at 

626 


Commission  Regulation  Inadequate  627 

least  have  to  be  less  restricted  and  more  comprehensive  than  it  has  been  hitherto. 
Obviously,  it  cannot  fully  protect  capital  where  its  jurisdiction  is  limited  by  the 
obligations  of  municipal  franchise  contracts  with  respect  to  construction,  service, 
and  rates.  From  this  point  of  view,  therefore,  state  regulation,  in  order  to  be 
a  sufficient  remedy  for  existing  difficulties,  must  be  freed  from  these  local  re- 
strictions and  be  put  in  a  position  where  it  can  move  rates  either  upward  or 
downward  and  can  establish  and  modify  standards  of  service  from  time  to  time. 
Furthermore,  in  view  of  the  proven  weaknesses  in  the  general  financial  structure 
of  the  electric  railways,  state  regulation  cannot  be  elYective  in  permanently  re- 
storing credit  unless  it  is  extended,  as  suggested  by  Mr.  W.  E.  Creed,  to  cover 
the  authority  to  compel  reorganizations  and  the  scaling  down  of  securities  and 
fixed  capital  obligations  to  a  point  where  they  will  closely  correspond  with  the 
recognized  financial  facts.  Moreover,  state  regulation,  to  be  measurably  effec- 
tive as  a  means  of  restoring  credit,  would  need  to  be  so  extended  as  to  have 
control  over  the  public  burdens  imposed  upon  the  electric  railways  through  taxa- 
tion and  otherwise,  and  also  so  as  to  have  ultimate  control  of  the  wages,  hours 
and  conditions  of  labor,  upon  which  operating  expenses  so  largely  depend. 

In  brief,  state  regulation  cannot  solve  the  electric  railway  problem  from  the 
point  of  view  of  capital  and  credit,  unless  it  is  made  much  more  comprehensive 
than  it  is  at  the  present  time,  and  even  then  capital  cannot  be  guaranteed  the 
enjoyment  of  a  fair  return  or  the  ultimate  security  of  the  investment,  except  as 
the  revenues  derived  from  the  service  at  rates  that  are  not  in  excess  of  the  reason- 
able value  of  the  service  to  the  public  are  sufficient  to  pay  the  expenses  of  opera- 
iton  and  yield  the  required  profit  for  the  investors.  It  must  be  admitted,  how- 
ever, that  the  idea  of  state  regulation,  even  as  applied  to  the  electric  railway 
business,  might  be  so  developed  as  to  include  as  a  part  of  the  rate  schedule  the 
imposition  of  standby  charges  upon  the  communities  served  or  upon  individual 
properties  receiving  the  benefit  of  the  service,  and  that  this  source  of  revenue 
supplementary  to  the  revenues  derived  from  fares  might  yield  a  substantial  part 
of  the  cost  of  local  transportation.  The  right  of  state  commissions  to  assess 
against  municipalities  the  cost  of  public  utility  service  directly  chargeable  to  the 
general  public  has  been  firmly  established  in  the  case  of  water  and  lighting 
utilities.  For  our  present  discussion  the  most  important  precedent  is  the  charge 
levied  against  municipalities  for  fire  service  rendered  by  a  private  water  com- 
pany. This  service,  ordinarily,  involves  the  consumption  of  small  quantities  of 
water,  but  it  assumes  large  expenditures  in  the  preparation  for,  and  in  the  main- 
tenance of.  readiness  to  serve.  In  just  what  form  such  an  extension  of  the  rate- 
fixing  authority  of  the  state  commissions  with  respect  to  the  electric  railway  in- 
dustry could  or  should  be  exercised  has  not  thus  far  been  suggested  in  detail, 
but  the  theory  of  such  a  policv  must  not  be  confused  with  the  idea  of  public  sub- 
sidies. State  regulation  through  the  police  power  does  not  contemplate  the 
granting  of  subsidies,  or  the  imposition  of  deficits  upon  the  taxpaying  public. 
The  idea  here  under  discussion  is  that  state  regulation,  being  responsible  for  the 
assessment  of  the  cost  of  service  upon  those  who  consume  or  benefit  'by  the 
service,  may  conceivably  include  in  an  electric  railway  rate  schedule  certain 
charges  against  property  or  against  the  communities  calculated  to  cover  the  cost 


628  Electric  Railway  Problem 

of  the  portion  of  the  service  that  is  rendered  for  the  benefit  of  property  or  for 
the  benefit  of  the  public  at  large.  There  could  be  no  guaranty  that  the  revenues 
derived  from  the  rate  schedule  would  be  sufricient  to  pay  the  full  cost  of  the 
service.  Furthermore,  it  is  not  a  part  of  the  function  of  state  regulation  to  com- 
pel potential  consumers  to  consume,  and  this  consideration  may  present  a  serious 
obstacle  to  the  assessment  of  a  readiness-to-serve  charge  in  the  manner  just  sug- 
gested, for,  in  the  electric  railway  business,  individual  property  owners  do  not 
maintain  physical  connections  with  the  electric  railways,  voluntarily  arranged  for 
and  continued,  as  is  true  in  the  case  of  most  other  public  utilities. 

Another  extension  of  the  scope  and  authority  of  the  regulatory  commissions 
that  is  essential  from  the  point  of  view  of  capital  is  the  power  to  regulate  com- 
petitive agencies  of  public  transportation  service,  either  through  the  total  exclu- 
sion of  competition,  or  at  least  through  the  imposition  upon  competitive  agencies 
of  the  same  burdens  and  service  obligations  that  apply  to  the  electric  railways. 

Thus,  it  will  be  seen  that  from  the  standpoint  of  capital  the  exercise  of  the 
police  power  as  a  means  of  solving  the  electric  railway  problem  is  dependent 
upon  a  concentration  of  authority  and  responsibility  in  the  established  regulatory 
commissions,  and  a  great  expansion  of  their  functions ;  and  even  on  this  basis, 
capital  must  accept  reorganization  and  the  reconstruction  of  its  permanent  obliga- 
tions, and  in  the  end  continue  to  assume  the  risk  that  as  an  unsubsidized  utility 
the  electric  railways  may  prove  unprofitable.  In  other  words,  state  regulation 
will  have  to  go  a  great  deal  farther  than  it  has  gone,  and  the  result  will  still  be 
in  doubt. 

From  the  point  of  view  of  labor,  state  regulation  cannot  offer  a  solution  of 
the  electric  railway  problem  unless  the  commissions  are  given  authority  to  pre- 
scribe the  wages,  hours  and  conditions  of  work,  and  to  compel  the  employing 
companies  to  meet  the  requirements  as  prescribed.  Moreover,  as  capital's  right 
to  a  fair  return  is  a  fundamental  constitutional  condition  of  the  exercise  of  the 
police  power,  so,  if  labor  is  to  be  protected  by  a  plan  based  upon  the  use  of  the 
police  power,  it  must  also  receive  either  constitutional  or  statutory  guaranties  of 
the  living  wage  or  of  some  other  standard  of  compensation  corresponding  to  "the 
fair  return"  to  ca|)ital.  Moreover,  dependence  upon  state  regulation  as  the  ex- 
clusive means  of  solving  the  electric  railway  problem  involves  the  acceptance  of 
the  principle  laid  down  by  the  United  States  Supreme  Court  in  upholding  the 
Adamson  Law.  to  the  effect  that  labor,  as  well  as  capital,  when  accepting  em- 
ployment in  an  industrj-  affected  with  a  public  interest  becomes  subject  to  public 
regulation. 

From  the  ()oint  of  view  of  the  public,  exclusive  state  regulation  violates 
the  general  principle  of  municipal  home  rule  and  specifically  restricts  the  power 
of  the  municipality  to  deal  as  it  sees  fit  with  a  public  function,  primarily  local 
and  in  many  ways  interrelated  with  the  public  functions  for  which  municipalities 
arc  deemed  to  be  responsible.  Moreover,  exclusive  state  regulation  deprives  the 
people  of  the  community,  who  pay  for  the  service,  of  the  right  to  prescribe  the 
extent  and  (|uality  of  the  .service  for  which  they  are  paying,  and  removes  to  a 
public  body,  responsible,  so  far  as  it  is  responsible  at  all.  to  a  much  wider  con- 
stituency, the  control  of  one  of  the  most  intimate  public  functions  of  urban  com- 


Commission  Regulation  Inadequate  629 

muiiity  life.  As  a  practical  matter,  the  municipalities  feel  that  local  transporta- 
tion ought  to  be  responsive  to  the  needs  and  to  the  will  of  those  for  whom  the 
service  is  designed ;  that  transportation  issues  are,  in  the  fundamental  and  appro- 
priate sense,  political  questions;  that  their  removal  from  the  arena  of  municipal 
politics  represents  an  unjustified  curtailment  of  municipal  powers  and  results  in 
an  atrophy  of  some  of  the  vital  organs  of  the  local  body  politic ;  and  that  the  state 
commissions,  through  their  remoteness  from  the  people  constituting  the  local 
public,  tend  more  and  more  to  become  subservient  to  the  influence  of  organized 
capital  which  has  the  means  and  knows  the  ways  of  creating  the  atmosphere 
about  them.  These  particular  objections  on  the  part  of  the  local  public  to  ex- 
clusive state  regulation  can  be  overcome  only  by  a  substitution  of  local  regu- 
lation, or  by  the  establishment  of  complete  political  control  over  the  state  com- 
missions. Either  of  these  modifications  of  the  state  regulation  policy  meets  with 
the  violent  opposition  of  capital. 

Perhaps  the  most  important  consideration  in  favor  of  the  policy  of  state 
regulation  is  that  it  provides  an  official  tribunal,  presumed  to  be  impartial,  by 
which  the  value  of  the  property  devoted  to  public  service  can  be  definitely  estab- 
lished for  rate-fixing  purposes.  The  theories  of  public  utility  valuation  advanced 
by  different  parties  in  interest  are  so  various  that  it  is  generally  impossible  to 
arrive  at  a  determination  of  the  amount  of  the  investment  upon  which  capital 
is  entitled  to  earn  a  fair  return,  except  through  the  exercise  of  the  informed 
judgment  of  a  public  body  before  which  the  conflicting  claims  and  the  evidence 
in  their  support  can  be  laid.  Under  most  conditions  a  fair  value  could  not  be 
arrived  at  through  negotiation,  for  this  one  reason  if  for  no  other,  namely,  that 
electric  railway  properties  have  been  subjected  to  so  many  complex  obligations 
as  to  leave  the  management  without  power  to  negotiate  a  value  unless  the  sum 
total  of  the  values  already  pledged  is  accepted  by  the  public  as  an  irreducible 
minimum.  It  is  at  least  doubtful,  in  view  of  the  evidence  laid  before  the  Com- 
mission and  of  other  well-known  or  highly  suspected  facts,  whether  it  is  at  all 
practicable  to  establish  a  fair  value  by  negotiation  except  in  certain  unusual  cases. 

The  advantage  of  a  definite  valuation  procedure  as  a  part  of  the  machinery 
of  state  regulation  is  offset  in  a  measure  by  the  fact  that  valuations  established 
in  this  way  are  generally  valuations  for  rate  or  capitalization  purposes.  They 
do  not  fix  the  purchase  price  at  which  the  electric  railway  property  may  be 
acquired  by  the  community,  nor  do  they  provide  a  means  by  which  the  value  of 
the  property  can  be  in  whole  or  in  part  amortized  out  of  earnings  for  the  benefit 
of  the  public  and  to  facilitate  the  transfer  of  title  to  the  community.  Even  here, 
the  state  commission  may  be  used,  as  it  is  in  Wisconsin,  as  an  agency  for  deter- 
mining the  value  of  the  property  for  public  purchase  when  the  community  has 
determined,  under  the  option  given  it  by  the  indeterminate  permit  law,  to  take 
over  a  private  utility ;  but  this  does  not  provide  a  means  by  which  the  muni- 
cipality can  prepare  long  in  advance  for  the  municipalization  of  an  electric  rail- 
way through  contract.  It  can  hardly  be  doubted  that  the  policy  of  unrestricted 
state  regulation,  in  the  main,  assumes  the  permanency  of  the  existing  ownership, 
and  does  not  concern  itself  with  an  ultimate  transfer  of  ownership  to  the  public. 
\\'hile  it  cannot  be  said  that  the  system  of  unrestricted  state  regulation  is  directly 


630  Electric  Railwav  Problem 

opposed  to  ultimate  public  ownership,  it  is  clear  that  in  most  cases  a  system  of 
state  regulation  tends  automatically  to  tie  the  hands  of  the  community  in  its  ef- 
forts to  take  over  the  utilities  for  public  ownership  and  operation. 

In  conclusion,  it  is  clear  that  we  have  not  yet  anywhere  worked  out  a  system 
of  regulation,  through  the  police  power,  adequate  to  meet  completely  the  present 
crisis  in  the  electric  railway  industry,  and  that  no  plan  based  upon  this  principle 
has  thus  far  been  suggested  that  is  not  subject  to  fatal  objections  from  the  stand- 
point of  capital,  from  the  standpoint  of  labor,  or  from  the  standpoint  of  the 
public.  Undoubtedly,  there  is  great  merit  in  the  regulatory  theor}-,  but  in  its 
practical  application  it  involves  so  high  a  degree  of  political  and  administrative 
intelligence  and  integrity  as  to  leave  us  with  the  conviction  that  a  community,  if 
it  can  successfully  apply  the  regulator)-  policy  to  the  existing  requirements  of  the 
electric  railway  situation,  is  capable  of  any  achievement  not  inherently  impossible. 


Ckapter  LIII 
WHERE    SERVICE    AT    COST    FALLS    SHORT 

The  third  course  open  as  a  means  of  solving  the  electric  railway  problem  is 
the  establishment  of  new  contractual  relations  between  the  companies  and  the 
government  upon  the  basis  of  service  at  cost.  On  the  public  side  these  contracts 
may  be  entered  into  either  by  the  municipalities  or  by  the  states.  In  general,  the 
theory  of  the  service-at-cost  contract  is  that  the  amount  of  capital  invested  in  the 
public  service  and  the  annual  rate  of  return  upon  it  shall  be  fixed  by  agreement ; 
that  operating  expenses  shall  be  controlled  by  some  arbitrary  device  such  as  an 
annual  budget  or  a  car  mile  allowance,  supplemented  by  a  certain  degree  of  dis- 
cretionary interference  by  the  supervising  authority,  or  else  by  some  sliding  scale 
or  bonus  scheme  to  give  the  management  incentive  for  economy ;  that  the  property 
shall  be  maintained  at  all  times  in  good  operating  condition ;  that  rates  shall  be 
flexible  and  shall  be  adjusted  automatically  or  semi-automatically  from  time  to 
time  s'o  as  to  produce  revenues  sufficient  to  cover  the  full  cost  of  the  service ;  and 
that  the  community  shall  have  the  option  to  take  over  the  property  for  public 
ownership  and  operation  upon  payment  of  the  recognized  capital  value. 

I  have  analyzed  at  considerable  length,  in  Chapter  XLI  of  this  report, 
service-at-cost  plans  that  have  been  worked  out  in  various  communities.  They 
differ  in  many  important  details,  and  in  some  cases  they  depart  considerably 
from  the  outline  just  given. 

In  considering  the  availability  of  service  at  cost  as  a  means  of  solving  the 
electric  railway  problem  we  must  again  answer  these  questions :  How  will  it 
safeguard  the  interests  of  capital?  How  will  it  safeguard  the  interests  of  labor? 
And  how  will  it  safeguard  the  interests  of  the  public? 

The  service-at-cost  plan  is  the  solution  chiefly  urged  by  the  representatives 
of  capital  at  the  hearings  before  the  Commission.  Like  state  regulation,  the 
service-at-cost  plan  recognizes  the  essential  importance  of  the  determination  of 
the  amount  of  the  investment,  but  depends  for  this  determination  upon  negotia- 
tion and  agreement.  The  theory  of  service  at  cost  is  based,  not  upon  the  exercise 
of  the  police  power,  but  upon  contract,  and,  therefore,  at  the  outset  no  service- 
at-cost  plan  can  be  put  into  effect  unless  the  company  accepts  the  proposed  valua- 
tion. This  was  true  even  in  Cleveland  where  the  company's  capital  stock  was 
cut  down  to  55  per  cent  of  par  as  the  result  of  a  long  and  bitter  struggle  and  a 
final  compromise  with  respect  to  the  value  of  the  property.  This  fundamental 
element  in  the  service-at-cost  plan  obviously  affords  to  the  capital  already  invested 
a  protection  that  is  theoretically  much  more  complete  than  the  protection  afforded 
by  public  regulation  under  the  police  power.  Whether  or  not  this  protection  be- 
comes  practically  effective   depends   upon   the   company's   ability   to   induce   the 

631 


632  Electric  Railway  Pkokle.m 

public,  as  the  price  of  service  or  as  the  price  of  peace,  to  accept  and  guarantee  a 
valuation  satisfactory  to  the  investors.  Theoretically,  also,  the  service-at-cost 
plan  gives  to  capital  a  much  better  assurance  of  a  fair  return  than  is  afforded  by 
state  regulation.  In  the  first  place,  the  service-at-cost  plan  fixes,  once  for  all, 
either  the  minimum  or  the  absolute  rate  of  return,  while  state  regulation  fixes 
the  rate  of  return  on  occasion  and  may  change  it  from  time  to  time  as  conditions 
or  policies  change.  It  is  true  that  some  of  the  witnesses  favoring  the  service- 
at-cost  plan  as  a  protection  to  capital  insisted  that  the  allowed  rate  of  return  be 
subject  to  future  adjustment  with  changes  in  the  money  market,  but  it  was 
brought  out,  upon  cross-examination,  that  capital  would  object  to  the  plan  if 
there  was  to  be  a  possibility  that  the  rate  of  return  would  be  adjusted  downward. 
Finally,  capital  finds  in  the  service-at-cost  plan  a  much  better  ultimate  protection 
of  its  investment  than  it  receives  under  state  regulation,  for  in  some  cases  the 
established  capital  value  fixes  the  ultimate  purchase  price,  and  in  all  cases  it 
tends  to  establish  a  presumption  that  if  the  property  is  acquired  the  price  paid 
will  be  no  less  than  the  value  recognized  in  the  contract.  The  whole  tendency 
of  the  service-at-cost  plan  is  to  give  security  to  the  investment  and  to  the  annual 
return  upon  it,  and,  at  the  same  time,  to  eliminate  the  opportunity  for  specula- 
tive profits.  Still,  service  at  cost  does  not  give  absolute  assurance  to  capital 
unless  it  is  accompanied  by  positive  and   permanent   guaranties. 

In  the  discussion  of  service-at-cost  plans  before  the  Commission,  it  became 
clear  that  under  private  management  the  representatives  of  capital,  notwith- 
standing their  devotion  to  the  service-at-cost  principle,  are  unwilling  to  accept  a 
diet  of  bread  and  water  seven  days  in  the  week  and  fifty-two  weeks  in  the  year. 
They  ask  for  security  at  a  fixed  rate  of  return  and  a  chance  to  earn  something 
more  as  a  reward  for  efficient  management  or  as  the  result  of  fortunate  develop- 
ments in  the  industry.  A  service-at-cost  plan  that  gives  an  ultimate  guaranty 
to  the  capital  invested  and  assumes  the  obligation  to  pay  tlie  fixed  rate  of  return 
would  reduce  the  entire  investment  to  the  basis  of  mortgage  bonds,  and  would 
practically  eliminate  capital  so  far  as  its  active  participation  in  the  enterprise  and 
its  controversy  with  opposing  interests  are  concerned.  Those  who  spoke  for 
capital  in  the  proceedings  before  the  Commission  are  not  yet  quite  ready  to  accept 
this  position  for  it.  It  is  true  that  no  one  of  the  service-at-cost  plans  thus  far 
put  into  practical  operation  has  gone  to  the  length  of  relegating  capital  to  this 
acquiescent  and  inactive  condition. 

From  the  facts  that  were  brought  out  in  the  lestmony  it  is  manifest  that  the 
service-at-cost  plan,  if  it  is  fully  to  satisfy  the  demands  of  capital  and  fully  to 
restore  electric  railway  credit,  must  either  go  farther  in  the  direction  of  public 
guaranty,  or  else  must  draw  back  from  the  fundamental  theory  of  service  at  cost 
and  provide  for  a  speculative  opportunity  in  addition  to  an  assured  minimum 
return.  In  other  words,  from  the  point  of  view  of  capital,  service  at  cost  must 
either  go  farther  and  reduce  the  investment  to  the  status  of  carefully  protected 
mortgage  bonds,  or  else  it  must  draw  hack  with  respect  to  the  limitations  it  now 
places  upon  the  reward  of  the  investor.  Moreover,  without  a  downright  public 
guaranty,  capital  is  still  subject,  under  the  .service-at-cost  plan,  to  the  risk  that 
the  enterprise  may  he  a  losing  one  at  any  rates  of  fare  that  may  be  charged; 


Service  at  Cost  Falls  Short  633 

while,  on  tlie  other  hand,  if  the  contract  contains  no  maximum  fare  Hmit,  it  is 
relieved  of  the  limitation  prescribed  by  the  courts,  in  dealing  with  the  police 
power,  that  the  rates  charged  shall  not  exceed  the  fair  value  of  the  service  to  the 
public.  Theoretically,  subject  to  these  final  uncertainties  of  the  financial  success 
of  the  enterprise,  the  service-at-cost  plan  relieves  capital  of  all  worry  about  ad- 
vancing wages,  the  increasing  cost  of  materials,  the  results  of  inefficient  manage- 
ment, the  public's  demands  for  more  and  better  service,  and  the  delays  of  regu- 
lating commissions.  All  these  are  swallowed  up  in  the  cost  of  the  service  and 
the  bills  for  them  are  passed  on  to  the  car  riders  or  to  the  taxpayers,  as  the  case 
may  be. 

\\'hat  does  service  at  cost  do  for  labor?  The  plans  thus  far  worked  out  do 
not  complete  the  triangle  of  public  utility  relationships  by  establishing  a  direct 
connection  between  the  public  and  the  employes.  At  the  same  time,  the  motive 
of  capital  to  exploit  labor  by  refusing  to  pay  a  living  wage,  or  to  grant  the  eight- 
hour  day,  or  to  provide  comfortable  and  convenient  conditions  of  work,  is  greatly 
weakened  wherever  the  service-at-cost  principle  is  strictly  applied.  When  the 
motive  for  efficiency  and  economy  is  restored  to  the  management,  representing 
capital,  through  concessions  to  the  speculative  interest,  then  the  old  inherent  an- 
tagonism between  capital  and  labor  is  to  that  extent  revived,  but,  on  the  whole, 
the  service-at-cost  plan  tends  to  make  the  demands  of  labor  more  or  less  a  matter 
of  indifference  to  capital,  as  it  is  fully  recognized  that  whatever  labor  costs  enter 
into  the  cost  of  service  will  be  taken  care  of  without  impinging  upon  the  security 
of  the  investors,  and  their  assured  return.  For  better  or  for  worse,  the  service- 
at-cost  plan  makes  the  public  acutely  conscious  of  the  problem  of  wages,  hours  and 
conditions  of  work  as  an  element  in  the  cost  of  transportation  service,  and  although 
the  plan  does  not  provide  for  a  direct  interference  by  the  representatives  of  the 
public  in  the  adjustment  of  the  relations  between  labor  and  capital,  it  stimulates 
public  interest  in  these  relations  and  tends  collaterally  to  the  adoption  of  mea- 
sures to  subject  the  demands  of  labor  to  public  scrutiny  and  official  determina- 
tion. In  its  immediate  effect,  the  service-at-cost  plan  undoubtedly  strengthens 
the  position  of  labor  to  the  extent  that  it  weakens  or  removes  capital's  opposition 
to  labor's  demands,  while  at  the  same  time  providing  an  automatic  readjustment  of 
revenues  to  supply  the  "wherewithal"  to  meet  labor's  requirements  as  fixed  by 
agreement  or  by  arbitration.  Under  the  service-at-cost  plan  labor  shares  with 
capital,  though  not  on  an  equal  basis,  the  ultimate  risk  that  the  enterprise  may 
not  be  financially  self-supporting. 

From  the  public  point  of  view,  theoretically,  the  service-at-cost  plan  pro- 
tects the  car  riders  from  the  burden  of  an  excessive  return  to  capital,  and  gives 
them  the  right  to  have  as  much  service  and  as  good  service  as  they  are  willing 
to  pay  for.  It  also  gives  the  community  the  right  to  acquire  the  property  at  a 
fixed  price  for  the  purpose  of  embarking  upon  the  policy  of  public  ownership 
and  operation.  It  might  provide  for  the  amortization  of  any  elements  of  dead 
capital  or  even  for  the  reduction  of  the  "capital  value"  and  the  purchase  price 
below  the  true  value  reflected  by  the  physical  property;  but  amortization  of  living 
capital  is  not  strictly  a  part  of  the  theory  of  service  at  cost,  except  as  it  may 
take  place  to  a  limited  extent  in  anticipation  of  future  obsolescence.     It  cannot 


634  Electric  Railway  Problem 

be  denied  that  the  public  may  receive  important  benefits  from  the  adoption  of  the 
service-at-cost  plan,  but  these  possible  benefits  are  likely  to  be  measured  by  the 
vigor  and  intelligence  displayed  by  the  community  in  driving  the  initial  bargain, 
and  by  the  alertness  and  efficiency  contiimously  displayed  thereafter  by  the  com- 
munity's representatives  in  administering  the  terms  of  the  agreement. 

From  the  public  point  of  view,  service  at  cost  is  a  "gold  brick"  unless  the 
contract  is  worked  out  on  a  basis  of  full  public  information  and  recognized 
equity.  It  is  admitted  by  everyone  that  public  cooperation  is  essential  to  the 
success  of  a  service-at-cost  plan  or  any  other  plan  for  the  rehabilitation  of  the 
electric  railways.  The  absence  of  public  cooperation  affects  not  only  the  in- 
terests of  capital  and  the  interests  of  labor,  but  even  reacts  adversely  upon  the 
interests  of  the  public  itself ;  yet  the  testimony  of  Secretary  Baker  and  other  wit- 
nesses familiar  with  the  long  struggle  that  finally  ended  in  the  acceptance  of  the 
Tayler  plan  in  Cleveland  proves  beyond  peradventure  that  service  at  cost  is  not 
a  patented  and  standardized  article  of  commerce  to  he  purchased  on  the  market 
by  any  community  wiicnever  it  feels  the  need  of  a  readjustment  of  its  relations 
with  the  local  electric  railway  system.  Service  at  cost,  from  the  public  point  of 
view,  can  be  successful  only  as  it  in  fact  subordinates  the  special  interests  of 
both  capital  and  labor  to  the  predominant  interests  of  the  public.  This  does  not 
mean  that  service  at  cost  must  pay  less  than  the  full  measure  of  the  fair  return 
and  the  living  wage,  but  that  if  the  public  interest  is  to  be  protected,  it  cannot 
tolerate  the  survival  of  the  motive  of  exploitation  in  either  capital  or  labor  as  an 
active  factor  in  the  detennination  of  their  compensation  for  the  service  they  ren- 
der in  supplying  local  transportation. 

Service  at  cost,  if  worked  out  and  adopted  in  a  way  that  protects  the  public 
interest,  necessarily  means  the  assumption  of  much  greater  public  initiative  and 
public  responsibility  for  the  character  and  the  cost  of  transportation  service. 
It  is,  in  its  necessary  characteristics,  a  long  steji  in  the  direction  of  public  owner- 
ship and  operation.  W'ithout  doubt,  any  community  that  succeeds  in  negotiating 
a  just  service-at-cost  contract,  and  that  through  a  series  of  years  succeeds  in 
administering  the  contract  in  such  a  way  as  to  protect  the  public  interest,  without 
infringing  upon  the  just  claims  of  both  capital  and  labor,  is  eminently  qualified 
to  undertake  and  make  a  success  of  public  ownership  and  operation.  It  seems 
inevitable  that  under  a  service-at-cost  contract  either  the  community  will  take 
a  more  and  more  active  part  in  the  management,  and  will  assume  a  greater  and 
greater  responsibility  for  the  supply  of  capital  required  from  time  to  time  in  the 
expansion  of  the  enterprise,  or  else  it  will  gradually  slip  back  into  a  subordinate 
position  while  the  speculative  interest  of  capital  and  the  self-serving  spirit  of 
labor  revive.  The  public  cannot  tolerate  an  offensive  and  defensive  alliance 
between  capital  and  labor  to  make  the  electric  railways,  under  service  at  cost 
or  any  other  plan,  a  private  enterprise  designed  primarily  for  the  benefit  of  those 
engaged  in  it.  instead  of  a  jiuhlic  utility  designed  primarilv  for  the  benefit  of 
those  who  need  the  service. 


Chapter  LIV 

PUBLIC    OWNERSHIP    AND    OPERATION    THE    ULTIMATE 

SOLUTION 

When  a  housewife  finds  through  a  long  succession  of  sad  experiences  that 
the  problem  of  "domestic  help"  is  destroying  the  peace  of  the  family  and  threat- 
ening it  with  financial  ruin,  her  best  course,  and  in  some  cases  her  only  course, 
is  to  set  the  children  to  work  and  organize  the  family  group  on  the  basis  of  self- 
help  without  the  intervention  of  "servants."  In  that  way  the  family  is  enabled 
to  "carry  on"  without  being  dependent  upon  the  hired  girl.  If  the  silver  is  stolen 
it  will  have  to  be  by  a  burglar,  not  by  the  scrub-woman ;  if  the  potatoes  are  burned 
and  the  dishes  broken  criticism  will  lose  its  edge  because  responsibility  will  not 
rest  upon  an  outsider ;  if  the  meals  are  not  on  time,  or  if  the  washing  is  unfin- 
ished, the  blame  cannot  be  laid  at  the  door  of  "striking"  domestics.  The  family 
learns  the  lesson  of  self-help,  is  educated  in  initiative  and  responsibility,  and  pays 
for  what  it  gets  and  gets  what  it  pays  for.     This  is  the  true  service  at  cost. 

Municipal  government  has  often  been  described  as  community  housekeeping, 
and.  without  question,  the  city  has  many  lessons  to  learn  from  the  well-ordered, 
domestic  household.  Not  the  least  of  these  is  the  lesson  that  when  the  public 
welfare  and  happiness  are  dependent  upon  the  efficient  performance  of  a  par- 
ticular community  function,  and  all  indirect  methods  of  getting  it  performed 
end  in  failure  or  bring  intolerable  collateral  results,  then  the  only  proper  thing 
to  do  is  to  perform  the  function  directly. 

It  may  be  assumed  that  the  essential  public  necessity  of  electric  railway 
service  has  been  proven,  and  that  in  any  case  the  public  must  take  the  ultimate 
responsibility  for  procuring  the  service  that  it  cannot  get  along  without.  In  its 
very  nature  the  electric  railway  industry  is  aiifected  with  a  public  interest  and 
cannot  possibly  be  left  to  be  carried  on  as  an  unregulated  private  business.  It 
has  been  shown  that  thus  far  various  systems  of  public  regulation  have  been 
tried  and  found  wanting,  as  proven  by  the  fact  that  never  before  was  the  electric 
railway  industry  in  such  a  desperate  condition  as  now,  and  never  before  was  the 
danger  of  the  ultimate  impairment  or  destruction  of  the  service  so  imminent  as 
now.  It  may  be  admitted  that  the  service-at-cost  plan  as  worked  out  in  Cleveland 
has  thus  far  proven  to  be  a  more  satisfactory  arrangement  than  any  other  worked 
out  under  private  management ;  yet  the  Cleveland  plan  already  shows  signs  of 
breaking  down.  Capital  is  demanding  that  some  of  the  very  fundamental  things 
in  it.  upon  which  its  acceptance  by  the  public  was  based,  shall  be  changed.  The 
public,  on  the  other  hand,  looks  upon  the  plan  as  defective  because  it  gives  the 
city  no  authority  to  intervene  in  labor  disputes  and  no  final  control  of  extensions, 
and  thus  leaves  the  public  without  adequate  protection  in  the  two  most  funda- 

635 


636  Electric  Railway  Problem 

mental  factors  of  transportation  service,  namely,  continuity  of  operation  and  con- 
tinuous expansion  of  facilities.  Even  with  its  faults,  the  Cleveland  plan  was 
achieved  only  through  a  decade  of  fierce  campaigning  with  unexampled  per- 
severance, financial  resourcefulness,  and  political  genius  in  command  on  the 
public  side.  It  is  doubtful  whether  there  is  a  single  municipality  in  the  United 
States  today  prepared  to  pay  the  cost  of  procuring  a  settlement  on  the  Cleveland 
basis,  and  certain  it  is  that  few,  if  any,  electric  railway  companies,  even  in  their 
period  of  critical  distress,  would  be  willing  to  concede  such  a  settlement  without 
a  bitter  and  prolonged  struggle.  Granting  the  merits  of  the  Cleveland  plan — 
and  they  are  many,  both  from  the  standpoint  of  the  public  and  from  the  stand- 
point of  capital — it  is  doubtful  whether  elsewhere  the  parties  can  afford  to  go 
through  the  painful  and  expensive  process  necessary  to  achieve  such  a  settle- 
ment, especially  when  it  does  not  establish  a  permanent  policy  or  furnish  a  final 
solution.  From  the  point  of  view  of  the  cost  of  the  service  it  can  hardly  be 
questioned  that  the  cost  of  capital  under  private  ownership  is  becoming  prohibi- 
tive, and  that  the  advantage  of  the  use  of  public  credit  as  a  means  of  supplying 
transportation  service  is  becoming  greater  all  of  the  time.  Likewise,  the  labor 
problem  presses  forward  more  and  more  as  one  that  cannot  be  solved  in  a  man- 
ner consistent  with  the  public  interest  without  public  intervention.  All  of  these 
things  point  to  the  conclusion  that  public  ownership  and  operation  of  electric 
railways,  at  least  to  the  extent  that  they  are  rendering  essential  transportation 
service  to  urban  communities,  is  inevitable. 

Having  admitted  that  the  electric  railway  is  an  essential  public  industry  in 
times  of  peace  as  well  as  in  times  of  war,  and  having  found  no  method  by  which 
the  legitimate  interests  of  capital  and  labor  can  be  fully  protected  under  private 
management  without  the  sacrifice  of  some  of  the  essential  characteristics  of  pub- 
lic service,  we  find  ourselves  in  the  position  of  the  housewife  who  reluctantly 
dismisses  the  hired  girl  and  organizes  the  family  to  operate  the  kitchen  and  tht 
laundry.  In  one  case,  as  in  the  other,  the  new  program  presents  many  ditticultics. 
Perhaps  the  housewife  has  pottered  around  for  a  score  of  years  without  learning 
how  to  cook.  Perhaps  the  city,  likewise,  has  pottered  around  for  a  generation 
or  two  without  having  learned  how  to  administer  j)ublic  affairs.  Politicians  in 
public  life  arc  among  the  most  ready  to  pay  tribute  to  their  own  incompetence 
and  lack  of  initiative.  They  shun  responsibility  and  a  man's  job.  Most  of 
them  oppose  the  policy  of  municipal  ownership,  and  their  opposition  is  due, 
in  great  measure,  to  their  consciousness  of  their  own  unfitness  to  undertake  big 
things  on  behalf  of  the  common  weal.  If  big  things  are  to  be  undertaken,  then 
there  is  danger  that  big  men  will  be  asked  to  do  them,  and  then  they  will  be  out 
of  power.  So  long  as  government  is  primarily  a  series  of  interferences  and 
exactions,  and  so  long  as  public  moneys  are  spent  on  jobs  where  the  performer 
docs  not  have  to  make  good,  any  ordinary  fellow  with  ambition  to  become  a  petty 
tyrant  is  qualified  for  public  office. 

It  is  a  trite  saying  that  the  men  of  initiative  and  force  and  ability  are  at  the 
present  time  engaged,  to  a  ver>'  great  extent,  in  the  game  of  money-making, 
and  that  so  long  as  men  of  constructive  ability  remain  private-minded  they  will 
seek  to   retain   the  opjiortunities   for  initiative  and   profit   that   have   heretofore 


The  Ultimate  Solution  637 

characterized  the  electric  railway  field  as  a  private  industry.  They  have  sought, 
and  to  a  considerable  extent  still  seek,  the  responsibility  for  doing  things,  while 
the  politicians  in  public  life  shun  the  acceptance  of  public  responsibility  for  these 
things,  although  the  responsibility  for  local  transportation  service  is  inherently 
and  inescapably  public.  The  greatest  obstacle  in  the  way  of  a  solution  of  the 
electric  railway  problem  is  the  shrinking  of  public  men  from  the  burdens  of 
constructive  responsibility  for  the  performance  of  public  work,  and  this  will- 
ingness of  private  men  to  assume  responsibility  for  public  work  in  the  hope 
and  expectation  of  being  able  to  exploit  the  public  need  for  private  gain.  Still, 
the  time  has  come  when  the  public  must  face  the  responsibility  that  it  can  no 
longer  shirk. 

It  is  not  now  a  question  of  a  nice  consideration  of  the  difficulties  in  the  way 
of  the  public  performance  of  a  public  function  for  the  purpose  of  determining 
whether  or  not  the  public  function  is  to  be  publicly  performed.  With  the  break- 
down of  private  agencies  for  the  performance  of  the  function,  public  ownership 
and  operation  become  inevitable.  The  first  step  toward  the  solution  of  the 
problem  is  the  acceptance  of  the  conclusion  that  it  must  be  worked  out  directly 
through  public  agencies.  With  that  necessity  admitted,  the  attention  of  the  coun- 
try and  the  experience  and  ability  of  the  leaders  of  capital,  of  labor,  and  of 
government  can  be  concentrated  upon  the  specific  measures  to  be  adopted,  upon 
the  removal  of  the  natural  and  artificial  difficulties  from  the  path  of  public  owner- 
ship and  operation,  and  upon  the  specific  constructive  measures  necessary  for  the 
effectualization  of  the  new  policy. 

It  is  only  the  most  hardy  and  unthinking  optimists  who  look  upon  the  tran- 
sition from  private  to  public  ownership  and  operation  of  the  electric  railways 
as  a  step  easy  of  achievement.  Immense  difficulties — legal,  contractual,  financial, 
administrative  and  political — stand  in  the  way.  Thus  far  our  governmental  struc- 
ture and  the  public  law  have  been  devised,  in  large  measure,  for  the  very  purpose 
of  preventing  governmental  agencies  from  assuming  public  responsibility  for 
enterprises  which  are  now  recognized  to  be  public  utilities.  Street  railway  sys- 
tems have  been  permitted  to  expand  and  consolidate  under  private  ownership 
without  respect  to  the  boundary  lines  of  municipalities  and  other  political  sub- 
divisions. Street  franchises  have  often  been  granted  for  long  periods  of  years, 
or  even  in  perpetuity.  Electric  railway  companies  and  their  superior  holding 
companies  have  not  been  prevented  from  issuing  securities  in  excess  of  the  value 
of  their  property  and  from  assuming  permanent  capital  obligations  that  are 
utterly  inconsistent  with  the  financial  soundness  of  the  electric  railways  as  a 
public  utility.  Municipal  debt  limits  have  been  established  and  debt-incurring 
powers  exhausted  for  other  purposes.  Municipalities  still  retain  boundary  lines 
that  are  not  coterminous  with  the  boundaries  of  the  communities  of  which  they 
are  supposed  to  be  the  organized  political  expression,  and  boundary  lines  that 
do  not  include  complete  transportation  units.  Civil  service  rules  and  other 
methods  designed  to  enforce  upon  those  temporarily  in  control  of  governmental 
departments  the  efficiency  and  nonpartisanship  which  they  naturally  shun  have 
built  up  barriers  against  the  free  development  of  constructive  policies  in  public 
administration.     These  and  other  difficulties,  most  of   them   self-imposed,   will 


638  Electric  Railway  Problem 

have  to  be  overcome  in  preparation  for  the  full  assumption  by  the  public  of  direct 
responsibility  for  local  transportation  as  a  public  function. 

With  these  artificial  difficulties  removed,  there  is  nothing  inherent  in  the 
construction  and  operation  of  electric  railways  that  calls  for  so  high  a  degree 
of  knowledge,  technical  skill,  perseverant  watchfulness,  fair-mindedness,  and 
political  sagacity  as  is  required  for  the  successful  protection  of  the  public  interests 
either  under  a  scheme  of  unrestricted  state  regulation  or  under  a  service-at-cost 
plan.  If  only  a  fraction  of  the  brains  and  energy  now  being  devoted  to  attempted 
solutions  of  the  electric  railway  problem  through  the  avoidance  of  public  owner- 
ship and  operation  were  directed  toward  the  removal  of  the  existing  obstacles 
in  the  way  of  that  policy  and  to  the  definite  formulation  of  constructive  measures 
to  make  the  policy  successful,  it  cannot  be  doubted  that  the  most  important  dif- 
ficulties in  the  way  of  an  ultimate  solution  of  the  electric  railway  problem,  just 
to  capital,  fair  to  labor  and  conducive  to  the  public  welfare,  would  quickly  dis- 
appear. 

The  history  of  the  electric  railway  industrj'  and  its  present  condition  are 
sufficient  proof  that  no  mere  policy  of  opportunism  will  suffice  to  solve  the  prob- 
lem. What  is  needed  is  a  definite,  comprehensive,  constructive  policy,  and  no 
such  policy  has  been  suggested  that  does  not  have  public  ownership  for  its  ulti- 
mate goal.  It  is  said  that  the  electric  railways  are  so  sick  that  they  cannot  sur- 
vive the  delay  while  the  public  ownership  ])rograni  is  being  worked  out,  and  that, 
therefore,  the  iminediaie  necessity  is  to  give  them  emergency  help  to  tide  them 
over  until  a  permanent  constructive  policy  can  be  adopted.  Many  suggestions 
for  immediate  or  emergency  assistance  have  been  made.  Doubtless,  some  of 
them  can  he  carried  out  without  serious  prejudice  to  the  permanent  solution. 
Exceptional  public  burdens  can  be  lifted  for  a  temporary  period;  temporary  fare 
increases  can  be  granted  within  limits  that  do  not  seriously  restrict  the  use  of 
the  cars;  equality  of  regulatory  treatment  can  be  meted  out  to  competing  jitneys; 
one-man  safety  cars  can  be  installed  and  other  economies  in  operation  effected; 
the  assessment  plan  can  be  used  or  public  credit  loaned,  where  the  constitution 
permits,  for  the  construction  of  extensions  and  the  provision  of  additional  facil- 
ities; the  powers  of  regulatory  commissions  can  be  extended;  and.  under  certain 
favorable  conditions,  service-at-cost  contracts  can  be  workctl  out  on  a  sound 
basis  as  a  step  in  the  direction  of  ultimate  public  ownership  and  operation.  The 
promptness  with  which  these  various  forms  of  relief  can  be  administered  varies 
largely  with  the  legal  conditions  prevailing  in  different  communities,  but  it  is 
of  the  greatest  importance  that  these  emergency  measures,  local  and  temporary 
in  their  nature,  shall  not  he  taken  on  a  basis  that  is  inconsistent  with  a  permanent 
constructive  policy,  or  that  will  delay  the  practical  working  out  of  .such  a  policy. 
The  work  that  will  take  the  longest  for  its  completion  ought  to  be  undertaken 
without  delay.  So  many  obstacles  have  been  put  in  the  wav  of  the  policv  of 
public  ownership  and  operation  upon  a  sound  and  efficient  basis  that  no  time 
should  be  lost  in  connneiuing  the  work  of  removing  the.se  obstacles. 

The  electric  railway  problem  is  extremely  urgent.  The  communities  are 
unre.idy  to  assume  the  responsibilities  that  rightfully  belong  to  them.  If  they 
stand  heli)lcss  to  undertake  the  function  of  local  transportation  and  yet  see  that 


The  Ultimate  Solution  639 

it  is  an  essential  public  function,  they  will  be  compelled  to  make  whatever  terms 
the  companies  and  the  employes  demand  of  them.  Such  a  condition  of  help- 
lessness in  the  face  of  public  necessity  is  a  confession  of  governmental  incom- 
petence, so  inconsistent  with  the  claims  of  democracy  as  an  instrument  of  com- 
munity welfare  that  it  cannot  for  a  moment  be  made  by  or  on  behalf  of  the  muni- 
cipalities and  the  commonwealths   of   America. 

What,  then,  are  the  main  outlines  of  the  program  of  preparation  for  the  ulti- 
mate solution  of  the  electric  railway  problem  through  public  ownership  and 
operation  ? 

At  the  outset,  the  fundamental  difficulty  in  the  establishment  of  new  rela- 
tions between  the  public  and  the  industry,  namely,  the  determination  of  the 
private  investment  used  in  the  public  service,  which  is  to  be  recognized  and 
protected,  must  be  overcome.  In  valuation  it  is  no  easy  thing  to  arrive  at  an 
authoritative  figure,  but  public  purchase  has  the  advantage  of  all  other  processes 
in  which  valuation  is  a  factor  in  this  respect,  namely,  that  when  the  purchase 
price  has  been  fixed  and  paid  the  matter  is  settled  for  all  time,  and  the  commtmity 
can  then  take  such  measures  as  it  may  find  necessary  to  reduce  and  ultimately 
wipe  out  the  capital  obligations  incurred  as  an  incident  of  the  purchase.  In  the 
case  of  public  acquisition  the  value  of  an  electric  railway  may  be  fi.xed  by  nego- 
tiation, but  the  chances  of  an  agreement  upon  a  figure  that  is  just  from  the 
public  point  of  view  are,  in  most  instances,  slight,  for  the  reasons  that  I  have 
already  given.  Therefore,  it  is  an  essential  and  fundamental  element  in  the 
program  of  preparation  for  public  ownership  that  in  all  cases  a  procedure  shall 
be  established  by  which  the  value  of  the  property  may  be  determined  on  a  just 
and  reasonable  basis  and  title  to  the  property  taken,  without  the  consent  of  the 
present  owners.  This  can  be  accomplished  under  the  right  of  eminent  domain, 
but  it  is  clear  that  ordinary  condemnation  proceedings,  however  adequate  for  the 
acquisition  of  parcels  of  real  estate  for  street  or  park  purposes,  may  not  be 
adequate  for  the  determination  of  value  of  so  vast  and  complex  a  property,  made 
up  of  so  many  technical  elements,  as  a  street  railway  system.  Under  certain  con- 
ditions, where  a  fully  equipped  state  public  service  commission  exists,  it  may  be 
practicable  and  advisable  to  confer  upon  this  commission  the  power  and  the  duty 
to  determine  the  fair  value  of  the  property  and  to  fix  the  purchase  price  to  be 
paid  for  it.  Under  other  circumstances,  it  may  be  desirable  to  establish  a  special 
condemnation  procedure  for  this  purpose.  This  particular  part  of  the  program 
is  beset  with  difficulties  and  some  danger,  but  it  ought  not  to  be  impossible  to 
devise  a  procedure  that  will  give  reasonable  assurance  of  a  just  result.  It  must 
be  remembered  that  the  property  of  an  electric  railway  is  already  devoted  to 
public  service,  and  that  there  should  be  no  presumption  against  the  public  in  the 
establishment  of  values  when  the  property  is  being  taken  merely  to  be  continued 
in  the  same  use  under  public  auspices. 

As  illustrating  some  of  the  possible  provisions  of  a  public  utility  condemna- 
tion law,  I  refer  again  to  the  Fowler  Municipal  Ownership  Bill  introduced  in  the 
Xew  York  State  Senate  in  March,  1920.  This  bill  provides  that  whenever  a 
municipality  desires  to  acquire  a  privately  owned  public  utility  it  may  make  appli- 
cation to  the  state  public  service  commission    for  a   determination  of   the   fair 


640  Electric  Railway  Problem 

value  of  the  utility  property.  In  such  a  case  the  municipality  will  have  full 
access  to  the  books,  records  and  accounts  of  the  utility  to  be  acquired,  and  free 
access  to  the  utility  property  for  the  purpose  of  securing  any  information  useful 
in  the  determination  of  the  amount  of  the  owner's  investment  in  the  property, 
the  present  condition  of  the  property,  the  revenues  derived  from  its  operation, 
the  cost  of  such  operation,  and  the  value  and  adaptability  of  the  property  to  pub- 
lic use,  and  the  nmnicipality  as  well  as  the  owner  of  the  property  is  given  the 
right  to  present  evidence  on  these  several  matters  at  public  hearings  to  be  given 
by  the  commission  before  it  makes  a  determination  of  value.  The  bill  also  pro- 
vides that  the  commission  in  fi.xing  the  value  of  the  property  "shall  take  into 
consideration  the  fact  that  the  property  to  be  acquired  is  already  devoted  to  the 
public  service  and  is  subject  to  the  obligations  and  limitations  imposed  upon  it  by 
the  laws  of  the  state  and  the  valid  franchise  contracts  under  which  the  property 
is  being  operated" ;  and  that  it  "shall  also  take  into  consideration,  among  other 
things,  the  amount  of  capital  honestly  and  prudently  invested  in  the  original  acqui- 
sition, construction  or  installation  for  utility  purposes  of  the  property  subject  to 
acquisition  by  the  municipality,  the  present  condition  of  such  property,  its  depre- 
ciation from  all  causes  and  its  adaptability  and  potential  usefulness  for  municipal 
utility  purposes."  Under  the  terms  of  the  Fowler  Bill  a  finding  of  fair  value 
by  the  public  service  commission,  if  offered  in  condemnation  proceedings  by  any 
party  in  interest,  would  constitute  prima  facie,  though  not  conclusive,  evidence 
of  such  value. 

After  adequate  provision  for  the  determination  of  the  value  of  electric  rail- 
ways for  public  purchase  through  the  exercise  of  the  power  of  eminent  domain, 
or  by  local  arbitration  or  agreement  subject  to  the  approval  of  the  proper  state 
authority,  has  been  made,  it  is  essential  that  effective  provisions  shall  be  made 
for  the  use  of  public  credit  to  whatever  extent  may  be  required  in  procuring  the 
funds  to  effect  the  purchase.  This  may  be  accomplished  through  a  revision  of 
debt  limitations,  or  possibly  through  the  enactment  of  legislation  similar  to  the 
Washington  and  the  Wisconsin  laws  which  I  have  described  in  Chapter  XLII 
of  this  report.  In  any  case,  the  financial  measures  adopted  to  make  public 
acquisition  of  the  electric  railways  practicable  must  be  generous  and  complete. 
If  they  are  so  restricted  or  inadequate  as  to  destroy  or  seriously  impair  the  eco- 
nomic advantage  in  the  use  of  public  as  compared  with  private  credit,  they  will, 
of  course,  tend  to  prevent  the  accomplishment  of  the  purpose  for  which  the 
entire  program  is  designed,  and  will  handicap  the  policy  of  public  ownership 
and  operation  at  the  start. 

In  view  of  the  extraordinarj'  development  of  large  electric  railway  systems 
which  not  only  supply  local  urban  transportation  in  the  strict  sense  of  the  term, 
but  also  .suburban  and  intcnirhan  service  through  areas  which  often  include  many 
municipalities,  it  is  necessary,  as  another  step  in  preparation  for  the  realization 
of  the  jwlicy  of  public  ownership  and  operation,  to  confer  upon  municipalities 
the  right  to  own  and  operate  transportation  lines  not  only  within  their  own  cor- 
porate limits  hut  within  their  immediate  environs,  and  in  many  cases  to  go  further 
and  provide  for  the  establishment  of  transportation  areas  coterminous  with  the 
territories  .served  by  existing  electric   railwav   svstems.  or  at   least   coterminous 


The  Ultimate  Solution  641 

with  the  largest  areas  in  which  the  public  interest  requires  that  electric  railway 
transportation  be  operated  as  a  unit.  In  some  cases,  no  doubt,  state  operation 
will  be  more  advantageous  than  either  municipal  or  district  operation.  While 
the  problem  of  determining  by  what  public  agencies  the  electric  railways  shall 
be  owned  and  operated  presents  some  difficulties,  it  is  by  no  means  insuperable. 
It  may  be  solved  in  different  ways  in  different  commonwealths. 

Another  essential  step  in  the  preparation  for  public  ownership  and  opera- 
tion is  legislation  under  which  individual  communities  not  yet  ready  to  take  over 
the  electric  railways  may  enter  into  contracts  with  them  on  some  basis  akin  to 
service  at  cost,  under  which  the  continuation  and  development  of  transportation 
service  may  be  assured  while  the  city,  the  district  or  the  state  is  preparing  to  put 
into  full  effect  the  policy  of  public  ownership  and  operation. 

Another  essential  step  in  the  program  is  the  enactment  of  legislation  under 
which  the  wages,  hours  and  conditions  of  work  on  publicly  owned  and  operated 
electric  railways  may  be  determined,  with  adequate  guaranties  that  the  just  in- 
terests of  labor  will  be  protected,  and  that  labor  shall  have  the  right  to  collective 
bargaining  and  participation  in  management  to  the  e.xtent  that  the  exercise  of 
these  rights  is  found  to  be  compatible  with  public  interest.  Such  legislation 
should  provide  for  the  modification  of  civil  service  rules,  where  they  e.xist,  so  as 
to  make  them  fully  adaptable  to  the  requirements  of  the  transportation  service. 

Still  another  step  is  the  enactment  of  legislation  giving  to  the  communities 
which  assume  responsibility  for  the  operation  of  the  transportation  service  the 
right  to  determine  how  the  cost  of  that  service  shall  be  paid,  whether  wholly 
from  the  collection  of  fares,  or  in  part  from  the  levy  of  standby  charges  upon 
property  or  persons  benefited,  or  wholly  or  in  part  from  general  taxation ;  also, 
whether  the  rate  schedule  shall  be  established  on  the  basis  of  the  uniform  flat 
fare,  or  on  the  basis  of  the  distance  tariff,  or  otherwise.  Street  railway  trans- 
portation being  an  essential  element  of  the  city  plan,  and  the  social  aspects  of 
street  railway  rates  being  of  vital  public  importance,  it  is  essential  that  the  com- 
munity where  the  service  is  rendered  should  have  these  matters  within  its  control. 

It  is  unfortunate  that  the  present  acute  crisis  in  electric  railway  transpor- 
tation should  have  arisen  at  a  time  when  the  country  was  so  poorly  prepared  on 
the  basis  of  experience  to  adopt  public  ownership  and  operation  as  a  general 
policy.  It  is  a  well-known  fact,  however,  that  most  of  the  chief  cities  of  Great 
Britain  went  to  public  ownership  and  operation  a  good  many  years  ago.  Lon- 
don County,  Birmingham,  Glasgow,  Liverpool,  Manchester,  Edinburgh,  Belfast, 
Leeds,  Sheffield,  Cardiff  and  100  other  cities  and  towns  of  Great  Britain  and 
Ireland  own  and  operate  the  tramway  systems  upon  which  they  depend  for  local 
transportation  service.  In  London  the  tubes  and  the  bus  lines  are  privately 
owned  and  operated.  Private  companies  own  and  operate  altogether  about  100 
tramway  systems  in  the  United  Kingdom,  but  outside  of  Bristol,  Dublin  and 
Cork,  company  operation  is  confined  for  the  most  part  to  small  and  medium- 
size  towns,  or  to  special  lines  rendering  suburban  service. 

The  Proceedings  include  very  little  first  hand  testimony  with  respect  to  the 
financial  condition  of  the  British  tramways.  In  my  own  testimony  I  called  at- 
tention to  the  statement  of  Sir  Eric  Geddes,  made  in  the  House  of  Commons 


642  Electric  Railway  Problem 

in  March,  1919,  introducing  the  government  bill  for  the  establishment  of  the 
Ministry-  of  Ways  and  Communications,  to  the  ettect  that  the  municipal  tram- 
ways were  earning  7  per  cent  on  their  capital.  Some  doubt  was  thrown  upon 
the  accuracy  of  Sir  Eric's  statement  by  reference  to  a  paper  read  at  a  convention 
of  the  British  Tramways  and  Light  Railways  Association,  July  25,  1919,  by 
Mr.  William  L.  Madgen,  Director  of  the  British  Electric  Traction  Company, 
Ltd.,  a  holding  concern  that  has  an  interest  in  25  or  30  electric  tramway  proper- 
ties in  different  parts  of  England.  A  digest  of  Mr.  Madgen's  paper  and  of  the 
comments  upon  it  by  other  speakers  at  the  convention  was  placed  before  the 
Commission  by  the  Executive  Secretary.  It  appears  at  pages  2046  to  2054  of 
the  Proceedings.  The  burden  of  Mr.  Madgen's  paper  was  that  the  tramways 
in  Great  Britain  are  a  starved  industry,  as  a  result,  primarily,  of  governmental 
rate  restrictions.  Mr.  Madgen  used  the  tramway  statistics  published  by  the 
Board  of  Trade  from  returns  for  the  fiscal  year  1913-1914.  and  pointed  out  that 
while  the  gross  profits  Were  shown  by  these  returns  to  be  7.03  per  cent,  this 
figure  would  be  reduced  to  3.03  per  cent  if  4  per  cent  were  taken  out  for  depre- 
ciation. Whether  the  statement  made  by  Sir  Eric  Geddes,  like  Mr.  Madgen's 
statement,  was  based  upon  the  returns  for  the  last  year  before  the  war  does  not 
appear.  At  any  rate,  the  first  purpose  of  Mr.  Madgen's  paper  was  to  prove  that 
the  British  tramways  need  more  revenues,  and  that  the  way  to  get  them  is  to 
increase  the  initial  fare.  He  argues  that  the  straight  distance  tariff  in  use  in 
Great  Britain,  giving  very  low  fares  for  short  rides,  has  the  effect  of  encourag- 
ing congestion  of  population  and  preventing  the  tramways  from  getting  enough 
revenue.  It  is  well  known  that  most  of  the  municipal  tramway  systems  have 
increased  their  fares  during  the  war  period,  but  Mr.  Madgen's  discussion  of  the 
present  condition  of  the  British  tramway  industry  applies,  primarily,  to  the  con- 
ilitiun  of  the  private  companies,  which,  as  he  claims,  are  unable  to  provide  new 
capital  for  extensions  because  their  revenues  are  too  restricted  to  maintain  their 
credit.  Mr.  Madgen  admits  that  "municipal  corporations  can  obtain  loans  upon 
favorable  terms  because  they  offer  to  investors  the  security  of  the  rates"  (taxes), 
but  he  adds:  "They  are  naturally  loth  to  increase  municipal  indebtedness  for 
the  extension  of  services  which  arc  not  likely  to  be  rennnicrativc  unless  such 
services  are  obligatory.  Tramway  companies  cannot  obtain  capital  for  exten- 
sions unless  they  show  that  their  existing  enterprise  is  giving  a  reasonable  re- 
turn." He  also  says:  "While  a  number  of  the  municipal  tramway  systems 
show  good  financial  returns,  they  are  nevertheless  starved,  because  the  bulk  of 
their  net  receipts  are  appropriated  in  aid  of  the  rates  (taxes),  instead  of  being 
utilized  in  the  imprnvtmcnt  of  the  service."  It  appears  from  this  that  the 
trouble  with  the  particular  municipal  tramways  referred  to  is  that  thev  are 
profitable,  but  that  the  profits  are  appropriated  for  the  relief  of  taxes  instead 
of  being  put  into  extensions. 

At  page  2M7  of  the  Proceedings,  in  the  digest  of  Mr.  Madgen's  paper,  refer- 
ence is  made  to  a  report  by  Mr.  J.  M.  McElroy,  General  Manager  of  the  Tram- 
ways nepartment  of  the  City  of  Manchester.  As  a  matter  of  fact,  this  report 
was  submitted  in  February.  1914.  that  is.  in  the  pre-war  period.  The  statement 
in  the  Proceedings  is  as  follows: 


The  Ultimate  Solution  643 

"Mr.  McEIroy,  in  Iiis  report  on  the  Manchester  tramways,  showed  that  the  extensive 
iinprovements  recommended  could  be  financed  from  the  tramway  net  receipts  if  the  City 
Council  would  refrain  from  appropriating  100,000  poimds  per  annum  for  the  benefit  of 
the   borough    fund." 

A  similar  statement  appears  in  the  abstract  of  Mr.  Madgen's  paper  published  in 
the  Electric  Railway  Journal  for  August  30,  1919.  Mr.  McElroy  is  misquoted. 
What  he  actually  said  in  his  Manchester  report  was  that  the  proposed  improve- 
ments could  be  financed  from  the  net  receipts  of  the  municipal  tramways  if  the 
City  Council  would  refrain  from  appropriating  more  than  100,000  pounds  per 
annum  for  the  reduction  of  taxation.  It  is  well  known  that  the  City  of  Glasgow 
has  paid  off  its  entire  tramway  debt  out  of  profits  and  that  other  British  cities 
have  made  great  progress  in  the  same  direction.  The  evidence  is  clear  that  the 
financial  condition  of  the  municipally  owned  and  operated  tramways  in  Great 
Britain,  after  five  years  of  war,  is  infinitely  better  than  the  financial  condition 
of  the  privately  owned  electric  railways  of  this  country  after  going  through  a 
much  shorter  period  of  war  strain.  The  Glasgow  tramways  have  not  only  paid 
for  themselves  out  of  earnings,  but  have  also  paid  the  regular  taxes  upon  the 
property  and  have  coi^tributed  several  million  dollars  to  the  "Common  Good" 
for  the  relief  of  other  taxpayers. 

While  transportation  conditions  in  Great  Britain  are  undoubtedly  different 
in  many  important  respects  from  conditions  in  the  United  States,  it  cannot  be 
denied  that  municipal  ownership  and  operation  of  tramways  has  proven  to  be 
successful  in  the  United  Kingdom,  and  that  no  tendency  has  showh  itself  there 
to  go  back  to  private  ownership  or  private  operation.  For  what  it  may  be  worth, 
the  experience  of  the  British  cities  supports  the  policy  of  public  ownership  and 
operation  here  suggested  as  offering  the  solution  of  the  electric  railway  problem 
in  America. 


SUMMARY' 

I.  The  street  railway  is  an  essential  public  industry,  as  shown  (a)  by  its 
magnitude;  (b)  by  its  relation  to  the  public  streets;  (c)  by  the  fact  of  public 
regulation,  and  (d)   by  the  present  appeal  tor  i)ublic  help. 

II.  The  witnesses  for  the  electric  railways,  those  for  the  state  commissions 
and  the  municipalities  and  those  for  the  general  public  agree  in  the  main  that 
the  street  railway  as  an  industry  is  in  a  desperate  financial  condition.  They  also 
agree  that  a  fimdaniental  requisite  for  relief  is  the  restoration  of  its  credit,  so 
that  the  new  capital  for  continued  expansion  of  transportation  facilities  will  be 
induced  to  flow  into  the  business. 

III.  Labor  is  universally  recognized  as  a  vital  factor  in  the  street  railway 
business,  hut  the  tendency  is  to  treat  the  labor  problem  primarily  as  a  problem 
of  operating  expense  and  et^kiency.  and  to  give  little  or  no  consideration  to  the 
human  elements  in  it.  The  employing  companies  are  interested  in  not  paying 
more  for  labor  than  they  have  to  pay,  just  the  same  as  they  are  interested  in 
keeping  other  expenses  down.  With  them  it  is  a  question  of  financial  results, 
and  they  sometimes  fail  to  grasp  the  full  value  of  loyalty  and  intelligent  coopera- 
tion on  the  part  of  the  men.  I'Vom  the  public  point  of  view  quality  of  service 
and  continuity  of  oi)eration  are  of  primary  importance.  .Ml  these  things  depend 
in  a  great  measure  upon  the  will  of  the  workers,  and  require  conditions  of  em- 
ployment that  will  attract  competent  and  reliable  men  and  that  will  prevent 
industrial  dissatisfaction  and  disputes,  which  lead  to  deterioration  or  interrup- 
tion of  service. 

I\'.  .\  fundamental  conception  of  the  street  railway  problem,  therefore, 
will  include  as  coordinate  requirements  the  need  for  credit  with  which  to  get 
capital,  and  the  need  for  an  etTective  sjiirit  of  cooperation  with  which  to  enlist 
the  continued  and  etVicicnt  support  of  labor. 

V.  Under  normal  conditions  and  conservative  management  credit  would 
be  an  easy  nuitter  for  the  street  railways  because  of  (a)  their  steady,  assured 
and  rapicUy,  increasing  revenue;  (b)  the  conspicuous  location  of  their  property 
and  activities;  (c)  their  small  need  for  working  capital;  (d)  the  fact  that  a 
depreciation  reserve  wouUl  be  available  to  provide  a  portion  of  the  funds  needed 
for  additions  and  improvements,  and  (e)  the  fact  that  refunding  operations 
could  be  carried  through  as  a  matter  of  course,  although  the  rate  of  interest 
paid  might  be  either  greater  or  less,  as  the  condition  of  the  market  demamled. 

\'!.  Tlie  testimony  put  forward  on  behalf  of  the  electric  railways  with 
respect  to  the  amount  of  new  capital  rcquiretl  each  year  in  the  industry  was  in- 
ex.ict  and  incnnclusive.  l-'rom  the  point  of  view  of  exaggeration  the  inexact- 
ness was  partly  due  to  a  confusion  of  the  needs  of  the  electric  railway  with  the 
needs  of   all   utilities   taken   together,   |)artly   due   to   the   use   of   capitalization 

M4 


Summary  645 

figures,  and  partly  due  to  the  adoption  of  a  yearly  average  for  the  entire  period 
from  1902  to  1917.  Moreover,  no  consideration  was  given  to  the  reduction  of 
the  demands  for  new  capital  on  account  of  the  abandonment  of  lines  and  the 
slowing  down  of  traffic  development  under  increased  fares.  On  the  other  hand, 
from  the  point  of  view  of  conservatism,  little  or  no  consideration  seems  to  have 
been  given  to  the  fact  that  under  present  price  conditions  a  much  greater  amount 
of  capital  is  required  to  perform  a  given  amount  of  work,  nor  to  the  fact  that 
in  an  era  of  high  prices  new  capital  is  required  in  the  process  of  making  re- 
placements, even  where  no  extension  or  enlargement  of  facilities  takes  place. 

VII.  As  a  matter  of  fact,  the  amount  of  new  capital  required  in  the 
electric  railway  business  at  the  present  time  is  not  even  approximately  shown 
by  the  evidence.  Nevertheless,  it  is  clear  from  the  testimony  that  the  restora- 
tion of  credit  is  essential  to  the  full  performance  of  the  function  of  the  street 
railway  (1)  because  of  the  increasing  demands  of  population  and  traffic,  requir- 
ing extensions  and  additions  from  time  to  time;  (2)  because  of  the  continuing 
adjustment  of  the  capital  account  to  the  higher  price  level,  and  (3)  because  of  the 
run-down  condition  of  many  properties  which  demand  immediate  rehabilitation, 
for  which  no  reserves  have  been  accumulated.  Even  though  rehabilitation  be 
not  considered  a  proper  capital  charge,  it  can  be  effected  under  existing  condi- 
tions only  through  the  use  of  new  capital  to  take  the  place  of  invested  capital 
that  has  been  destroyed  or  lost. 

VIII.  Upon  the  assumption  that  street  railway  credit  is  gone,  our  search 
for  a  remedy  must  begin  with  an  analysis  of  the  fundamental  and  immediate 
causes  for  its  disappearance.  Why,  in  any  industry  so  favorably  situated  from 
the  point  of  view  of  credit,  has  credit  been  lost?  The  causes  for  its  disappear- 
ance must  be  sought  in  the  financial  policies  which  have  been  followed  by  the 
industry  itself,  or  in  the  attitude  of  the  public  toward  it  in  the  process  of  regu- 
lation, or  in  changed  economic  conditions. 

IX.  From  the  point  of  view  of  the  financial  policies  of  the  industry  as 
they  afTect  credit,  the  first  thing  that  demands  attention  is  the  almost  universal 
practice  of  initial  overcapitalization,  particularly  in  the  early  years  of  electrifi- 
cation. The  bad  ultimate  effects  of  overcapitalization  have  been  accentuated  in 
many  cases  by  the  process  of  converting  stock  into  guaranteed  securities,  either 
through  the  issuance  of  bonds  or  through  the  assumption  of  rental  charges  in 
connection  with  the  consolidation  of  properties,  so  that  as  time  has  gone  on  a 
greater  proportion  of  the  return  upon  the  investment  has  taken  the  form  of 
fixed  charges.  This  policy  has  tended  to  reduce  the  "margin  of  safety"  upon 
which  private  companies  have  to  depend  for  new  capital  and  to  destroy  the 
financial  flexibility  necessary  for  the  preservation  of  solvency  in  a  period  of 
distress. 

X.  Not  only  by  initial  overcapitalization  and  the  assumption  of  exces- 
sive fixed  charges  have  the  electric  raihvay  companies  pursued  an  unsound 
financial  policy,  but  also  by  the  fact  that  seldom,  except  through  duress  in  the 
case  of  receiverships  and  reorganizations,  have  they  written  oflf  any  of  the 
excess  capital   originally   issued.     Their  policy,   with    few   exceptions,   has   been 


646  Electric  Railwav  Problem 

to  swell  the  capital  account  and  to  perpetuate  in  it  any  items  representing  in- 
tangible values  or  "capitalized  hopes"  that  have  once  gotten  into  it. 

XI.  The  companies  have  pursued  an  unsound  financial  policy  in  still 
another  respect.  Not  only  have  they  been  overcapitalized  at  the  beginning  and 
have  subsequently  refused  or  neglected  to  write  off  their  excess  capitalization, 
but  thev  have  also  generally  neglected  to  build  up  a  depreciation  reserve  equal 
to  the  difference  between  the  legitimate  investment  in  the  plant  when  new  and 
its  condition  when  it  has  worn  down  to  the  normally  depreciated  condition  of  an 
old  but  efficient  operating  property.  Thus,  by  the  process  of  wear  and  tear, 
even  the  legitimate  initial  capitalization  has  become  inflated  to  the  extent  of  the 
normal  accrued  depreciation  not  represented  by  depreciation  reserves. 

XII.  Still  further,  the  companies,  in  many  cases,  have  pursued  a  policy 
of  artificially  maintaining  credit  by  paying  dividends  when  ordinary  mainten- 
ance and  essential  replacements  were  neglected  or  deferred,  with  the  result  that 
the  physical  property,  representing  the  capitalization,  has  been  further  impaired, 
and  is  now  in  a  condition  where  a  complete  general  rehabilitation  is  necessary 
if  adequate  service  is  to  be  given. 

XIII.  In  many  localities  the  electric  railways  have  been  overbuilt  from 
the  point  of  view  of  an  industry  expected  to  be  financially  self-sustaining.  This 
overbuilding  has  resulted  from  several  causes:  (1)  the  construction  of  compet- 
ing lines  in  the  same  community;  (2)  the  premature  extension  of  lines  for  the 
special  benefit  of  tracts  of  real  estate  in  which  the  companies,  or  the  men  who 
controlled  their  policies,  were  directly  interested;  (3)  the  construction  of  new 
lines  in  thin  territory  as  a  result  of  the  ambition  of  imscrupulous  or  ovcr- 
optiniistic  promoters  to  get  rich  quickly  through  the  exploitation  of  the  gulli- 
bility of  the  investing  public:  (4)  the  use  of  progressively  heavier  cars  and 
heavier  track  construction  in  the  equipment,  extension  and  rebuilding  of  lines. 
While  these  causes  of  overbuilding  have  their  origin  for  the  most  part  in  pol- 
icies for  which  the  companies  themselves  have  been  responsible,  the  local  author- 
ities have  often  "made  the  motion"  or  "seconded"  it  as  a  result  of  their  con- 
ception of  public  needs  or  personal  advantage. 

XIV'.  As  a  result  of  overcapitalization  and  its  attendant  evils  based  upon 
the  idea  that  the  street  railway  was  a  fruitful  field  for  speculative  investment, 
the  street  railway  industry  fell  into  the  control  largely  of  investment  bankers, 
whose  profits  were  dependent  upon  the  volume  of  securities  turned  out  and  a 
frequent  turnover  in  the  companies'  financial  arrangements.  These  policies  led 
to  absentee  ownership  of  street  railway  securities  and  the  formation  of  holding 
companies  for  the  inflation  and  exploitation  of  street  railway  credit.  The  sound 
principle  of  simple  corporate  organization,  direct  financial  responsibility,  and 
community  ownership  of  community  cnlerprises  was  entirely  lost  sight  of.  so 
that  the  underlying  support  of  local  pride  and  local  interest  in  the  successful 
construction  and  operation  of  transportation  facilities  resjionsive  to  local  needs 
was  lost.  Thus  the  comiianies  themselves  abandoned  and  alienated  the  most 
substantial  source  of  ultimate  credit  for  a  public  utility. 

X\'.  From  the  point  of  view  of  public  rel.ations  and  the  responsibility  of 
the  public  through   its  govermnental   agencies    for  conditions   that    have   helped 


Summary  647 

to  destroy  the  credit  of  the  street  railways,  the  first  thing  to  be  mentioned  is 
the  fixed  five-cent  fare,  which,  in  the  earlier  days,  was  generally  made  a  condi- 
tion of  street  railway  franchises.  The  fixed  fare,  which  had  no  particular  rela- 
tion to  the  necessary  cost  of  service  and  certainly  provided  no  flexibility  for  the 
adjustment  of  the  fares  to  the  changes  in  the  cost  of  service,  either  up  or  down, 
was  the  cornerstone  of  speculation  in  the  industry  at  a  time  when  a  guaranteed 
five-cent  fare  over  a  long  period  or  in  perpetuity  was  supposed  to  represent  an 
opportunity  for  enormous  profit.  In  urban  areas  the  fixed  fare  was  a  tempta- 
tion to  speculation  and  overcapitalization.  It  aided  and  abetted  the  street  rail- 
way companies  in  the  adoption  and  pursuit  of  the  unsound  financial  policies 
above  described. 

XVI.  As  a  result  of  the  arbitrary  and  corrupt  methods  often  pursued  by 
street  railway  promoters  in  securing  franchises  with  the  five-cent  fare  provision 
in  them,  and  on  account  of  the  enormous  overcapitalization  which  street  railway 
promoters  indulged  in.  the  public  was  led  to  believe  that  the  street  railways, 
out  of  their  use  of  public  property  as  rights  of  way,  were  exploiting  the  public 
and  reaping  unreasonable  rewards.  The  public,  claiming  the  rights  of  partner- 
ship, invoked  the  taxing  power  as  a  means  of  diverting  to  the  public  treasury  a 
portion  of  the  earnings  of  the  business,  and  in  communities  where  new  fran- 
chises or  renewals  of  old  franchises  were  sought,  the  granting  of  these  "favors" 
was  made  the  occasion  for  loading  upon  the  companies  financial  burdens  and 
obligations  which  it  was  thought  would  in  some  measure  be  compensatory  for 
the  value  of  the  privileges  granted. 

XVII.  But  the  public  was  not  satisfied  to  use  the  taxing  power  alone.  It 
demanded  adequate  service  as  well  as  a  share  in  the  profits.  As  the  franchises 
granted  were  in  most  cases  irrevocable,  and  as  the  street  railways  could  not  be 
subjected  to  effective  competition,  the  public  laid  hold  of  the  police  power  as  a 
weapon  for  enforcing  the  obligations  of  monopoly  and  compelling  the  com- 
panies to  extend  and  improve  their  service.  Thus  the  companies  found  that, 
though  limited  to  the  five-cent  fare,  they  were  not  free  to  scamp  the  service  at 
will  in  order  to  swell  their  profits,  but  could  be  compelled  to  enlarge  and  improve 
it  indefinitely,  at  least  so  long  as  they  were  financially  able  to  do  so,  and  largely 
without  regard  to  the  amount  of  profits  left  for  the  investors. 

X\'III.  The  public  also,  as  a  result  of  its  observation  of  the  evils  of  over- 
capitalization and  speculation  in  public  utilities,  including  the  electric  railways, 
created  the  public  service  commissions  and  conferred  upon  them  authority  to 
regulate  new  issues  of  securities  and  prohibited  the  issuance  of  securities  not 
representing  new  cash  put  into  the  business  for  capital  purposes.  At  the  same 
time  the  commiissions  were  not  authorized  to  reorganize  the  companies  and  cut 
down  the  capitalization  already  outstanding.  Thus  the  public  required  a  new 
and  more  conservative  method  of  financing  with  respect  to  capital  additions, 
without  a  reconstruction  of  the  existing  financial  base.  The  companies,  there- 
fore, no  longer  had  the  advantages,  precarious  and  unsound  though  they  were, 
of  the  old  methods  of  financing,  while  at  the  same  time  they  were  unable  to 
issue  new  securities  upon  a  basis  independent  of  the  inflated  securities  already 
out.     The  "margin  of  safety,"  within  the  limits  of  a  reasonable  return  upon  the 


648  Electric  Railway  Problem 

investment,  was  in  many  cases  noticeably  decreased  as  a  result  of  this  incomplete 
and  imperfect  form  of  public  regulation. 

XIX.  The  causes  for  the  decline  of  street  railway  credit  thus  far  enu- 
merated have  arisen  out  of  the  financial  policies  adopted  by  the  street  railways 
themselves  or  out  of  the  policies  of  regulation  adojHed  by  the  public,  and  so  far 
as  these  policies  were  unsound  those  responsible  for  their  adoption  and  con- 
tinuance must  share  the  responsibility  for  the  present  condition  of  street  rail- 
way credit.  Still  another  set  of  causes  can  be  found  by  an  analysis  of  economic 
conditions. 

XX.  For  a  long  time  the  public  tried  to  secure  the  benefit  of  competition 
in  the  street  railway  business,  not  recognizing  that  it  was  a  monopoly  by  nature. 
But  with  the  appeal  to  the  police  power  to  compel  improved  service,  the  public 
recognized  in  a  more  or  less  formal  and  legal  way  the  existence  of  monopoly 
as  a  necessary  fact,  just  as  this  recognition  was  becoming  general,  the  develop- 
ment of  the  automobile  brought  into  the  field  for  the  first  time  an  effective  and 
dangerous  competitor  of  the  street  railways.  In  other  words,  when  the  public 
got  around  to  recognize  the  existence  of  monopoly  in  local  transportation  service 
the  development  of  the  automobile  partially  reestablished  the  condition  of  com- 
petition which,  in  theory,  had  just  been  discarded.  In  many  communities  it  has 
been  fully  recognized  that  the  two  methods  of  local  transportation  cannot  sur- 
vive on  a  self-sustaining  basis  as  coni])ctitors.  The  inroads  made  by  this  new 
form  of  transportation  upon  the  actual  traffic  and  revenues  of  street  railways 
in  many  comnumities.  and  the  resulting  uncertainty  as  to  the  future  of  the  elec- 
tric railway,  reacted  seriously  upon  the  credit  of  the  industry. 

XXI.  In  the  old  days,  the  profits  of  street  railway  operation  were  depen- 
dent in  large  measure  upon  low  wages,  long  hours,  and  unsatisfactory  conditions 
of  work  for  the  employes.  Gradually,  as  time  went  on.  the  employes,  in  part 
as  a  result  of  general  public  favor,  became  more  and  more  organized,  and  were 
in  a  position  to  demand  higher  wages,  shorter  hours,  and  more  expensive  pro- 
tection and  privileges  from  their  employers.  This  tendency,  of  course,  has  been 
greatly  accentuated  since  the  beginning  of  the  war  and  as  one  of  the  results  of 
war  conditions.  N'evertheless,  the  tendency  existed  before  the  war,  and  the  un- 
certainty of  the  labor  element  in  its  relation  to  the  management  was  a  factor  of 
increasing  importance  in  disturbing  the  hopes  of  those  wiio  had  gone  into  the 
street  railway  business  as  speculators,  and  had  cajiitalized  the  future.  Disap- 
pointed hopes  in  the  industry,  even  when  such  hopes  were  at  the  beginning  il- 
legitimate or  unwarranted,  had  a  tendency  to  restrict  the  credit  of  the  industry 
and  to  cool  the  ardor  of  new  investors  to  go  into  it. 

XXII.  All  these  forces  conspiring  together  to  impair  street  railway  credit 
would  have  cfTectively  destroyed  it  long  before  the  war,  if  it  had  not  been  made 
so  nearly  indestructible  by  the  character  of  the  industry  it.self  and  by  the  enor- 
mous (levelopmeiu  of  the  demand  for  urban  transportation.  It  is  by  no  means 
surprising  that  the  Great  War  put  the  finishing  touches  on  the  job.  The  funda- 
mental basis  of  credit  at  all  times  is  security  for  the  investment  and  its  present 
and  prospective  net  earning  power.  Any  sudden  great  expansion  in  the  cost  of 
service  that  is  not  accompanied  by  a  corresponding  increase  in  revenues  must 


Summary  649 

adversely  affect  the  present  earning  power  of  the  investment,  and  if  the  prospect  is 
for  the  permanence  or  long  continuance  of  these  adverse  conditions,  then  they 
result  in  reducing  the  ultimate  security  and  the  prospective  earning  power  of  the 
investment.  The  effect  of  the  war  upon  general  economic  conditions  has  been  to 
increase  the  cost  of  materials  entering  into  street  railway  construction,  maintenance 
and  operation  probably  to  an  even  greater  extent  than  wages  have  increased.  It 
is  now  generally  expected  that,  because  of  world-wide  economic  changes,  the  high 
prices  of  materials,  the  high  cost  of  living,  and  the  consequent  relatively  high 
wages  will  continue  for  a  considerable  period,  at  least  for  a  period  longer  than 
the  companies  can  hope  to  survive  and  perform  their  functions  without  the  use 
of  credit. 

XXIII.  Having  admitted  the  necessity  for  credit  in  the  street  railway 
business,  and  having  analyzed  the  causes  that  have  led  to  its  disappearance,  we 
come  to  a  discussion  of  the  question :  How  can  credit  be  restored  ?  A  variety 
of  remedies  have  been  proposed  by  witnesses  speaking  on  behalf  of  the  electric 
railways,  on  behalf  of  the  regulating  commissions,  or  on  behalf  of  the  general 
public.  It  is  agreed  with  practical  unanimity  that  the  electric  railways  have  come 
to  be  essentially  public  agencies,  and  that  the  function  of  local  transportation  is 
so  vital  to  the  welfare  of  every  urban  community  as  to  make  it  a  community 
problem.  It  is  generally  agreed  that  if  credit  cannot  be  restored  under  private 
ownership  and  operation  it  is  inevitable  that  public  ownership  and  public  opera- 
tion, one  or  both,  will  have  to  come.  The  fear  expressed  by  many  of  the  wit- 
nesses that  the  results  obtainable  from  public  ownership  and  operation  would  be 
unsatisfactory  from  the  point  of  view  of  economy  and  efficiency  was  not  strong 
enough  to  make  these  witnesses  admit  that  they  would  prefer  to  have  the  electric 
railways  disappear  rather  than  be  owned  and  operated  by  governmental  bodies 
as  a  public  function. 

XXIV.  The  testimony  reflected  the  fundamental  divergence  in  the  eco- 
nomic theories  and  points  of  view  of  the  witnesses.  Many  expressed  confidence 
that  under  public  ownership  the  street  railways  would  not  be  economically  and 
efficiently  operated,  and  viewed  with  strong  aversion  the  possible  ultimate  neces- 
sity for  the  adoption  of  public  ownership  as  a  general  policy.  Other  witnesses, 
taking  the  point  of  view  that  local  transportation  is  an  essential  public  function, 
expressed  the  belief  that  public  ownership  is  not  only  inevitable  because  of  the 
inherent  difficulties  of  continuing  private  ownership  and  the  practical  impossi- 
bility of  restoring  private  credit  in  the  business,  but  also  because  public  owner- 
ship and  operation  are  inherently  logical  and  desirable  with  respect  to  such  a 
function  as  local  transportation. 

XXV.  There  is  a  general  agreement  that  the  public  relations  of  the  electric 
railway  industry  prior  to  the  war  and  before  the  present  acute  crisis  arose  were 
unsatisfactory;  that,  in  fact,  the  electric  railway  industry  got  started  wrong; 
that  it  got  "in  bad"  with  the  public ;  that  the  cooperation  of  the  public  is  essen- 
tial to  the  full  performance  of  electric  railway  service  upon  a  sound  financial 
basis;  and  that  to  restore  the  credit  of  the  companies  and  to  enable  them  to 
function,  an  entirely  new  deal  is  required. 

XXVI.  The  first  requisite  for  the  restoration  of  credit  in  the  view  of  the 


650  Electric  Railway  Problem 

witnesses  for  the  electric  railways  is  a  readjustment  of  the  relation  between  reve- 
nues and  expenses  so  as  to  increase  the  margin  available  for  return  on  capital. 
Obviously,  this  can  be  accomplished  only  (1)  by  an  increase  in  revenues  or  (2) 
by  a  decrease  in  expenses. 

XXVII.  The  electric  railway  companies  propose  to  increase  their  revenues 
first  by  increasing  the  unit  fares.  In  this  way  they  hope  (  1)  to  escape  from  the 
principle  of  the  fixed  fare,  as  embodied  in  the  five-cent  limitation,  and  (2)  to 
secure  an  immediate  increase  in  earnings. 

XXVIII.  The  proposal  to  increase  unit  fares  raises  two  vital  points:  (1) 
the  effect  of  straight  fare  increases  upon  revenues,  and  (2)  the  effect  of  straight 
fare  increases  upon  the  usefulness  of  the  street  railway  as  a  public  utility.  As  a 
remedv.  fare  increases  are  useless  unless  they  provide  additional  revenue,  and  in 
fact  they  may  injure  credit  if  they  indicate  the  inability  of  the  electric  railways 
to  earn  the  full  cost  of  service  at  any  fare  that  may  be  charged.  From  the 
public  point  of  view,  fare  increases  are  a  failure  if  they  result  in  a  serious  and 
progressive  curtailment  of  the  use  of  street  railway  service. 

XXIX.  As  an  alternative  to  straight  fare  increases,  the  adoption  of  a 
zone  system  or  distance  tariff  is  put  forward  by  some  of  the  witnesses  as  a  means 
for  raising  more  revenue  through   ( 1 )   the  cultivation  of  short  haul  traffic  and 

(2)  the  establishment  of  charges  for  long  rides  proportional  to  the  cost  of  the 
service  rendered.  This  proposal  raises  a  fundamental  question  as  to  the  rela- 
tive effects  of  the  uniform  fare  policy  and  the  zone  fare  policy  upon  the  distribu- 
tion of  population  and  business  and  upon  the  development  of  realty  values. 

XXX.  Another  proposed  measure  for  increasing  the  margin  available  for 
return  on  capital  is  the  removal  of  special  tax  burdens  and  franchise  obligations 
from  the  electric  railways,  leaving  them  either  upon  the  same  basis  as  other  in- 
dustries, or  giving  them  special  exemptions  on  account  of  the  importance  of  the 
function  they  perform  and  their  peculiar  relations  to  the  [)ublic  and  the  public 
streets.  This  proposal  raises  certain  grave  questions:  (1)  the  sufficiency  of  the 
relief  that  could  be  granted  in  this  way;  (2)  the  legal  and  financial  difliculties, 
from  the  point  of  view  of  the  government  bodies,  in  the  way  of  giving  uj) 
these  sources  of  revemie;  and  (3)  the  political  difficulty  of  relieving  a  public 
utility  from  these  burdens  or  of  granting  it  s|)ecial  exemptions  while  it  remains 
in  private  hands. 

XXXI.  Still  another  means  proposed  for  increasing  the  margin  available 
for  return  upon  capital  is  the  adoption  of  operating  economies  such  as  ( 1 )  a  re- 
arrangement of  car  schedules  for  the  elimination  of  duplicating  or  unnecessary 
service,  excessive  layovers,  etc.;  (2)  a  rerouting  of  cars  for  the  elimination  of 
useless  or  dead  car  mileage  and  the  avoidance  of  street  congestion  aTid  delays; 

(3)  the  skip  stop  for  increasing  speed  and  decreasing  power  consumption;  (4) 
the  training  and  supervision  of  motormen  in  the  saving  of  power;  (5)  the  use 
of  light  one-man  safety  cars  as  a  means  of  decreasing  platform  expense,  power 
consumption,  accideiu  exjjcn.se  and  track  and  car  maintenance;  {6)  the  elimina- 
tion of  collusive  contracts  for  the  ])urchase  of  materials  and  supplies,  or  power; 
and  (7)  the  abandonment  of  electricity  as  a  motive  power  and  the  use  of  gaso- 
line or  alcohol  in  its  place  along  the  lines  promised  by  Henry  Ford. 


Summary  651 

XXXII.  It  is  also  proposed  on  behalf  of  the  electric  railways  that  jitney 
competition  be  curtailed  or  abolished,  and  that  the  street  railway  be  given  pro- 
tection as  a  legalized  monopoly  in  the  rendering  of  local  transportation  service. 
This  proposal  raises  ( 1 )  the  question  as  to  whether  or  not  automobile  buses 
may  under  certain  conditions  be  more  economical  and  efficient  as  a  means  of 
transportation  than  the  electric  railways  are,  and  (2)  the  question  as  to  how  far 
the  public  may  properly  go  in  restricting  competition  in  order  to  give  the  electric 
railways  under  private  ownership  and  operation  a  monopoly. 

XXXIII.  Another  suggested  method  of  enlarging  electric  railway  income 
is  by  the  establishment  of  cooperative  relations  between  the  management  and  the 
employes.  In  this  way  it  is  contended  that  the  interest  of  the  employes  can  be 
enlisted  in  efficiency  and  economy  and  in  the  sale  of  transportation  service,  and 
the  losses  through  "knocking  down"  of  fares  and  through  strikes  minimized  or 
entirely  done  away  with. 

XXXIV.  The  serious  objection  to  high  fares  or,  in  the  alternative,  the 
abandonment  of  electric  railway  service  altogether  in  certain  communities  has 
led  to  the  suggestion  that  the  revenues  of  the  street  railways  be  supplemented  out 
of  taxation,  on  the  ground  that  business  men  and  property  owners  receive  great 
benefits  from  electric  railway  service  even  where  they  never  ride  on  the  street 
cars.  It  is  the  idea  that  these  subsidies  from  taxation  should  be  made  to  pre- 
vent the  abandonment  of  unprofitable  lines  or  to  keep  the  fares  down  to  a  reason- 
able level  on  lines  that  could  be  made  self-supporting  with  high  fares.  On 
account  of  constitutional  difficulties  in  the  way  of  subsidizing  private  enterprise, 
and  on  account  of  inherent  objections  to  such  a  policy,  this  plan  may  not  be 
practicable  in  some  jurisdictions  except  under  public  ownership  or  public  man- 
agement. 

XXXV.  As  a  means  of  getting  the  electric  railway  business  upon  a  con- 
servative basis,  the  abandonment  of  duplicating  and  unprofitable  lines  is  sug- 
gested. This  plan  involves  the  difficulties  and  disadvantages  inherent  in  a  plan 
for  taking  away  transit  facilities  from  communities  or  portions  of  communities 
whose  development  and  present  social  and  industrial  arrangements  are  largely 
dependent  on  them.  It  also  raises  a  question  as  to  where  the  line  is  to  be  drawn 
with  respect  to  street  railway  extensions.  To  what  extent  do  the  obligations  of 
monopoly  within  a  given  transportation  area  require  a  symmetrical  and  complete 
development  of  transportation  service,  with  little  or  no  regard  to  the  profitable- 
ness of  individual  lines? 

XXXVI.  On  the  part  of  the  public  the  suggestion  is  made  that  capital  in 
the  electric  railway  industry  has  received  too  great  a  return  in  the  past,  and  that 
the  restoration  of  street  railway  credit  requires  among  other  things  a  complete 
reorganization  of  the  financial  structure  of  the  companies  and  the  scaling  down 
of  their  fixed  charges  to  a  conservative  basis.  It  is  urged  that  bankruptcy  in 
many  cases  may  be  absolutely  necessary  as  a  condition  precedent  to  the  restora- 
tion of  credit  on  a  sound  basis. 

XXX\TI.  The  witnesses  generally  recognize  the  improbability  that  the 
credit  of  the  electric  railways  can  be  completely  restored  by  any  one  of  the  mea- 
sures heretofore  mentioned  taken  by  itself,  and  that  even  a  combination  of  as 


652  Electric  Railway  Pkublem 

many  of  them  as  are  compatible  with  one  another  may  not  be  effective  for  this 
purpose.  A  fundamental  readjustment  of  the  relations  between  the  electric  rail- 
ways and  the  public  is  regarded  as  essential. 

XXXVIII.  There  is  general  agreement  that  the  first  fundamental  step  in 
such  a  readjustment  in  each  particular  case  is  the  determination  of  the  amount 
of  the  investment  upon  which  the  electric  railway  should  be  permitted  to  earn  a 
return.  This  raises  a  multitude  of  different  questions  as  to  the  correct  principles 
of  valuation,  as  to  which  there  are  radical  differences  of  opinion.  In  general, 
the  companies  claim  value  on  the  basis  of  reproduction  cost  of  the  physical 
property  at  the  time  of  the  determination  without  any  deduction  on  account  of 
depreciation,  and  with  large  additions  for  intangibles  to  cover  superseded  prop- 
erty and  past  deficiencies  below  a  liberal  rate  of  return  from  the  beginning  of  the 
enterprise.  In  the  reproduction  cost,  they  include  liberal  structural  overheads, 
together  with  big  allowances  for  such  items  as  promoter's  remuneration,  broker- 
age and  preliminary  expenses  in  the  organization  and  development  of  the  project. 
Specifically,  they  maintain  that  the  purchasing  power  of  the  dollar  having  de- 
creased under  war  conditions,  the  valuation  should  be  made  on  the  basis  of  the 
"last-minute"  prices.  If  the  historical  cost  method  is  used  as  an  alternative  to 
the  reproduction  cost  method  of  fixing  present  value,  the  companies  would  in- 
clude every  dollar  that  has  gone  into  the  enterprise  from  the  beginning,  regardless 
of  the  present  condition  of  the  property,  plus  the  capitalized  services  of  pro- 
moters and  bankers  and  deficiencies  below  a  liberal  return  from  the  beginning 
of  the  enterprise  cumulated  at  comjjound  interest.  The  public,  on  the  other 
hand,  inclines  toward  the  amount  of  capital  actually  and  prudently  invested  in 
existing  useful  property  less  accrued  depreciation  as  the  proper  measure  of  the 
capital  to  be  recognized  as  the  basis  for  the  proposed  new  relationship  between 
the  communities  and  the  companies.  Here  is  the  big  problem  to  be  solved  before 
any  fundamental  readjustment  of  the  status  of  the  electric  railway  industry  can 
be  effected. 

XXXIX.  The  next  step  in  the  proposed  readjustment  is  the  determination 
of  the  rate  of  return  to  be  allowed  upon  the  recognized  investment.  It  is  gener- 
ally admitted  that  under  private  management,  the  rate  of  return  must  be  sufficient 
in  connection  with  the  security  offered  to  induce  investors  to  put  new  capital  into 
the  electric  railway  industry  as  it  is  required  from  time  to  time.  Here  we  are 
confronted  with  several  specific  problems:  (1)  Shall  the  rate  of  return  be  fixed 
for  a  long  period  uf  years  or  shall  it  be  flexible  so  as  to  adjust  itself  to  changing 
market  conditions?  (2)  Shall  the  same  rate  be  allowed  upon  the  capital  already 
in  the  industry  as  may  be  required  to  induce  new  cai)ital  to  flow  into  it?  (3) 
Shall  the  rate  of  return  be  definitely  limited  and  guaranteed,  or  shall  a  leeway 
be  left  for  the  encouragement  of  economical  management?  (4)  Is  a  rate  of 
return  that  will  induce  private  cajiital  to  flow  into  the  street  railway  industry  at 
the  present  time  so  high  as  to  be  prohibitive?  The  rate  of  return  applied  to  the 
valuation  determines  the  compensation  of  capital,  so  that  the  two  factors  must 
he  considered  together  in  the  determination  of  the  basis  for  the  final  result. 

XI..  One  suggestion  is  that  the  new  deal  between  the  public  and  the  elec- 
tric railways  shall  merelv  be  the  removal  of  contractual  restrictions  and  the  trans- 


Summary  653 

fer  of  all  remaining  local  powers  of  regulation  to  the  state  commissions  so  that 
thev  can  take  full  responsibility  on  behalf  of  the  public  for  so  regulating  the 
industry  as  to  keep  it  solvent  and  efficient.  This  plan  is  met  by  certain  objec- 
tions :  ( 1 )  that  electric  railway  transportation  is  primarily  a  local  function ; 
(2)  that  under  private  management  financial  success  is  impossible  without  the 
good  will  and  cooperation  of  the  people  who  ride  and  the  local  authorities  in 
control  of  the  streets;  (3)  that  each  municipality,  as  a  matter  of  right  and  of 
good  public  policy,  should  determine  the  amount  and  character  of  the  local  trans- 
portation service  to  be  rendered  and  the  way  it  is  to  be  paid  for;  and  (4)  that 
exclusive  state  regulation  may  interfere  with  the  development  of  a  policy  of 
ultimate  municipal  ownership  based  upon  contractual  relations  between  the  muni- 
cipalities and  the  companies.  Another  objection  to  exclusive  state  regulation 
may  be  that  it  falls  short  of  meeting  the  present  situation  where  a  guaranty  of 
earning  power  or,  at  least,  of  power  to  pay  the  allowed  return  on  capital  is  essen- 
tial to  the  restoration  of  electric  railway  credit.  / 

XLI.  The  inherent  lirriitations  upon  the  security  of  the  investment,  and  ihe 
uncertainly  that  the  companies  will  earn  a  fair  return  without  a  guaranty,  have 
given  great  impetus  to  the  service-at-cost  plan  based  upon  contracts  with  the 
municipalities  or  the  states,  under  which  the  companies  will  be  practically  guar- 
anteed a  fixed  return  upon  their  investment,  either  through  a  flexible  system  of 
fares,  or  through  a  fixed  fare  supplemented  by  public  subsidies  or  otherwise.  It 
is  recognized  that  the  service-at-cost  plan  as  exemplified  in  the  Cleveland  street 
railway  settlement  of  ten  years  ago  has  worked  greatly  to  the  advantage  of  the 
company  in  the  preservation  of  its  credit,  and  has  been  more  beneficial  to  the 
public  than  any  other  plan  thus  far  tried  in  this  country  over  a  considerable 
period  of  time  on  an  important  scale  under  private  ownership.  The  service-at- 
cost  plan,  with  all  its  proven  merits  in  the  Cleveland  case,  has  not  worked  so  well 
elsewhere.  Its  success  seems  to  depend  upon  certain  factors  which  are  largely 
peculiar  to  Cleveland:  (1)  a  conservative  initial  valuation  and  a  relatively  low 
rate  of  return  on  the  investment;  (2)  an  unusual  degree  of  local  pride  and  con- 
fidence in  the  justness  of  the  settlement,  making  public  and  official  cooperation 
with  the  company  possible  and  effective;  (3)  a  policy  with  respect  to  replace- 
ments that  prevents  the  inflation  of  the  capital  account  in  a  period  of  rising 
prices:  (4)  a  relatively  low  fare  to  start  with,  so  that,  when  costs  increase,  the 
fares  will  not  become  excessive.  A  general  objection  to  the  service-at-cost  plan 
is  that  it  is  calculated  to  weaken  the  motive  for  efficiency  and  economy  in  opera- 
tion under  private  management  and  to  put  upon  the  public  regulatory  authorities 
the  responsibility  for  enforcing  these  street  railway  virtues  by  indirect  means  to 
the  same  extent  as  they  would  be  called  upon  to  enforce  them  directly  under 
public  management.  Another  objection  is  that,  even  under  so  good  a  service-at- 
cost  plan  as  the  one  in  force  in  Cleveland,  it  has  been  deemed  necessary  to  in- 
crease the  rate  of  return  upon  capital  to  seven  per  cent.-  Moreover,  the  Cleve- 
land plan,  after  being  modified  from  time  to  time  in  favor  of  the  company,  is 
tending  more  and  more  toward  a  perpetuation  of  private  management  and  a 
weakening  of  public  control,  which  is  everywhere  becoming  more  and  more  vital 
to  the  public  welfare.     It  is  to  be  noted  also  that  the  service-at-cost  plan  sub- 


G54  Electric  Railway  Problem 

stitutes  a  semi-automatic  control  of  rates  for  the  continuous  power  of  regulation 
by  state  commissions,  and  establishes  local  control  of  service,  so  that  under  this 
plan  the  necessary  functions  of  the  state  commissions  with  respect  to  street  rail- 
ways are  reduced  nearly  to  the  vanishing  point. 

XLII.  The  final  solution  advocated  by  many  of  the  witnesses,  and  ad- 
mitted by  the  rest  as  the  ultimate  alternative,  in  case  their  particular  plans  do 
not  succeed,  is  public  ownership  and  operation  by  the  municipalities,  by  the 
states,  or  by  specially  created  transportation  districts.  It  is  admitted  that  public 
ownership  and  operation,  under  adequate  constitutional  and  statutory  provisions, 
would  be  able  to  provide  the  credit  necessary  to  enable  the  electric  railways  to 
continue  functioning. 

XLIII.  We  now  come  to  the  question  of  labor.  During  the  war  the  supply 
of  labor  was  short  in  the  street  railway  business  as  in  many  other  industries. 
It  cannot  be  said,  however,  that  there  has  ever  been  for  a  prolonged  period  any 
particular  difliculty  in  securing  men  to  operate  street  railways.  The  condition 
at  the  present  time  is  that  the  wages  paid  are  nominally  much  higher  than  they 
were  before  the  war,  and  that  during  1919  there  was  an  epidemic  of  strikes, 
resulting  in  great  losses  of  revenue  and  generally  in  radical  advances  in  wages, 
sometimes  with  a  provision  for  back  pay.  While  the  National  War  Labor  Board 
was  in  existence,  there  was  a  national  agency  to  which  both  parties  could  appeal 
for  the  arbitration  of  wage  questions.  Now  that  the  War  Labor  Board  has 
gone  out  of  existence,  no  such  agency  will  be  present  to  meet  the  problems  that 
arise  as  the  contracts  between  the  local  divisions  of  the  Amalgamated  Associa- 
tion and  the  employing  companies  expire  from  time  to  time.  The  industry  is 
more  thoroughly  unionized  than  it  ever  was  before,  and  the  men  are  in  a  stronger 
position  by  reason  of  the  fact  that  a  strike  is  not  relatively  60  serious  a  matter 
from  the  public  point  of  view  as  it  used  to  be  before  the  advent  of  the  automo- 
bile. At  the  present  time  a  pretty  good  sized  city  can  get  along  for  a  few  days 
without  street  railway  service,  and  the  interruption  of  this  service  is  less  likely 
to  stimulate  the  social  disorders  that  in  former  times  almost  universally  attended 
a  street  railway  strike.  It  is  perhaps  increasingly  dititicult  for  the  coiupanies 
to  "break"  strikes.  If  the  cost  of  living  goes  on  climbing,  or  even  continues  at 
its  present  high  level,  it  is  to  be  expected  that  as  their  yearly  contracts  expire 
many  of  the  unions  will  demand  further  increases  in  wages,  and  that  this  will 
drive  the  companies  that  arc  not  already  in  bankruptcy  closer  to  the  verge  of  it, 
if  the  men's  demands  are  granted.  This  may  follow,  irrespective  of  any  fare 
increases,  because  it  is  not  yet  certain  that  during  the  ])resent  era  of  high  prices, 
the  street  railway  industry  as  a  whole  can  be  made  to  pay  the  full  cost  of  service 
that  is  involved  in  higher  wages  along  witii  the  high  prices  paid  for  materials  and 
money,  l-'rom  the  point  of  view  of  the  l.ihor  problem,  therefore,  the  present 
conilition  of  the  street  railway  industry  contains  the  seeds  of  trouble  not  only 
for  the  people  financially  interested  in  the  industry,  but  also  for  the  general 
public.  For  the  latter  there  is  the  double  danger  of  increasing  cost  of  service 
on  the  one  hand,  and  of  paralysis  of  service  through  industrial  conflicts  on  the 
other. 

XLIV.     Perhaps   the  major  cause  of   the  labor  difficulty,   aside    from   the 


Summary  655 

general  increase  in  labor  costs,  is  the  fact  that  heretofore  in  the  relations  between 
the  public  and  the  companies  as  fixed  in  the  franchises,  the  employes  have  been 
for  the  most  part  ignored.  The  companies  have  undertaken  for  a  consideration 
to  perform  a  public  function  and  to  deliver  service,  and  the  public  has  had  no 
direct  relation  with  the  men,  leaving  them  to  be  employed  and  discharged  by 
the  companies,  without  any  public  interference.  But  the  recognized  necessity 
for  continuous  service  has  brought  things,  during  the  war  period,  to  a  pass 
where  it  is  seen  to  be  essential  that  the  employes  of  the  street  railway  companies 
acquire  a  full  sense  of  public  responsibility  and  get  away  from  the  position  of 
mere  wage  earners  in  private  employment,  with  no  concern  as  to  the  relations 
between  their  employers  and  the  general  public. 

XLV.  One  of  the  remedies  proposed  is  the  establishment  of  public  trib- 
unals through  which  wages  and  the  hours  and  conditions  of  labor  may  be  fixed 
by  public  authority,  coupled  with  the  enactment  of  laws  to  prohibit  and  penalize 
strikes  in  the  street  railway  field.  This  remedy  is  generally  opposed  by  organ- 
ized labor  which  regards  "the  right  to  strike,"  even  in  industries  where  continuity 
of  operation  is  essential  to  public  convenience,  as  their  indefeasible  ultimate  guar- 
anty of  adequate  wages  and  satisfactory  conditions  of  work. 

XLVI.  Another  remedy  is  based  on  the  right  claimed  by  the  Amalgamated 
Association  of  Street  and  Electric  Railway  Employes  to  the  universal  recogni- 
tion of  the  union,  a  living  wage,  and  the  eight  hour  day,  with  the  relations  be- 
tween the  companies  and  the  employes  determined  by  contracts  annually  renewed, 
with  arbitration  of  any  difTerences  by  special  boards  of  arbitration  established 
from  time  to  time  in  the  local  communities,  and  with  the  men  reserving  the  right 
to  strike  in  case  the  companies  refuse  to  grant  their  fundamental  demands  or 
refuse  to  submit  to  arbitration  any  differences  that  may  arise,  or  refuse  to  abide 
by  the  results  of  an  arbitration. 

XLVH.  Another  remedy  proposed  is  to  give  the  employes  the  right  to  par- 
ticipate in  the  management.  This  would  change  in  part  the  present  relationship 
between  the  men  and  their  employers.  Those  who  propose  this  plan  advocate 
it  on  the  theory  that  participation  in  management  would  give  the  men  an  interest 
in  efficiency,  economy  and  continuity  of  service,  and  a  sense  of  responsibility 
both  to  the  public  and  to  the  investors  which,  as  mere  employes,  they  cannot  feel. 

XLVIII.  Another  remedy  proposed  for  the  labor  problem  in  the  electric 
railway  industry  is  public  ownership  and  operation,  under  which  the  employes 
would  become  civil  servants  and  have  all  the  advantages  and  be  subject  to  all  the 
restrictions  which  inhere  in  that  relationship. 

XLIX.  The  street  railway  problem  as  a  whole  cannot  be  solved  merely  by 
the  solution  of  the  problem  of  credit  and  it  cannot  be  solved  merely  by  the  solu- 
tion of  the  labor  problem.  Each  reacts  upon  the  other.  Both  must  be  included 
in  a  coordinate  way  in  the  final  solution,  and  any  solution  arrived  at  must  meet 
the  fundamental  requirements  that  the  street  railways  exist  primarily  for  service 
rather  than  for  profits,  since  they  have  become  a  public  function  absolutely  essen- 
tial to  the  public  welfare  and  for  which  the  community  itself  must  assume  the 
ultimate  and  final  responsibility  for  self-help. 

L.     In  seeking  a  solution  of  the  electric  railway  problem  the  only  possible 


656  Electric  Railway  Problem 

choices  are  these:  (1)  to  abandon  the  theory  of  public  interest  in  the  industry 
and  abrogate  the  practice  of  public  regulation  with  respect  to  it,  leaving  the  elec- 
tric railways  to  work  out  their  own  salvation  as  a  private  speculative  business 
enterprise;  (2)  to  continue  and  perfect  the  theory  and  practice  of  public  regula- 
tion by  the  complete  elimination  of  contractual  relations,  at  least  so  far  as  they 
relate  to  the  value  of  the  property,  the  rate  of  return  to  capital,  the  extent  and 
quality  of  ser\ice  to  be  rendered  and  the  compensation  therefor;  (3)  to  estab- 
lish a  more  intimate  contractual  relation  between  the  companies  and  the  public 
than  has  heretofore  existed,  based  upon  some  form  of  the  service-at-cost  plan, 
with  service  controlled  under  most  conditions  by  the  municipalities,  and  fares 
regulated  more  or  less  automatically  without  the  intervention  of  state  commis- 
sions; or   (4)   public  operation  or  both  public  operation  and  public  ownership. 

LI.  Quite  a  number  of  witnesses  complained  of  the  bad  effects  of  public 
regulation  as  it  has  heretofore  been  practiced,  and  it  was  even  suggested  that  all 
restrictions  be  removed  from  the  electric  railways  in  order  that  they  might  battle 
to  the  death  with  their  new  competitor,  the  automobile.  The  idea  was  that  only 
by  such  removal  of  restrictions  can  the  ultimate  relative  merits  of  the  electric 
railway  and  the  gasoline  motor  car  be  tested  out.  The  overwhelming  weight  of 
testimony,  however,  was  clearly  adverse  to  such  a  policy.  To  most  of  the  wit- 
nesses it  would  be  unthinkable  that  the  public  should  "wash  its  hands  of"  the 
electric  railways  and  relegate  them  into  the  position  of  a  purely  private  industr>-. 

Lll.  The  policy  of  complete  and  exclusive  state  regulation,  freed  from  the 
limitations  imposed  by  municipal  contracts,  could  hardly  be  carried  out  to  its 
logical  conclusion  except  on  the  assumption  that  the  municipalities  have  no 
special  local  interest  in  electric  railway  service,  and  that  the  present  status  of 
private  ownership  and  o|)eration  is  to  be  continued  indefinitely.  Moreover,  state 
regulation,  as  it  has  thus  far  been  developed,  holds  out  no  adequate  assurance 
that  it  will  be  able  to  restore  and  niaintain  the  credit  of  the  electric  railways,  or 
that  it  will  be  able  to  preserve  continuity  of  service  through  a  solution  of  the 
labor  problem.  At  best,  state  regulation  gives  the  industry  an  opportunity  to 
earn  a  fair  return  upon  the  investment  if  the  industry  can  be  made  self-sustain- 
ing from  the  rates.  Public  regulation  can  give  no  guaranty,  and  in  an  emergency 
like  the  present  one  is  compelled  gradually  to  withdraw  the  hand  of  control  and 
permit  the  companies  to  do  whatever  seems  necessary  to  enable  them  to  work 
out  of  their  financial  difiiculties. 

LI  IF.  A  contractual  relationship  fixing  the  investment  value  of  the  prop- 
erty, and  the  allowed  rate  of  return  to  the  investors,  with  provisions  assuring 
to  the  companies  that  their  investment  will  be  protected  and  their  annual  return 
upon  it  earned  or  paid,  might  have  the  effect  of  restoring  the  comjianies'  credit 
and  of  enabling  them  to  go  on  in  the  performance  of  their  functions.  This  solu- 
tion of  the  problem  involves  the  elimination  of  the  element  of  risk  and  of  chance 
for  reward,  which  lie  at  the  very  foundation  of  private  initiative.  The  service- 
at-cost  plan  is  pre-emineiUly  suited  to  public  enterprise  in  which  the  idea  of  profit 
is  entirely  absent.  When  it  takes  the  fonn  of  a  contract  between  the  municipality 
or  the  state  and  the  electric  railway,  it  is  designed  as  a  means  to  avoid  the  neces- 
sity of  public  ownership  and  operation,  on  the  thcor}-  that  private  ownership  and 


Summary  657 

operation  are  better.  It  is  admitted  on  all  sides  that  most  serious  evils  have  re- 
sulted from  the  treatment  of  the  electric  railways  as  a  speculative  industry,  and 
that  both  from  the  public  point  of  view  and  from  the  point  of  view  of  the  in- 
vestors, ultimate  salvation  lies  in  security.  The  fundamental  purpose  of  the 
service-at-cost  plan  is  to  remove  the  speculative  element,  but  in  doing  so  it  re- 
moves the  very  condition  which  is  put  forward  as  the  chief  reason  for  a  continu- 
ation of  private  management  in  the  case  of  an  industry  which  is  universally  recog- 
nized to  have  become  a  public  function. 

LIV.  The  character  of  the  electric  railway  industry,  the  impossibility  of 
leaving  it  to  be  carried  on  as  a  private  business,  the  failure  of  public  regulation 
to  solve  the  problem  advantageously  either  for  the  electric  railway  companies  or 
for  the  public,  the  inherent  limitations  of  the  service-at-cost  plan,  the  imprac- 
ticability of  dealing  effectively  with  the  Jabor  problem  under  private  management, 
and  the  fact  that  the  cost  of  capital  without  the  support  of  public  credit  has 
become  prohibitive,  all  point  to  the  conclusion  that,  with  respect  to  local  transpor- 
tation, public  ownership  and  operation  are  an  ultimate  necessity.  A  program  of 
public  ownership  and  operation  will  not  be  easily  carried  out.  A  careful  and 
prolonged  consideration  of  the  problem  reveals  no  easy  solution  of  it.  It  is  clear, 
however,  that  the  industry  cannot  be  put  upon  its  feet  and  the  public  interests 
served  except  through  the  adoption  of  a  definite,  comprehensive  and  construc- 
tive policy.  No  such  policy  has  been  suggested  that  does  not  have  ultimate  public 
ownership  as  its  goal.  It  is,  perhaps,  unfortunate  that  the  prejudice  of  control- 
ling public  opinion  against  public  ownership  of  public  utilities,  and  the  immense 
vested  interests  in  the  electric  railways  and  other  utilities,  have  during  the  past 
erected  legal,  contractual  and  financial  barriers  in  the  way  of  the  adoption  of  this 
policy.  Even  in  a  crisis  these  barriers  cannot  be  overcome  without  great  diffi- 
culty. In  the  present  state  of  the  laws  governing  municipal  action,  and  in  the 
present  state  of  municipal  finances,  it  is  quite  obvious  that  public  ownership  of 
the  electric  railways  as  a  general  program  cannot  be  effected  short  of  a  consider- 
able period  of  years,  unless  it  is  brought  about  by  a  compelling  emergency  that 
brooks  no  delay.  Whatever  temporary  measures  may  be  recommended  or  adopted 
for  immediate  relief,  it  is  essential  that  such  measures  shall  not  in  any  way  in- 
terfere with  the  adoption  of  a  program  looking  to  the  pennanent  solution  of 
the  problem,  and  that  there  should  be  no  postponement  of  the  initial  steps  in  the 
work  that  will  take  the  longest.  For  this  reason,  a  declaration  should  now  be 
made  of  the  ultimate  necessity  of  public  ownership  and  operation,  and  public 
attention  should  now  be  directed  toward  the  specific  problem  of  legal,  financial 
and  administrative  preparation  for  it.  It  seems  clear  that,  no  matter  how  soon 
the  program  is  initiated,  the  necessity  for  its  application  will  arrive  before  the 
communities  are  fully  prepared. 


APPENDIX    A 


LOCAL   TRANSPORTATION    ISSUES    IN 

NEW   JERSEY 


BY 

DELOS  F.  WILCOX,  Ph.D. 


(1)  Letter  to  Messrs.  Read  and  Bugbee,  June  2,  1920. 

(2)  Letter  to  Governor  Edwards,  July  19,  1920. 

(3)  Local  Transportation  Issues: 

I. — Public  Service  Railway  Company's  Attack  on  the  Jitneys  a  Move  toward 
Higher  Trolley  Fares. 
II. — Public  control  over  Public  Services  at  Stake  in  the  Present  Crisis. 
III. — Conflicting  Theories  of  Valuation  and  the  Results  They  Bring. 
IV. — A  Definite  and  Constructive  State  Policy  Needed. 


i 


7'  Appendix  A 

(1)  LETTER  TO  MESSRS.  READ  AND  BUGBEE 

Elmhurst,  N.  Y., 
June  2,  1920. 
Hon.  William  T.  Read,  State  Treasurer, 
Hon.  Newton  A.  K.  Bugbee,  State  Comptroller, 
V'aluation  Commissioners, 
Trenton,  N.  J. 
Dear  Sirs: 

I  am  writing  you  as  members  of  the  Valuation  Commission  appointed  by  the 
legislature  by  Chapter  351  of  the  Laws  of  1920,  providing  for  the  valuation  of 
street  railway  property  in  New  Jersey. 

In  1918  I  was  engaged  as  chief  expert  for  the  New  Jersey  State  League  of 
Municipalities  in  the  proceedings  before  the  Board  of  Public  Utility  Commis- 
sioners upon  the  application  of  the  Public  Service  Railway  Company  for  emer- 
gency relief.  In  that  proceeding  the  summary  of  the  Cooley valuation  was  pro- 
duced by  the  company  at  the  request  of  the  Commission,  but  was  not  proven  by 
the  testimony  of  Dean  Cooley  or  any  of  his  assistants.  It  was  marked  as  an 
exhibit  in  the  case,  but  we  had  only  a  limited  opportunity  to  examine  it.  The 
Commission,  in  its  orders  of  July  10  and  September  25,  1918,  disregarded  the 
Cooley  appraisal  on  the  ground  that  it  had  not  been  proven  and  was  not  properly 
in  evidence. 

Again,  in  1919,  when  the  Public  Service  Railway  Company  filed  its  zone 
report  and  asked  the  Commission  to  fix  permanent  rates,  I  was  engaged  by  the 
City  of  Newark  and  the  Associated  Municipalities  as  chief  expert  representing 
the  municipalities.  In  this  1919  proceeding  (still  pending)  the  Public  Service 
Railway  Company,  as  you  doubtless  know,  submitted  the  Cooley  appraisal  and 
supported  it  by  the  evidence  of  Dean  Cooley  himself,  his  associate.  Professor 
Henry  C.  Anderson,  and  the  various  real  estate  experts  who  were  employed  by 
Dean  Cooley  to  appraise  the  Public  Service  Railway  lands.  The  company  also 
introduced  expert  testimony  in  support  of  or  supplementing  this  appraisal  by  rep- 
resentatives of  the  engineering  and  utility  management  firms  of  Ford,  Bacon  & 
Davis,  The  J.  G.  White  Management  Corporation,  Stone  &  Webster  and  Sander- 
son &  Porter;  also  a  number  of  other  witnesses,  both  consulting  engineers  and 
men  engaged  in  the  financing  of  public  utilities.  On  the  part  of  the  municipal- 
ities we  made  an  analysis  of  the  actual  cost  of  the  Public  Service  Railway  prop- 
erties, so  far  as  it  could  be  ascertained  from  the  books  and  records  now  avail- 
able, and  also  made  an  analysis  and  criticism  of  Cooley's  valuation.  Our  esti- 
mate of  the  fair  present  worth  of  the  property  for  rate  purposes  was  a  little 
under  $60,000,000.     The  Stone  &  Webster  man  who  testified  in  February  of  this 

6-^1 


662  Appendix  A 

year  put  the  value  up  to  $180,000,000.  and  another  engineer,  Mr.  Harold  Almert, 
who  fixed  the  fair  value  at  $165,000,000.  indicated  that  he  was  restrained  from 
making  it  $220,000,000  or  $230,000,000  merely  by  the  knowledge  that  such  a 
valuation  would  necessitate  a  rate  of  fare  so  high  as  to  defeat  itself. 

The  wide  range  in  the  estimates  of  value  presented  by  the  various  witnessc> 
before  the  Commission  are  accounted  for  primarily  by  differences  in  theories 
of  valuation.  It  is  my  understanding  that  one  of  the  fundamental  function> 
of  courts  and  public  service  commissions  before  which  testimony  in  rate  cases 
is  taken  is  to  weigh  all  of  the  evidence,  take  into  consideration  all  of  the  perti- 
nent and  proven  facts,  decide  what  are  the  correct  and  le,tjal  rules  in  the  appli- 
cation of  the  several  methods  of  appraisal  and  finally  determine,  on  the  basis 
of  all  these  factors,  what  in  their  judgment  is  the  fair  present  value  for  rate 
purposes  of  the  property  devoted  to  the  public  service  in  the  case  before  them. 
This  function  of  the  court  or  the  commission  is  a  governmental  function  of 
the  highest  type.  It  requires  independence,  public  responsibility,  a  full  and 
unprejudiced  consideration  of  the  claims  of  the  company  and  the  rights  of  the 
public.  The  performance  of  this  function  at  the  present  time  is  peculiarly 
difficult  because  of  the  unsettled  condition  of  valuation  law,  the  conflicting 
precedents  and,  above  all,  the  extraordinary  conditions  which  now  prevail  as  a 
result  of  war  prices. 

With  all  of  these  things  in  view,  I  have  read  with  profound  astonishment 
the  provisions  of  Chapter  351  of  the  Laws  of  1920,  under  which  the  Governor, 
the  State  Treasurer  and  the  State  Comptroller  are  designated  as  a  commission 
to  procure  the  valuation  of  street  railway  property  in  New  Jersey.  Tliis  law, 
as  I  read  it,  is  based  upon  the  fallacious  assumption  that  the  fair  value  of  a 
public  utility  property  for  rate  purposes  is  a  fact  which  any  firm  of  experienced 
and  competent  engineers  can  go  out  and  ascertain,  whereas  the  truth  is.  as  I 
have  already  pointed  out,  that  the  determination  of  the  value  of  such  a  property 
is  not  an  engineering  but  a  governmental  function,  and  depends  upon  the  weigh- 
ing of  a  great  number  of  difTerent  facts  by  a  body  clothed  with  governmental 
power  and  public  responsibility.  If  I  read  the  valuation  act  correctly,  it  directs 
the  Valuation  Commission  to  farm  out  to  some  engineering  firm  for  a  price  the 
performance  of  this  governmental  fuTiction.  Your  Commission  seems  to  be 
directed  to  make  provision  for  government  by  contract.  It  would  be  no  more 
radical  departure  from  established  governmental  procedure  if  Congress,  weary- 
ing of  the  delay  of  the  United  States  Supreme  Court  in  deciding  the  constitu- 
tionality of  tlie  N'olstead  .Act.  should  pass  a  law  directing  the  President,  the 
Comptroller  of  the  Currency  and  the  Secretary  of  Labor  or  three  other  e.xecu- 
tive  officials  to  employ  a  legal  firm,  of  experience  and  standing  in  the  examina- 
tion of  constitutional  (|uestions.  to  look  into  the  circumstances  imder  which 
the  Eighteenth  .-\mendment  and  the  X'olstead  Act  were  adopted  and  to  render 
an  exhaustive  and  final  opinion  upon  their  constitutionalitv,  with  the  provision 
that  upon  the  delivery  of  this  opinion  to  the  exeiulive  commission  api>ointed 
for  the  purpose,  it  should  be  immediately  transmitted  to  the  Supreme  Court 
with  the  instruction  that  the  court  should  accept  and  be  bound  by  the  opinion 
so  prepared   and   delivered.      If   this  comparison   is   thought    to   be    far-fetched. 


Transportation  Issues  in  New  Jersey  663 

we  can  make  another  that  will  illustrate  my  point  just  as  well.  The  Interstate 
Commerce  Commission  has  for  several  years  been  engaged  in  the  valuation  of 
the  railroads  of  the  United  States.  The  work  is  not  completed,  and  yet  there 
is  urgent  need  for  the  fixing  of  value  as  a  basis  for  the  immediate  readjustment 
of  freight  and  passenger  rates.  It  would  be  an  almost  exact  parallel  to  the 
provisions  of  the  New  Jersey  law  if  Congress  had  directed  an  executive  com- 
mission of  three  men  to  make  a  contract  with  an  engineering  firm  to  make  a 
valuation  of  the  railroads  of  the  United  States,  with  the  provision  that  when 
the  valuation  was  completed  and  nicely  bound  up  in  a  volume  or  series  of 
volumes,  with  a  blue  ribbon  on  it,  it  should  be  delivered  to  the  executive  com- 
mission and  by  that  commission  transmitted,  without  examination  or  the  exer- 
cise of  any  act  of  judgment,  to  the  Interstate  Commerce  Commission  and  there- 
after should  be  accepted  by  the  Interstate  Commerce  Commission  as  the  basis 
for  rate  fixing. 

It  is  almost  unbelievable  that  a  legislature  representing  the  people  of  a 
great  and  enlightened  state  like  New  Jersey  should  have  put  upon  the  statute 
books  such  an  outrageous  measure.  I  am  not  a  constitutional  lawyer,  but  if 
there  is  anywhere  tucked  away  in  the  articles  of  either  the  Federal  Constitution 
or  the  State  Constitution  of  New  Jersey  any  guaranty  of  protection  for  the  public 
in  the  valuation  of  public  utilities  and  the  fixing  of  public  utility  rates,  I  feel 
sure  that  this  act  runs  contrary  to  that  guaranty. 

I  speak  in  this  emphatic  manner  because  for  many  years  in  public  employ- 
ment and  in  the  pursuit  of  my  profession  I  have  been  striving  for  the  establish- 
ment and  recognition  of  sound  public  policies  in  the  public  utility  field,  and 
because,  in  connection  with  the  proceedings  still  pending  before  the  Board  of 
Public  Utility  Commissioners,  large  expense  has  been  incurred  in  the  prepara- 
tion and  presentation  of  a  case  based  upon  our  conception  of  public  rights  and 
fair  and  just  regnlation.  and  because  I  see  that  it  is  now  proposed  under  this 
law  that  your  commission  shall  hand  over  to  some  engineering  firm — it  may 
be  for  all  the  pubHc  knows  one  of  the  firms  that  have  already  supplied  witnesses 
in  support  of  the  Public  Service  Railway's  contentions  in  this  very  case' — the 
governmental  function  of  determining  the  value  of  the  property  for  rate  pur- 
poses, by  which  determination  the  public  bodies  of  the  state  of  New  Jersey,  to 
which  the  municipalities  have  to  look  for  justice,  shall  be  bound.  As  I  read 
the  new  law,  there  is  no  provision  for  public  hearings  or  proof  or  cross-exam- 
ination of  witnesses,  and  your  commission  is  not  even  authorized  to  retain  the 
valuation  report  in  its  possession  long  enough  to  read  it.  The  determination 
will  be  the  determination  of  an  engineering  firm  hired  to  perform  a  public 
function,  without  supervision,  without  responsibility,  without  public  hearings 
and  even  without  testimony.^ 

I  have  seen  in  the  newspapers  the  report  that  the  Governor  has  declined 
to  serve  on  the  commission,  and  it  is  for  this  reason  that  I  am  addressing  this 
letter  to  you  as  the  other  members  of  the  commission.^ 

Very  truly  yours, 

DELOS  F.  WILCOX. 


(2)  LETTER  TO  GOVERNOR  EDWARDS 

July  19,  1920. 

Hon.  Edward  I.  Edwards,  Governor, 
Trenton,  New  Jersey. 

Dear  Sir: 

A  few  weeks  ago,  as  you  probably  know,  I  addressed  a  letter  to  Hon. 
Williani  T.  Read  and  Hon.  Newton  A.  K.  Bugbee  as  members  of  the  Street 
Railway  \'aluation  Commission  designated  by  Chapter  351  of  the  laws  of  1920. 
I  did  not  address  that  communication  to  you  as  Chairman  of  the  Commission 
for  the  reason  that  your  definite  refusal  to  act  in  that  capacity  had  come  to  my 
attention. 

1  am  now  transmitting  to  you  as  Governor  a  review  of  the  local  trans- 
portation issues  in  New  Jersey  as  I  see  them.  Not  being  a  resident  of  the 
state,  1  ought  to  explain  my  connection  with  the  problem. 

Several  years  ago,  at  the  request  of  Senator  Carlton  B.  Pierce,  I  drafted 
an  indeterminate  franchise  bill  which  was  introduced  in  the  New  Jersey  legis- 
lature in  1912  and  at  one  or  two  subsequent  sessions,  but  never  got  through. 
It  was  strongly  opposed  by  the  Public  Service  Corporation.  Later,  at  the 
time  when  the  Public  Service  Newark  Terminal  project  was  under  discussion, 
1  was  invited  by  the  Newark  Evening  News  to  make  a  report  upon  the  project 
and  upon  the  numerous  franchises  then  under  consideration  by  the  Board  of 
Street  and  Water  Commissioners  of  the  City  of  Newark.  My  report  appeared 
in  a  series  of  articles  published  in  the  News  in  July,  1913.  In  January,  1918, 
after  the  Newark  Terminal  had  been  in  operation  tor  two  years  and  had  failed 
to  solve  the  transit  problem  in  Newark,  I  was  asked  by  the  News  to  make 
another  survey.  In  the  intervening  years  Port  Newark  had  been  developed 
and  jitney  competition  had  come  in  as  new  factors  in  the  problem.  My  second 
report  was  published  in  the  News  as  a  series  of  articles  in  April,  1918.  In 
March  of  that  year  the  Public  Service  Railway  Company,  taking  advantage 
of  the  decision  of  the  Court  of  Errors  and  Appeals  in  the  Collingswood  Sewer- 
age Case,  had  filed  with  the  Board  of  Public  Utility  Commissioners  an  appli- 
cation for  permission  to  abandon  the  five-cent  fare  and  install  a  seven-cent 
fare,  with  a  charge  for  transfers.  The  New  Jersey  State  Leagxie  of  Munic- 
ipalities determined  to  oppose  this  application,  and  I  was  employed  as  its  chief 
expert  in  the  proceeding.  Hon.  Marshall  Van  Winkle  and  Hon.  George  L. 
Record  were  the  counsel  for  the  League  in  this  case.  Again,  in  1919,  when 
the  Public  Service  Railway  Company  submitted  its  zone  report  and  filed  with 
the   Utilities    Hoard   an   entirely    new    schedule   of    rates,   based    upon    the    zone 


Transportation  Issues  in  New  Jersey  665 

plan,  I  was  retained  by  the  City  of  Newark  and  the  Associated  Municipalities 
as  their  chief  expert  in  general  charge  of  the  case,  under  the  direction  of  Hon. 
Frank  H.  Sommer,  their  special  counsel. 

As  a  result  of  this  series  of  employments  I  have  been  pretty  familiar  with 
street  railway  developments  in  New  Jersey  during  the  past  few  years,  and 
feel  that  I  owe  a  certain  responsibility  to  the  state  and  municipal  authorities 
which  at  least  demands  that  I  lay  before  you,  as  Governor,  a  review  of  the 
Public  Service  Railway  rate  proceedings,  with  a  statement  of  what  I  conceive 
to  be  the  most  important  issues  involved.  1  might  also  add  that  during  the 
past  few  months  I  have  been  engaged  in  a  study  and  analysis  of  the  entire 
street  railway  situation  of  the  country  for  the  Federal  Electric  Railways  Com- 
mission. In  this  connection  I  have  had  an  exceptional  opportunity  to  familiar- 
ize myself  with  the  claims  being  advanced  by  all  the  principal  parties  to  the 
electric  railway  controversy :  the  companies  themselves,  the  banking  interests, 
the  employes,  the  public  service  commissions,  the  municipalities,  and  the  spe- 
cial students  of  the  problem.  As  a  result  of  this  study,  coming  on  top  of  my 
prolonged  connection  with  the  New  Jersey  proceedings,  I  am  fully  convinced 
that  nowhere  in  the  country  is  the  electric  railway  problem  more  important, 
more  complex  and  more  difficult  than  in  the  State  of  New  Jersey.  As  every- 
where else,  the  valuation  of  the  property  devoted  to  public  use  is  the  essential 
first  step  in  the  formulation  of  an  adequate  public  policy  with  respect  to  local 
transportation  service.  For  this  reason,  and  also  because  of  the  confusion 
that  has  been  injected  into  the  situation  by  the  recent  passage  of  the  Street 
Railway  Valuation  Act,  I  have  taken  considerable  pains  to  analyze  and  set 
forth  the  conflicting  claims  of  the  Public  Service  Railway  Company  and  of 
the  municipalities  as  presented  in  the  record  of  the  rate  case. 

The  review  transmitted  herewith  I  have  entitled,  "Local  Transportation 
Issues  in  New  Jersey."    It  is  divided  into  four  sections,  as  follows: 

I.     Public  Service  Railway  Company's  attack  on  the  jitneys  a  move  toward  higher  trolley 

fares. 
II.     Public  control  over  public  services  at  stake  in  the  present  crisis. 

III.  Conflicting  theories  of  valuation  and  the  results  they  bring. 

IV.  A  definite  and  constructive  state  policy  needed. 

Respectfully, 

DELOS  F.  WILCOX. 


(3)    LOCAL  TRANSPORTATION   ISSUES   IN    NEW  JERSEY 


PUBLIC   SERVICE    RAILWAY   COMPANY'S   ATTACK    ON   THE    JITNEYS    A 
MOVE  TOWARD  HIGHER  TROLLEY   FARES 

The  Public  Service  Railway  Company  is  trying  to  put  the  jitneys  out  ot" 
business.  It  has  filed  complaints  in  the  Court  of  Chancery  against  36  jitney 
operators  in  as  many  ditTcrent  numicipalities.  In  these  complaints  it  alleges 
that  it  is  suffering  immeasurable  and  irreparable  damages  from  jitney  com- 
petition and  prays  that  the  defendants  be  enjoined  from  continuing  such  com- 
petition." The  company  alleges  that  its  business  represents  an  investment  of 
more  than  $150,000,000  and  that,  largely  as  a  result  of  the  unlawful  com- 
petition and  interference  with  its  business  by  the  jitneys,  it  is  not  earning  a 
fair  return  upon  this  investment. 

This  move  against  the  jitneys  is  undoubtedly  preparatory  for  a  ten-cent 
trolley  fare.  The  claim  of  an  investment  of  more  than  $150,000,000  falls  in 
very  nicely  with  the  legislative  plan  clearing  the  way  for  an  unsupervised  and 
unchecked  valuation  to  be  made  by  some  firm  of  friendly  engineers,  skilled 
in  the  art  of  giving  substance  to  the  intangible,  and  is  obviously  calculated  to 
secure  ultimate  official  recognition  of  a  value  so  high  as  to  place  the  Public 
Service  Railway  forever  beyond  the  pale  of  effective  regulation.  The  correct- 
ness of  these  conclusions  will  be  made  clear  by  a  review  of  the  statistics  of 
jitney  competition  in  Newark,  of  the  evidence  in  the  Public  Service  Railway 
rate  proceedings  before  the  Utilities  Board,  and  of  the  terms  of  the  street 
railway  valuation  act  of  1920. 

Danforth  Called  Jitneys  a  Godsend  in  1918 

In  the  Emergency  Rate  case,  General  Manager  Richard  E.  Danforth  testi- 
fied on  May  17,  191S,  that  in  his  opinion  the  jitneys  at  that  time  were  taking 
in  at  least  a  million  dollars  a  year  in  competition  with  the  Public  Service  Rail- 
way lines.  Me  added  that  during  the  preceding  12  or  15  months  the  rush-hour 
con»pctition  had  been  a  "godsend"  to  the  company,  because  it  did  not  itself 
have  the  facilities  to  handle  the  traffic.  If,  during  the  most  critical  period  of 
the  war.  jitney  competition  at  the  rush  hour  could  be  described  as  a  "godsend" 
to  the  Public  Service  Railway  Company,  what  must  it  have  been  under  such 
circumstances  to  the  public! 

Immense  Growth  of  Jitney  Traffic  in  Newark 

Licensed  jitneys  have  now  been  operating  in  New  jersey  for  a  period  of 
four  years.     The  statistics  of  jitney  traffic  in  the  City  of  Newark,  as  reported 

666 


Transportation  Issues  in  New  Jersey  667 

to  the  city  treasurer,  are   full  of   import  to  the   Public   Service   Railway   Com- 
pany.    The  figures  are  as  follows : 

Total  Xiiiiihei-  of  Average  Xiimber  of 

Twelve  Months'  Period  Jiliicy  Passciiyers  Passenycrs  per  Day 

June,   1916,  to  May,   1917 6,559,678  17,971 

June,    1917,   to   May,    1918 10,342.673  28.336 

June,    1918,   to   May,    1919 24,323,265  66.639 

June,   1919.  to   May,   1920 39.868.377  108,930 

The  Newark  jitneys  carried  490.000  passengers  in  June,  1916,  3,000,000 
in  June,  1919,  and  3,837.000  in  .May,  1920.=  When  the  Public  Service  Rail- 
way Company  put  in  the  seven-cent  fare  in  October,  1918,  the  jitney  traffic 
jumped;  when  the  Public  Service  Railway  Company  had  a  six-day  strike  in 
March,  1919,  the  jitney  traffic  jumped  again;  when  the  Public  Service  Rail- 
way Company  installed  the  experimental  zoning  scheme  in  September,  1919, 
the  jitney  traffic  jumped  higher  yet  —  in  fact,  it  reached  a  maximum  of 
4,005,000  in  October,  1919.  But  with  the  restoration  of  the  flat  seven-cent 
fare  last  December  jitney  traftic  in  Newark  fell  oiif  a  little.  It  had  a  big 
slump  in  February,  1920,  the  month  of  snow  and  ice ;  but  in  May,  as  we  have 
seen,  it  was  up  again  almost  to  the  October  maximum. 

The  evidence  is  clear  that  jitney  competition  is  no  longer  regarded  by 
the  Public  Service  Railway  Company  as  a  godsend.  On  the  contrary,  its 
increase  is  viewed  with  great  alarm  and  the  jitneys  are  regarded  as  a  major 
obstacle  in  the  way  of  Public  Service  Railway  prosperity.  Not  only  do  the 
jitneys  take  an  immense  amount  of  traffic  which  the  street  cars  would  other- 
wise get,  but  while  jitney  competition  continues  the  Public  Service  Railway 
Company  does  not  dare  to  inaugurate  further  increases  in  the  trolley  fare ; 
for  such  increases,  under  existing  conditions,  would  defeat  themselves  by  driv- 
ing away  a  still  greater  amount  of  traffic  to  the  Railway  Company's  competi- 
tors. In  connection  with  its  zoning  studies  the  company  had  occasion  to  inves- 
tigate the  amount  of  traffic  that  the  jitneys  were  then  carrying  and  to  estimate 
the  effect  of  jitney  competition  under  the  proposed  zone  system  of  fares  on 
the  street  cars.  On  April  24,  1919,  in  the  course  of  his  testimony  before  the 
Utilities  Board,  Mr.  Danforth  said: 

"My  estimate  is  that  jitneys  today  are  doing  a  business  at  an  average  of  four  million 
dollars  a  year,  and  that  means  that  they  are  carrying  eighty  million  passengers.  That  is 
nearly  25  per  cent  of  the  number  of  passengers  Public  Service  expects  to  carry  under  the 
zone  rate  of  fare.  In  other  words,  one  out  of  every  five  people  are  using  jitneys,  and  the 
disturbing  feature  is  that  these  are  the  short  riders,  that  the  jitneys  are  operating  along 
street  railway  lines  and  on  street  railway  tracks  where  there  is  the  greatest  amount  of 
passenger  traffic  and  they  run  only  so  far  along  the  line  as  they  can  afford  to  run  and  break 
even.  They  take  our  short-haul  business  and  they  leave  for  the  Railway  the  long-haul 
business." 

Indeed,  during  the  study  of  the  company's  zoning  plan  made  by  the  ex- 
perts for  the  Associated  Municipalities,  a  memorandum  prepared  by  Mr.  Dan- 
forth under  date  of  April  ll,  1919,  came  into  the  possession  of  Dr.  Robert  H. 
Whitten,  and  was  introduced  by  him  in  evidence  in  his  testimony  on  behalf 
of  the  Municipalities.  In  this  memorandum  Mr.  Danforth  estimated  that  the 
total  number  of  jitneys  in  operation  in  the  principal  cities  served  by  the  Public 


668  Appendix  A 

Service  Railway  Company  on  April  1,  1919,  was  793,  of  which  328  were  in 
Newark,  220  in  Jersey  City,  77  in  Hoboken,  39  in  Paterson,  20  in  Passaic, 
53  in  Elizabeth,  5  in  New  Brunswick,  6  in  Plainfield  and  45  in  Camden. 

"A  check  of  the  passengers  carried  by  jitneys,"  said  this  memorandum,  "seems  to  indi- 
cate that  buses  operating  along  trolley  lines  earn  $7,300  per  year  per  bus  in  the  lariger 
cities.  •  *  *  *  Taking  a  conservative  figure,  it  is  safe  to  assume  that  750  buses  would 
earn  in  excess  of  $4,000,(KX)  per  annum  and  carry  80,000,000  passengers.  If  this  number 
c'l  passengers  were  carried  on  Railway  cars  under  the  zone  system,  allowing  for  the  average 
ride  of  each  jitney  passenger  of  Ijj  miles,  the  revenue  derived  from  such  passengers  would 
be  $4,800,000.  It  is  safe  to  assume  that  at  least  one-half  of  these  passengers  (surely  those 
riding  in  non-rush  hours)   would  be  carried  in  cars  now  operated  by  Railway." 

On  this  basis  Mr.  Dan  forth  figured  out  that  the  Railway  Company  would 
need  to  incur  a  total  additional  operating  expense  of  only  $1,360,000  to  enable 
it  to  take  care  of  all  the  jitney  traffic,  from  which  it  would  derive  an  additional 
gross  revenue  of  $4.i^<00.000,  leaving  $3,440,000  as  the  estimated  figure  repre- 
senting the  net  profit  that  would  come  to  the  Railway  Company  from  the  elim- 
ination of  jitney  competition.  This,  Mr.  Danforth  said,  would  be  nearly  one 
cent  for  each  cash  passenger  then  being  carried  by  the  railway. 

Low  Fares  for  Short  Rides  under  Zone  Plan  Were  Expected  to  Overcome 

Jitney  Competition 

It  was  the  theory  of  the  Utilities  Board,  and,  indeed,  of  all  parties  in  the 
case  who  looked  with  any  favor  at  all  upon  a  zoning  plan,  that  low  fares  for 
short  rides  would  tend  to  develop  the  short-haul  traffic  and  curtail  or  elim- 
inate jitney  competition;  but  the  zone  fare  experiments  put  into  effect  in  Sep- 
tember and  November,  1919,  proved  to  be  egregious  failures  from  every  point 
of  view.  Neither  of  these  plans  had  the  eft'ect  of  attracting  short-haul  traffic. 
and  while  they  were  in  operation  the  jitneys  throve  as  never  before.  The 
zone  plan  was  put  into  effect  with  improvised  facilities  for  collection;  the  fares 
charged  were  unsatisfactory  and  unjust;  the  scheme  was  too  inflexible  and 
not  properly  adjusted  to  local  conditions  in  different  communities;  the  service 
was  slowed  down;  and,  in  general,  public  opinion  was  outraged.  Under  these 
circumstances  the  zoning  idea  did  not  get  a  fair  trial  and  the  hope  of  meeting 
jitney  ci)m|ii-titi(iii  tlirdiiijh  a  zone  system  of   fares  went  glinmu'ring. 

Flat  Nine-cent  Fare  Hardly  Sufficient,  Said  McCarter  a  Year  Ago 

The  Public  Ser\-ice  Railway  Company,  in  its  famous  zone  report  filed  with 
the  Utilities  Board  in  March.  1919.  had  proposed  a  schedule  of  fares  that, 
.iccnrding  to  the  company's  estimates,  would  yield  a  passenger  revenue  of 
$25,390,000  for  the  year  ending  June  30,  1920.  with  an  income  of  $7,162,000 
after  the  payment  of  operating  expenses,  taxes,  and  allowances  for  deprecia- 
tion reserve.  With  bond  interest,  rentals  and  other  fixed  charges  estimated  at 
$5,350,000,  the  company  figtired  that  under  the  proposed  rates  it  would  earn 
a  surjjius  of  $1,812,000  available  for  dividends  on  its  common  stock,  held  by 
the  Public  Service  Corporation.  On  July  29,  1919,  while  the  company's  orig- 
inal zone  application  was  still  being  considered,  Mr.  Thomas  N.  McCarter, 
President  of  the  Corporation  and  also  of  the   Railway  Company,  came  before 


Transportation  Issues  in  New  Jersey  669 

the  Utilities  Board  with  the  statement  that  an  award  of  the  National  War 
Labor  Board,  made  a  short  time  previously,  had  the  effect  of  increasing  the 
company's  pay  rolls  to  the  extent  of  $1,175,000  a  year  over  the  pay  rolls  taken 
into  account  in  the  zone  report.     At  that  time  Mr.  McCarter  said: 

"If  we  are  to  make  up  this  additional  amount  and  at  the  same  time  provide  any  measure 
of  return,  such  as  has  been  contemplated  throughout  the  proceeding,  to  the  Railway  Company, 
to  accomplish  that  end,  if  indeed  that  will  do  it.  will  take  a  9-cent  fare  with  a  penny  for 
a  transfer.  Now,  if  the  Commission  says  so,  we  are  ready  to  put  that  rate  into  eflfect,  but 
I  deprecate  it.  I  think  in  the  first  place  *  *  *  *  it  does  not  produce  enough  money, 
but  if  it  did,  it  means  that  the  company  would  fall  short  of  performing  its  functions  to  a 
large  number  of  people,  because  the  estimate  of  traffic  is  that  whereas  the  rate  filed  under 
the  zone  system  contemplates  something  like  308,000,000  passengers  carried,  under  the  sug- 
gested 9-cent  flat  fare  with  a  penny  for  a  transfer  the  number  of  passengers,  according  to 
our  best  light,  would  only  be  242,000,000.  While  the  money  might  be  produced  to  keep  the 
ship  going,  the  company  would  not  perform  its  functions  simply  to  the  extent  and  in  the 
manner  that  it  would  like  to  perform  its  functions,  and  this  would  be  the  parting,  as  the 
Commission  can  readily  see,  from  all  idea  of  a  zoning  system.  It  would  be  going  into  a 
higher  flat  fare  than  has  ever  been  tried  anywhere  e.xcept  in  Boston  where  they  now  have 
a  10-cent  fare,  and  I  think  in  Pittsburgh  they  now  have  a  10-cent  fare,  but  as  to  Boston,  it 
is   far   from  satisfactory  to  the  public." 

Zone  Plan  in  the  Discard  and  Company  Losing  Money  under  Seven-Cent  Fare 

The  ill-fated  zoning  experiment,  with  the  three-cent  minimum  charge  for 
a  mile  ride,  the  abolition  of  transfers  and  the  rapid  piling  up  of  fares  for  long- 
distance riding,  was  put  into  effect  in  September,  1919,  as  an  alternative  to 
the  flat  9-cent  fare  which,  in  the  company's  opinion,  would  have  been  barely 
sufficient  to  "keep  the  ship  going."  To  provide  what  the  company  regarded 
as  the  minimum  return  that  would  enable  it  to  remain  solvent  required  a  sur- 
plus in  excess  of  fixed  charges  of  approximately  $2,000,000  a  year,  or  $167,000 
per  month.  The  surplus  for  August,  1919,  while  the  company  was  preparing 
to  put  the  zone  experiment  into  eflfect,  A'as  $54,000;  in  September,  with  the 
zone  plan  in  eft'ect  for  17  out  of  30  days,  a  deficiency  of  $130,000  was  incurred; 
in  October,  the  deficiency  was  $305,000,  and  in  November,  $255,000.  The 
7-cent  fare  was  restored  on  December  7,  1919,  and  although  December  was 
generally  a  month  of  high  traffic  on  the  electric  railways  of  the  country,  the 
Public  Service  Railway  still  earned  a  deficiency  of  $14,000  in  that  month.  In 
Januar)-,  1920,  the  deficiency  was  $109,000;  in  Februar}-,  $141,000,  and  in 
March,  $64,000;  but  in  April  the  tide  turned  again  and  showed  a  surplus  of 
$108,000.  If  from  the  date  when  Mr.  McCarter  appeared  before  the  Utilities 
Board  stating  that  a  9-cent  flat  fare  would  scarcely  be  sufficient  to  enable  the 
Public  Service  Railway  to  keep  on  its  feet,  until  April  30,  1920,  a  period  of 
9  months,  the  company  had  earned  the  minimum  which  Mr.  McCarter  re- 
garded as  necessary,  it  would  have  earned  approximately  $2,350,000  more  than 
it  actually  did  earn.  In  other  words,  during  the  9  months  of  experimentation 
following  Mr.  McCarter's  declaration  of  July  29,  1919,  the  company  was  accu- 
mulating a  deficiency  at  the  rate  of  $3,140,000  a  year  below  the  minimum  which, 
according  to  his  claims  at  that  time,  was  necessary  to  keep  the  company  in 
healthy  financial  condition.  But  this  includes  the  bad  months  when  zone  fares 
were  in  effect.  If  we  take  only  the  first  four  months  of  1920,  with  the  seven- 
cent  fare  in  effect  during  the  entire  time,  the  shortage  was  accumulating  at  the 
rate  of  about  $2,600,000  a  year. 


670  Appendix  A 

Now,  it  so  happens  that  in  the  niontli  of  April,  1920,  a  new  wage  increase 
was  granted,  ettective  the  first  of  May,  which,  according  to  the  company's 
statement,  will  increase  the  pay  rolls  to  the  extent  of  $1,200,000  annually. 
Under  the  new  wage  schedule,  unless  the  company  succeeds  in  effecting  im- 
portant economies,  it  will  claim  an  increase  of  approximately  $3,800,000  in 
annual  net  income,  over  what  it  has  been  earning  recently  with  the  seven-cent 
fare,  as  the  minimum  necessary  to  keep  the  ship  going." 

Ten-cent  fare  in  Prospect  if  Jitneys  Are  Eliminated 

If  Mr.  Danforth's  1919  estimates  were  correct,  the  recovery  for  the  street 
cars  of  the  entire  amount  of  the  trafVic  then  being  taken  by  the  jitneys  would 
pretty  nearly  make  up  this  deficiency  without  the  necessity  for  a  further  in- 
crease in  the  fare.  But  obviously,  the  Public  Service  Railway  would  not  get 
all  of  the  present  jitney  traffic,  even  if  the  jitneys  were  entirely  eliminated, 
as  much  of  this  traffic  originates  at  points  where  street  car  facilities  are  now 
inadequate.  Also,  it  must  be  kept  in  mind  that  the  surplus  over  fixed  charges 
demanded  by  the  I'ublic  Service  Railway  Company  in  its  zone  report  and  in 
its  subsequent  applications  for  immediate  relief,  is  not  by  any  means  a  meas- 
ure of  what  it  claims  that  it  is  entitled  to  earn  under  the  established  principles 
of  regulation.  It  is  not  4  per  cent  on  its  common  stock,  but  8  per  cent  upon 
the  entire  value  of  the  property  operated  by  it,  that  measures  the  company's 
claim.  The  value  for  rate  purposes  fixed  by  its  various  witnesses  has  a  range 
of  many  millions,  but  the  average  would  be  at  least  $150,000,000,  and  that  is  the 
minimum  investment  figure  set  up  in  its  bills  of  complaint  against  the  jitnevs. 
Eight  per  cent  on  this  amount  would  be  $12,000,000  a  year,  or  $4,728,000 
more  than  the  minimum  amount  upon  which  Mr.  McCarler's  nine-cent  fare 
estimate  was  based.  Obviously,  even  with  the  jitneys  eliminated,  while  present 
operating  costs  continue,  the  Public  Service  Railway  Company  is  headed  for 
reorganization  or  for  a  fare  of  ten  cents  or  more." 

The  Public  Service  Railway  Company,  the  Public  Service  Corporation  and 
Mr.  Thomas  N.  McCarter  personally  are  playing  for  great  stakes.  They  do 
not  dare  to  increase  the  fare  above  seven  cents  under  present  conditions,  be- 
cause, while  jitney  operation  continues,  the  siiort-haul  street-car  riders,  if  they 
are  driven  from  the  street  cars  by  a  further  increase  in  fares,  will  have  two 
alternatives — they  may  walk,  or  they  may  take  a  bus.  If  the  buses  are  driven 
out  their  only  choice  will  be  to  walk.  Without  a  doubt  the  falling  oflf  in  street 
car  traffic  as  a  result  of  a  further  increase  in  street  car  fares  will  be  mucli  less 
if  active  jitney  competition  is  eliminated  than  it  would  be  with  buses  running. 

With  Competition  Gone  No  Known  Limit  on  Value  of  Service 

It  may  be  also  that  the  I'ublic  .Service  Railway  Company  has  another  thing 
in  mind.  Tlierc  is  an  old  and  theoretically  well-established  rule  of  the  courts 
an<l  the  regulator)'  commissions  to  the  eflfect  that  charges  for  a  public  utility 
service  must  not  be  higher  than  the  service  is  reasonably  worth,  liven  though 
till-  rnmpany  ni.iv  m.t   \<r  earning  a  fair  return  u])on  the  value  of   the  property 


Transportation  Issues  in  New  Jersey  671 

devoted  to  public  use,  its  charges  are  restricted  by  this  upper  hniit.  The  rule 
in  this  respect  was  stated  by  Mr.  Justice  Swayze  in  his  celebrated  opinion  in 
the  Passaic  Gas  Case,  where  he  says : 

"On  the  one  hand,  a  just  and  reasonable  rate  can  never  exceed,  perhaps  can  rarely 
equal,  the  value  of  the  service  to  the  consumer.  On  the  other  hand,  it  can  never  be  made 
by  compulsion  of  public  authority  so  low  as  to  amount  to  confiscation.  A  just  and  reasonable 
rate  must  ordinarily  fall  somewhere  between  these  two  extremes,  so  as  to  allow  both  sides 
to  profit  by  the  conduct  of  the  business  and  the  improvements  of  methods  and  increase  of 
efficiency.  Justice  to  the  consumer  ordinarily  would  require  a  rate  somewhat  less  than  the 
full  value  of  the  service  to  him;  and  justice  to  the  company  would  ordinarily  require  a  rate 
above  the  point  at   which   it   would   become  confiscatory." 

In  this  opinion  Justice  Swayze  assumes  that  the  value  of  the  service  will 
always  be  greater  than  the  cost  of  the  service,  but  in  1913,  when  the  Passaic 
Gas  Case  was  decided,  nobody  could  foresee  the  tremendous  revolution  in  the 
condition  of  public  utility  service  that  has  since  come  about  as  a  result  of  the 
war.  It  is  now  very  far  from  certain  that  in  the  street  railway  business  the 
reasonable  value  of  the  service  to  the  car  rider  is  always  greater  than  its  cost. 
Under  these  circumstances  the  commissions  and  the  courts  will  be  called  upon 
to  establish  criteria  of  the  worth  of  street  railway  service,  and  v^fhat  criterion 
could  be  so  readily  applied  or  have  so  plausible  a  basis  as  the  fares  charged  by 
competing  jitney  buses  for  rendering  similar  service?  So  long  as  the  jitneys 
remain  in  active  competition  with  the  street  railways,  ready  to  carry  passen- 
gers at  a  five-cent  fare,  even  though  their  operations  be  restricted  to  the  com- 
paratively short-haul  business,  they  tend  to  establish  a  standard  price,  a  limit 
beyond  which,  under  the  principles  of  rate  regulation,  the  electric  railways 
may  not  be  permitted  to  go,  at  least  for  the  short  hauls.  And  with  the  zoning 
plan  down  and  out,  the  uniform  flat  fare  has  to  be  fixed  at  a  point  where  it 
will  not  be  unreasonable  even  for  those  who  ride  short  distances. 

The  Public  Service  Railway  Company,  therefore,  has  a  triple  purpose  in 
trying  to  drive  the  jitneys  out.  First,  and  most  obviously,  it  will  regain  some 
of  the  traffic  which  the  jitneys  have  taken  away  from  it ;  second,  it  will  be  rid 
of  the  active  competition  that  tends  to  make  further  fare  increases  ineffective 
and  disastrous  to  the  company ;  and  third,  it  will  remove  from  sight,  and  ulti- 
mately from  mind,  the  competitive  service  that  tends  to  fix  the  maximum  value 
above  which  local  transportation  fares  may  not  go  under  the  rules  laid  down 
by  the  courts  and  the  utilities  commissions. 

Public  Service  Railway  Claims  Franchise  Value  Equivalent  to  Watered  Stock 

The  people  of  New  Jersey  have  supposed  that  they  were  free  from  the 
danger  of  the  capitalization  of  franchise  values  as  a  basis  for  rate-fixing.  It 
is  generally  assumed  that  the  question  was  settled  in  favor  of  the  public  and 
against  the  companies  in  the  Passaic  Gas  Case,  but  in  that  case  the  company 
did  not  exhaust  its  devices.  It  carried  the  case  to  the  United  States  Supreme 
Court,  but  discontinued  it  before  argument,  and  the  United  .'-itates  Supreme 
Court  has  not  finally  determined  the  extent  to  which  franchise  values  are  to 
be   taken   into   consideration    in    fi.xing   rates.      In    the    Consolidated    Gas    Case, 


672  Appendix  A 

indeed,  the  court  held  that  the  company,  under  the  laws  of  New  York,  was 
entitled  to  earn  a  fair  return  on  nearly  $8,000,000  of  franchise  value  the  same 
as  on  any  other  portion  of  its  property.  What  the  court  would  do  with  the 
consolidation  and  franchise  values  of  the  Puhlic  Service  Railway  system,  cap- 
italized in  the  old  days  of  20-to-l  exchanges  about  which  Accountant  Mark 
Wolff  has  given  such  vivid  testimony,  lies  on  the  lap  of  the  gods.  That  the 
Public  Service  Railway  Company  does  not  itself  admit  the  correctness  of  the 
conclusion  reached  by  the  courts  of  New  Jersey  in  the  Passaic  Gas  Case  with 
respect  to  franchise  values  was  demonstrated  at  the  hearing  before  the  Utilities 
Board  in  the  pending  rate  case  on  February  27,  1920.  when  Senator  Edmund 
W.  Wakelee,  counsel  for  the  company,  formally  placed  upon  the  record  the 
following  statement: 

"The  Supreme  Court  of  this  state  held  in  the  Passaic  Gas  rate  case  that  franchises  of 
utility  corporations,  including  the  right  to  use  the  public  highways  in  their  business,  are 
property,  but  property  of  such  a  peculiar  kind  that  their  value  should  not  be  taken  into 
account  in  estimating  the  value  of  the  |)ri)i)erty  of  such  corj'orations  for  the  purpose  of 
fixing  rates  (84  N.  J.  L.  46J).  The  Court  of  Errors  reversed  the  judgment  of  the  Supreme 
Court  (84  N.  J.  L.  581).  Subsciiuently.  upon  rehearing  the  Court  of  Errors  reversed  its 
decision  (87  N.  J.  L.  ,^97)  and  adopted  the  opinion  of  the  Supreme  Court  as  its  opinion. 
*  •  •  *  The  SupreiTie  Court  of  the  L'nitcd  States,  however,  has  held  that  such  franchises 
are  property  and  their  value  must  be  taken  into  account  in  ascertaining  the  value  of  the 
property  of  a  public  utility  coriKiration.   for  the  purpose  of  ti.xing  rates. 

"In  this  state  of  the  law  we  insist  that  the  \'alue  of  the  franchises  of  Public  Service 
Railway  Company  must  be  taken  into  account  in  ascertaining  the  \'alue  of  its  property  in 
the  present  hearing:  that  if  the  value  of  such  franchises  is  not  taken  into  account  rights 
of  the  Railway  Company  secured  by  the  constitution  of  this  state  and  of  the  United  States 
would  l)e  violated.  The  value  of  such  franchises  can  best  be  ascertained  by  including  them 
in  the  value  of  all  the  property  of  the  corporation  to  which  they  appertain ;  that  the  best 
evidence  of  the  value  of  the  property  of  such  a  corporation,  including  all  the  elements  of 
its  property,  is  shown  by  leases  and  consolidation  agreements,  leases  for  9(X)  years  being 
substantially  sales,  and  prices  fixed  by  voluntary-  sales  of  property  are  universally  recognized 
as  the  best  evidence  of  value.  In  this  matter  the  consolidation  agreements  in  evidence  and 
leases  show  the  value  of  the  projicrty  now  owned  by  Public  Service  Railway  Company  at 
the  time  when  such  leases  and  consolidation  agreements  were  made,  respectively,  and  the 
company  insists  that  the  best  evidence  and  plenary  evidence  of  the  value  of  its  property  at 
the  time  when  those  leases  and  consolidation  agreements  were  made  is  contained  therein." 

Clearly,  the  Public  Service  Railway  Company  does  not  intend  to  miss  a  trick. 

The  company  has  already  been  freed  by  action  of  the  legislature,  of  the 
Utilities  Board  and  of  the  courts  from  the  fare  limitations  which  it  and  its 
predecessors  voluntarily  assumed  in  consideration  of  the  franchises  granted 
to  them  by  the  municipalities.  These  franchises  in  almost  everv  case  run  in 
perpetuity.  With  jitney  competition  removed,  the  franchises  will  be  not  only 
perpetual  and  free  from  rate  limitations,  but  also,  to  all  intents  and  purposes, 
exclusive.  The  L'tilitics  Board  will  have  no  effective  power  of  rate  regulation 
for  the  reason  that  no  matter  how  high  the  tares  may  go  the  contpanv,  on  the 
basis  of  its  excessive  valuation,  will  be  able  to  claim  that  it  is  not  earning  more 
than  it  is  entitled  to.  l-'urthermore,  with  the  jitneys  out  of  the  way.  it  will 
be  very  ilitlicult.  it  not  impossible,  for  the  Utilities  Board  to  establish  an  upper 
limit  above  which  the  fare  would  be  considered  as  more  than  the  service  is 
worth.  The  result  will  be  that  the  people  of  New  Jersey  for  all  time  to  come 
will  iiavc  the  choice  of  riding  on  the   Public  Service   Railway  cars  at  whatever 


Transportation  Issues  in  New  Jersey  673 

rates  of   fare  the  company  may  choose  to  charge,  or   of   providing  their  own 
private  vehicles  if  they  do  not  prefer  to  walk. 

Regulation  Should  Be  Effective  Before  Monopoly  is  Granted 

From  what  has  been  said  it  might  be  inferred  that  monopoly  in  trans- 
portation service  is  regarded  as  an  evil  and  that,  particularly,  jitney  competi- 
tion should  be  stanchly  preserved.  This  does  not  follow.  Local  transporta- 
tion service  should  be  developed  in  an  orderly  and  economical  way.  Jitneys 
ought  not  to  be  permitted  to  destroy  the  electric  railway  when  they  are  unable 
to  take  its  place.  Common  carrier  service  by  motor  buses  should  be  developed 
as  an  auxiliary  to  the  street  car,  not  as  a  competitor  with  it.  Nevertheless,  a 
private  monopoly  upon  which  a  great  conmiunity  is  dependent  for  an  essential 
public  service,  when  such  a  monopoly  has  manoeuvred  itself  into  a  position 
w'here  it  cannot  be  effectively  regulated  in  the  public  interest,  is  intolerable. 
The  Public  Service  Railway  Company  aspires  to  monopoly;  and  indeed  mo- 
nopoly in  local  transportation  service  has  great  advantages  from  the  viewpoint 
of  ability  to  render  adequate  service  at  minimum  cost.  But  before  New  Jersey 
establishes  or  reestablishes  monopoly  in  the  hands  of  the  Public  Service  Rail- 
way Company  it  otight  to  make  sure  that  the  service  will  in  fact  be  adequate 
and  that  the  cost  will  in  fact  be  kept  down  to  a  minimum.  The  state  cannot 
have  any  such  assurance  until  the  value  of  the  company's  property  devoted 
to  public  use  and  the  rate  of  return  to  be  allowed  upon  it  have  been  established 
upon  a  reasonable  and  conservative  basis ;  nor  until  son^e  guaranty  of  operat- 
ing efficiency  and  of  timely  expansion  to  meet  the  community's  increasing 
transit  needs  is  secured.  Otherwise,  the  company  will  be  in  a  position  to  flout 
the  community  in  any  effort  that  it  may  hereafter  make  through  the  Utilities 
Board  or  any  other  agency  for  the  protection  of  essential  public  rights. 


II. 

PUBLIC    CONTROL    OVER    PUBLIC    SERVICES    AT    STAKE    IN    THE 

PRESENT    CRISIS 

Shall  New  Jersey  establish  a  local  transportation  monopoly,  hoping  that 
effective  regulation  will  follow,  or  shall  it  establish  effective  regulation  first 
and  then  see  about  monopoly  afterwards? 

Most  of  the  electric  railways  of  the  country  are  undoubtedly  in  financial 
distress.  Their  present  critical  condition  is  due  in  part  to  financial  misman- 
agement and  in  part  to  public  hostility  that  has  developed  out  of  their  sordid 
past;  but  even  the  best  of  management,  coupled  with  the  greatest  good  will  on 
the  part  of  the  public,  would  not  entirely  relieve  them  of  the  difliculties  grow- 
ing out  of  the  extraordinary  times  upon  which  they  have  now  fallen.  Still, 
the  weakness  they  have  developed  under  the  new  conditions  resulting  from  the 
war  has  proven  beyond  a  doubt  that   their  financial  structure  is  unsound  and 


674  Appendix  A 

that  their  public  relations  from  the  beginning  have  been  wrong.  The  electric 
railways  themselves  everywhere  are  demanding  relief  from  the  voluntary  con- 
tracts which  they  made  in  their  days  of  prosperity  or  hope  of  prosperity,  and 
are  saying  that  as  public  servants  they  cannot  continue  to  "carry  on"  upon  the 
old  terms  and  conditions.  They  assert  that  if  they  are  to  fulfill  the  function 
of  an  essential  public  utility  they  must  be  given  a  new  deal  all  around. 

Danger  that  Cost  of  Street  Railway  Service  Will  Become  Prohibitive 

The  investors  have  already  been  hard  hit  by  a  tremendous  shrinkage  in 
the  market  value  of  their  securities  and  the  credit  of  the  industry  has  practi- 
cally disappeared.  On  many  street  railway  properties  maintenance  is  being 
neglected  and  service  curtailed.  With  credit  gone,  the  expansion  of  street  rail- 
way facilities  is  necessarily  at  a  standstill,  and  with  revenues  insufficient,  phys- 
ical properties  are  drifting  toward  a  state  of  general  disintegration.  If  this 
process  continues  the  old  investors  will  suffer  further  loss,  and  the  street  rail- 
ways themselves  will  ultimately  go  to  pieces  unless  arrangements  are  made  for 
their  general  rehabilitation — and  that  means  an  enormous  amount  of  new  capi- 
tal which  cannot  be  secured  at  all  without  further  guaranties  from  the  public. 
Wages  are  still  going  up  and  the  prices  of  materials  are  not  yet  coming  down. 
Scarcitv  of  free  capital  and  the  insecurity  of  street  railway  investments  are 
pressing  to  drive  the  cost  of  money  for  street  railway  purposes  to  a  new 
high  level.  All  these  things  combine  to  bring  the  cost  of  street  railway  service 
nearer  and  nearer  to  the  point  where  it  will  become  prohibitive.  The  financial 
condition  of  the  local  transportation  industry  is  chaotic,  and  everywhere  there 
is  a  sense  of  impending  danger,  not  only  of  irretrievable  losses  to  the  investors, 
but  also  of  the  failure  of  an  essential  public  function  at  a  time  when  the  nor- 
mal demands  upon  it  are  greater  than  ever.  As  the  census  returns  for  1920 
come  in,  it  becomes  apparent  that  in  spite  of  war  and  pestilence  and  the  slack- 
ening of  immigration  the  tide  of  population  toward  the  cities  is  still  running 
strong  throughout  the  country.  This  means  that  urban  transportation  prob- 
lems are  necessarily  becoming  more  critical  from  year  to  year  and  that  the 
financial  paralysis  of  the  electric  railway  cannot  but  have  a  far-reaching  effect 
upon  the  entire  group  of  social,  economic  and  political  problems  that  have  their 
origin  in  urban  congestion. 

Companies'  Financial  Embarrassment  Threatens  Breakdown  of  Regulation 

Under  these  conditions  there  is  grave  danger  that  the  very  distress  in 
which  the  street  railway  companies  now  find  them.selvcs  and  the  unreadiness 
of  the  public  to  assume  any  efifcctive  initiative  in  the  solution  of  the  trans- 
portation problem  will  result  in  a  complete  breakdown  of  regulation.  Urban 
comnnmities  everywhere  are  likely  to  find  themselves  in  the  position  where 
they  recognize  the  essential  character  of  local  transportation  service  but  are 
unwilling  to  do  anything  about  it  in  the  direction  of  self-help.  In  that  case 
the  financially-broken  companies  will  be  in  a  stronger  position  than  they  ever 
were  before,  and  the  new  street  railway  settlements  brought  about  under  these 


Transportation  Issues  in  New  Jersey  675 

circumstances  are  likely  to  be  upon  the  terms  and  conditions  which  the  com- 
panies prescribe.     For  once  poverty  will  be  power. 

Control  versus  Cooperation 

There  is  great  confusion  in  the  public  mind  as  to  the  true  relations 
between  the  community  and  the  public  utilities.  We  find  everywhere,  either 
latent  or  active,  a  sharp  antagonism  growing  out  of  the  fact  that  the  public  is 
primarily  interested  in  service,  while  the  companies  necessarily  have  their  eye 
on  profits.  At  the  same  time  the  cry  is  raised  by  the  so-called  conservative 
elements  of  the  community — the  "boosters" — that  the  real  interests  of  the  com- 
munity and  of  the  companies  are  identical  and  that  cooperation  should  be  the 
watchword.  This  plea  for  cooperation  has  a  strong  appeal  to  those  who  are 
impressed  with  the  disadvantages  of  constant  bickering  and  recrimination,  but 
still  remain  firm  believers  in  the  theory  that  public  utilities  should  be  privately 
owned  and  operated.  But  to  those  who  look  more  deeply  into  the  relations 
between  the  community  and  the  street  railway  companies  it  is  apparent  that 
cooperation  is  not  the  final  word.  It  is  impossible  to  escape  from  the  fact 
that  the  community  and  the  utility  corporation  cannot  work  together  as  part- 
ners unless  one  of  them  is  to  keep  silence  and  "go  along  with"  the  other.  The 
conflict  between  the  motive  of  service  and  the  motive  of  profit  is  irreconcil- 
able— one  or  the  other  must  be  subdued.  It  is  for  this  reason  that  the  public 
cannot  tolerate  a  public  service  corporation  in  any  other  position  than  a  sub- 
ordinate one.  The  proper  relation  of  the  community  to  its  public  servants  is 
one  of  control,  and  whatever  cooperation  is  practicable  or  necessary  must  be 
effected  on  that  basis. 

It  is  not  the  people  of  New  Jersey  alone  who  are  confronted  with  this 
complex  and  baffling  problem  of  utility  control ;  yet  the  Public  Service  Cor- 
poration of  New  Jersey  and  the  Public  Service  Railway  Company  stand  at 
the  very  forefront  in  the  street  railway  world  and  present  to  the  people  of  the 
state  a  problem  quite  unique  in  importance,  though  not  entirely  different  in  kind 
from  the  electric  railway  problems  of  other  states.  Where  else  can  we  find  such 
a  vast  number  of  municipalities,  comprising  three-fourths  of  the  population  of  a 
great  commonwealth,  bound  together  in  common  dependence  upon  a  compact 
family  of  private  corporations,  not  for  transportation  service  alone,  but  for  three 
services  of  such  transcendent  importance  as  transportation,  gas,  and  electric  light 
and  power?  New  Jersey  is  the  Argonne  Forest  in  the  battle  line  between  the 
Allies  loosely  joined  together  in  the  struggle  for  democracy  and  the  Central  Pow- 
ers representing  the  alleged  efficiencies  of  centralization  and  absolutism. 

The  Old  Question:  Shall  Corporations  or  the  Government  Prevail? 

While  the  great  battles  of  the  World  War  were  fought  to  make  the  world 
safe  for  democracy,  the  state  of  New  Jersey  has  a  big  fight  on  its  hands  to  achieve 
democracy  for  itself  and  save  it  for  the  world.  In  this  period  of  upheaval,  when 
every  civilized  nation  is  seething  with  unrest  and  when  the  common  people  who 
earn  their  bread  each  day  and  have  little  or  no  reserve  for  periods  of  sickness, 
unemployment  and  old  age,  have  everywhere  become  restive  toward  militarism, 


676  Appendix  A 

capitalism  and  the  restraints  of  government,  the  future  of  democracy  depends 
to  an  extraorcHnary  degree  upon  the  ability  of  the  English-speaking  peoples,  and 
particularly  upon  the  ability  of  the  Americans,  to  solve  their  social,  economic 
and  political  problems  through  orderly  processes  of  evolution  instead  of  being 
led  or  driven  into  disorderly  and  futile  processes  of  revolution.  The  Civil  War 
was  fought,  more  than  anything  else,  to  prove  the  superior  authority  of  the  nation 
as  a  whole,  imbued  with  a  determination  to  protect  the  common  welfare,  over  a 
great,  concentrated,  arrogant  property  interest  that  would  recognize  no  political, 
social  or  industrial  rights  unless  they  were  subordinated  to  the  perpetuation  of 
slavery  and  to  the  continued  exploitation  of  a  subject  race  by  the  capitalists  of 
the  South.  Following  the  close  of  the  Civil  War.  partly  as  a  a  result  of  economic 
disturbances  and  the  violent  readjustment  of  values  through  changes  in  the  pur- 
chasing power  of  money,  and  partly  through  the  subordination,  for  the  time  being, 
of  all  political  issues  not  related  directly  to  the  abolition  of  slavery  and  the  main- 
tenance of  the  Union,  a  period  ensued  during  which  the  railroads  and  other  great 
corporations  developed  enormous  power  in  the  nation  and  often  used  it,  unhap- 
pily, for  sinister  purposes.  Thirty  years  or  more  ago  the  great  political  interro- 
gation was  this:  Are  the  corporations,  representing  private  interests,  to  remain 
more  powerful  than  the  government  itself,  representing  the  public  interest,  or 
will  some  way  be  found  to  subdue  their  political  and  industrial  arrogance  and 
compel  them  to  serve  the  public?  Through  a  long  series  of  political  and  indus- 
trial conflicts  the  country  was  in  the  process  of  answering  that  question  when  the 
World  War  broke  upon  us  and  our  thoughts  were  turned  to  military  and  inter- 
national issues.  The  big  war.  with  its  tremendous  wastes;  with  its  world-wide 
upsetting  of  economic  conditions ;  with  the  standard  of  values  everywhere  changed 
and  the  commercial  and  industrial  world  shaken  to  its  foundations,  has  been  the 
occasion  for  the  revival  of  the  old  interrogation  with  a  new  sense  of  national  peril 
imless  the  (|uestion  can  be  answered  effectively  and  answered  right. 

Complete  Subordination  to  Public  Interest  Theoretically  Admitted  in 

New  Jersey 

The  public  utility  corporations  are  our  much  restricted,  much  distressed, 
much  feared  and  much  hated  servants.  They  perform  the  most  intimate  public 
functions  of  urban  civilization.  We  cannot  dispense  with  their  services  unless 
wc  arc  willing  to  help  ourselves,  and  as  communities  we  seem  to  be  weak  in 
muscle  and  untrained  in  mind  to  do  the  work  that  must  be  done.  In  New  Jersey 
the  corporations  engaged  in  the  exploitation  of  the  public  need  for  local  trans- 
portation and  for  light,  heat  and  power  have  taken  on  the  liverv  of  heaven;  they 
have  christened  themselves  public  servants,  and  in  apparent  humility  have  pro- 
claimed their  enterprises  undertaken  and  perpetually  carried  on  for  the  public 
pood.  We  have  the  I'ublic  Si'n'icc  Corporation,  the  Public  Scn-ice  Gas  Company, 
the  Public  Scn-ict-  F.lectric  Company,  the  Public  Scn-icc  Railroad  Company  and 
the  Public  Scn-icc  Railway  Company — the  Public  Scrz'ice  family.  Indeed,  the 
companies  collectively  have  come  to  refer  to  themselves  and  to  be  referred  to 
simi)ly  as  Public  Sen-ice.  which  naturally  would  connote  their  complete  identi- 
fication with  the  public  interest.     Theoretically,  the  case  for  public  control  and 


Transportation  Issues  in  New  Jersey  677 

for  the  absolute  subordination  of  private  interest  to  the  pubHc  welfare  in  connec- 
tion with  these  utiHties  is  placed  beyond  the  need  of  argvnnent  by  the  admissions 
of  the  very  companies  engaged  in  the  performance  of  these  several  functions. 
Yet  the  history  of  the  State  of  New  Jersey  during  the  past  seventeen  years  sug- 
gests the  pertinent  and  persistent  question  as  to  whether  these  public  servants, 
with  all  their  insignia  of  humility,  may  not  have  become  public  masters  and  may 
not  now  be  striving,  as  potently  as  ever,  to  perfect  and  maintain  their  public 
mastery. 

Origin  of  State  Regulation 

It  was  only  a  few  years  after  the  organization  of  the  Public  Service  Cor- 
poration of  New  Jersey  that  the  unbearable  arrogance  and  inefficiency  of  public 
utility  corporations  everywhere  gave  rise  to  the  movement,  originating  in  Wis- 
consin under  the  leadership  of  Senator  La  Follette  and  in  New  York  under  the 
leadership  of  Governor  Hughes,  for  the  establishment  of  political  machinery 
through  which  the  strong  arm  of  the  state,  clothed  with  the  powers  of  sov- 
ereignty, could  effectively  curb  the  private-mindedness  of  these  public  servants 
and  effectively  promote  in  them  the  habit  of  diligence  about  the  public  business 
in  which  they  were  supposed  to  be  engaged.  The  theory  that  gave  rise  to  the 
enactment  of  the  state  public  utility  laws  and  to  the  creation  of  state  utility  com- 
missions was  that  the  essential  nature  and  the  public  character  of  utility  services 
should  be  established  beyond  peradventure,  and  that  public  service  corpora- 
tions should  be  clothed  with  the  dignity  and  the  responsibility  of  public  servants 
and  should  be  given  the  public  protection  corresponding  to  their  position.  It  was 
the  theory  of  state  regulation  that  every  public  utility  should  be  required  to  render 
adequate  public  service  at  reasonable  rates,  and  should  at  the  same  time  be  put 
in  a  position  of  reasonable  security  against  the  destruction,  impairment  or  seizure 
of  its  property  devoted  to  public  use,  and  be  given  a  reasonable  assurance  that  so 
long  as  its  property  continued  to  be  devoted  to  the  public  use  it  would  be  per- 
mitted to  earn  a  fair  return  upon  it. 

While  the  general  principles  of  state  regulation  are  reasonably  clear,  their 
enunciation  leaves  for  determination  in  each  individual  case  a  number  of  issues 
of  fundamental  importance  and  extraordinary  difficulty.  What  is  adequate  ser- 
vice? \Miat  is  the  value  of  the  property  devoted  to  public  use?  What  is  a  fair 
rate  of  return  upon  it?  What  public  cooperation  shall  be  given  the  utility? 
What  is  a  reasonable  charge  for  the  service  rendered?  These  are  the  big  ques- 
tions that  plague  regulatory  commissions  everywhere.  These  are  the  rocks  upon 
which  the  good  ship  Public  Regulation,  imless  steered  by  wise  and  valiant  helms- 
men, founders. 

Failures  of  Regulation  in  Present  Emergency 

Since  1911  the  theory  and  practice  of  public  utility  regulation  by  a  state 
commission  has  been  on  trial  in  New  Jersey,  but  it  was  not  until  early  in  191S 
that  the  full  jurisdiction  of  the  Utilities  Board  over  the  charges  of  street  railway 
companies  was  established  by  the  courts  of  the  state.  Prior  to  that  time  it  had 
been  supposed  that  the  municipal  contracts  limiting  the  rates  of  fare  were  bind- 
ing upon  the  railway  companies  and  could  not  be  abrogated  by  the  Utilities  Board 


678  Appendix  A 

itself.  Therefore,  it  cannot  be  said  that  with  respect  to  local  transportation  rates 
the  theory  of  state  tegulation  has  had  any  trial  in  New  Jersey  under  normal 
conditions.  During  the  past  two  years,  since  the  problem  of  fare  fixing  was 
dropped  into  the  lap  of  the  Utilities  Board,  the  electric  railways  everywhere 
have  been  contending  with  abnormal  difficulties.  All  the  schemes  of  public  regu- 
lation and  control  under  private  ownership  are  breaking  down  because  of  their 
inability  to  cope  with  the  extraordinary  conditions  growing  out  of  the  war.  Even 
in  Massachusetts,  where  the  state  commission  was  supposed  to  have  full  juris- 
diction and  where  the  financial  problem  of  the  electric  railways  was  recognized 
as  critical  several  years  before  the  era  of  abnormal  war  costs,  state  regulation 
has  signally  failed  to  solve  the  problem  in  a  way  to  satisfy  at  one  and  the  same 
time  the  legitimate  needs  of  the  investors  and  the  imperative  requirements  of 
the  community  with  respect  to  this  supremely  important  public  service.  State 
regulation  has  nowhere  been  entirely  successful  in  meeting  the  crisis.  In  some 
cases  the  authority  of  the  commissions  has  been  too  much  restricted ;  in  other 
cases  the  commissions  may  not  have  acted  with  enough  promptness  and  decision ; 
in  still  others,  it  may  be,  a  solution  of  the  problem  lay  not  so  much  beyond  the 
authority  as  beyond  the  inherent  power  of  the  commissions.  It  is  not  surprising 
that  the  supreme  test  of  state  regulation  in  New  Jersey  came  with  the  rate  pro- 
ceedings initiated  by  the  Public  Service  Railway  Company  in   191S  and  1919. 

The  "Public  Service"  Family  and  the  State 

The  operating  companies  in  the  Public  Service  family  render  essential  public 
services  in  more  than  140  municipalities,  ranging  from  small  villages  up  to  the 
great  metropolitan  cities  of  the  state.  They  collect  revenues  amounting  to  more 
than  $60,000,000  a  year.  Their  net  capitalization  is  in  the  neighborhood  of 
$300,000,000.  The  Public  Service  Railway  Company  is  the  most  important  of 
the  operating  companies,  not  only  because  its  §25,000.000  of  annual  revenue  is 
greater  than  the  revenue  of  either  the  gas  company  or  the  electric  company,  but 
also  because  the  relative  importance  of  street  railway  transportation  is  even 
greater  when  consideration  is  given  to  the  number  of  financial  contacts  between 
the  different  utilities  and  the  public.  (las  and  electric  light  and  power  consumers 
pay  for  their  service  monthly ;  the  car  riders  pay  their  bills  whenever  they  ride. 
The  number  of  electric  meters  in  use  on  the  Public  Service  Electric  Company's 
system  at  the  end  of  1919  was  a  little  less  than  200.000  and  represented  about 
2,400.000  individual  financial  contacts  with  the  consumers  during  the  year.  The 
number  of  gas  meters  in  use  on  the  Public  Service  Gas  Com])any's  system  was 
53S.00O,  representing  more  than  6.000.000  financial  contacts  in  a  year.  But  the 
number  of  electric  railway  rides  given  by  the  Public  Service  Railway  Company 
was  about  390,000,000,  of  which  nearly  every  one  represented  a  separate  financial 
contact  with  a  car  rider.  Street  railway  service  is  the  most  democratic  of  utility 
services,  and  street  railway  fares  always  bulk  large  in  the  public  eye. 

In  the  common  parlance  of  denunciation,  the  Public  Service  Corporation  of 
New  Jersey  "owns  the  state."  and  the  Public  Service  Railway  Company,  more 
than  cither  of  the  two  other  principal  subsidiary  companies,  typifies  that  ownership 
and  control.     It  is  not  altogether  uncommon  in  the  United  States  to  find  a  town 


Transportation  Issues  in  New  Jersey  679 

built  up  by  a  single  industry,  with  "the  company"  dominant  in  the  business,  social 
and  political  affairs  of  the  community.  For  example,  Bethlehem  dwells  in  the 
shadow  of  the  Bethlehem  Steel  Company.  In  much  the  same  way  New  Jersey  as 
a  state  lives  in  the  shadow  of  the  Public  Service  Corporation.  Here,  if  any- 
where, the  question  as  to  whether  the  government  shall  control  the  utilities,  or 
the  utilities  control  the  government,  is  acute  and  persistent. 

Fighting  to  Avoid  Reorganization 

The  management  of  the  Public  Service  Corporation  belongs  to  what  is  known 
as  the  "old  school"  in  public  utilities.  It  stands  for  the  "consolidation  of  the 
gains"  made  in  the  early  days  of  electric  railway  development  by  the  bold  buc- 
caneers who  sought  to  exploit  for  profit  the  rapidly  growing  need  for  urban 
transportation  on  the  basis  of  a  purely  private  enterprise.  Back  of  the  Public 
Service  Railway  Company  lies  a  decade  or  more  of  financial  manipulation  that 
takes  rank  among  the  historic  street  railway  scandals  of  the  country.  The  Public 
Service  Corporation  was  organized  in  1903  as  a  means  of  preventing  the  collapse 
and  reorganization  of  the  old  street  railway  companies,  which  were  then  on  the 
brink  of  financial  ruin.  The  principal  trolley  lines  now  included  in  the  Public 
Service  Railway  system  have  not  gone  through  the  bankruptcy  and  reorganiza- 
tion which,  in  view  of  their  financial  history,  would  have  been  appropriate  for 
them.  They  have  been  saved  thus  far,  and  this  gives  the  key  to  an  understanding 
of  the  present  trolley  situation  in  New  Jersey  and  of  the  extraordinary  difficul- 
ties which  surround  the  efforts  of  the  state  to  establish  an  effective  policy  of 
public  regulation. 

Let  us  now  turn  to  a  more  detailed  consideration  of  the  fundamental  issues 
with  which  state  regulation  is  confronted  in  its  relation  to  the  Public  Service 
Railway  Company. 

Public  Service  Railway's  Record  of  Inadequate  Service 

First,  what  is  the  adequate  service  which  the  communities  of  Nev.-  Jersey  are 
entitled  to  demand  from  the  company?  In  1913,  prior  to  the  outbreak  of  the 
European  War,  traffic  congestion  at  Broad  and  Market  Streets  in  the  City  of 
Newark  had  reached  a  point  where  it  seriously  interfered  with  the  free  move- 
ment of  the  Public  Service  Railway  Company's  cars  during  the  rush  hours,  which 
are  always  the  hours  of  greatest  need  in  the  local  transportation  field.  Out  of 
this  condition,  out  of  the  desire  of  the  Public  Service  Corporation  to  house  itself 
and  its  subsidiaries  conveniently  and  conspicuously,  and  out  of  its  desire  to 
secure  ample  railway  terminal  facilities  on  private  property  adjacent  to  the  Morris 
Canal,  against  the  day  when  the  canal  would  be  abandoned  and  its  right  of  way 
could  be  secured  for  rapid  transit  purposes,  grew  the  Public  Service  Newark 
Terminal  project — splendid,  expensive  and,  from  the  point  of  view  of  public 
service,  unsatisfactory.  The  Public  Service  Newark  Terminal  did  not  solve  the 
problem  of  adequate  trolley  service  in  the  New  Jersey  metropolis.  The  re- 
routing of  cars  at  the  time  of  the  opening  of  the  terminal  in  1916  gave  partial 
and  temporary  relief  to  the  Four  Corners,  but  signally  failed  to  provide  adequate 
street  car  facilities  for  handling  the  immense  traffic  that  originates  at  the  Tubes 


680  Appendix  A 

station.  Again,  after  the  United  States  entered  the  war,  the  development  of 
ship  building  and  other  war  activities  on  the  meadows  and  at  Port  Newark 
found  the  Public  Service  Railway  Company  unprepared  to  handle  the  new 
trafific  created  by  these  new  industrial  developments.  It  was  not  until  September, 
1918.  when  the  war  was  nearly  over,  that  the  company,  tiianks  to  advances  made 
by  the  Uijited  States  Shipping  Board,  finally  got  a  line  open  to  Port  Newark. 
In  the  early  months  of  that  year,  when  the  workers  at  Port  Newark  had  no  street 
railway  facilities,  it  was  a  sight  for  gods  and  men  to  see  the  rout  of  humanity 
overflowing  jitney  buses,  automobile  trucks  and  every  imaginable  type  of  vehicle, 
swarming  up  Bay  Avenue  in  its  daily  exodus  from  Port  Newark. 

A  "Brilliant  Future"  Predicted  Four  Years  Ago 

I  am  not  familiar  in  detail  with  the  failures  of  the  Public  Service  Railway 
Company  to  render  adequate  service  in  other  communities  to  which  its  lines 
extend,  but  these  failures  in  the  city  of  Newark  will  suffice  to  explain  in  part 
the  hearty  welcome  that  has  been  extended  to  the  jitneys  and  the  extraordinary 
development  of  jitney  traffic.  In  the  summer  of  1916,  just  after  the  Newark 
Terminal  was  opened.  Professor  Mortimer  E.  Cooley,  in  submitting  to  the  Public 
Service  Corporation  his  report  on  the  value  of  the  Public  Service  Railway  prop- 
erty, made  the  following  remarkable  statement : 

"The  property  of  the  Public  Scr\'ice  Railway  Company  has  been  created  by  the  merger 
of  a  number  of  smaller  projicrties;  some  of  them  have  been  purchased  outright,  while  others 
are  tieing  operated  under  long-term  leases.  A  number  of  additions  by  new  construction  have 
been  made  since  the  merger.  •  •  •  »  Jhc  company  is  also  building  what  is  probably 
the  largest  electric  railway  terminal  in  the  country.  When  completed,  it  is  expected  to  solve 
the  transportation  problem  in  Newark  lor  the  next  twenty  or  twenty-five  years.  This  ter- 
minal is  one  illustration  of  how  the  management  is  planning  for  the  future  of  these  gre.it 
properties.     *     »     •     • 

"The  properties  in  general  are  well  located,  well  constructed,  and  well  maintained,  and, 
judging  from  general  observation,  their  management  is  all  that  could  be  desired. 

"The  possibilities  for  extensions  and  growth  of  these  properties  are  almost  unlimited. 
With  a  few  exceptions  the  municipalities  served  by  the  company  have  in  the  past  had  a  very 
large  increase  in  population  each  year,  and  all  indications  point  to  a  continuance  of  these 
conditions,     ♦     »     •     » 

"A  very  careful  study  of  the  conditions  surrounding  this  property,  made  during  the  past 
year,  leads  to  the  belief  that  few,  if  any,  electric  railway  properties  in  the  United  States 
can  anticipate  a  more  brilliant  future  than  that  of  the  Public  Service  Railway  Company." 

Surely  it  cannot  be  said  that  the  Public  Service  Railway  Company,  in  the 
enjoyment  of  perpetual  franchises,  located  in  so  exceptional  a  street  railway 
tralVtc  area,  and  supported  by  the  powerful  hand  of  the  Public  Service  Corpora- 
tion, could  not  have  been  expected  to  provide  the  facilities  reasonably  required 
for  the  satisfaction  of  the  transportation  needs  of  the  City  of  Newark  and  its 
si.ster  municipalities.  It  is  clear  that  state  regulation,  through  the  Utilities  Board 
or  otherwise,  signally  failed  to  compel  the  Public  Service  Railwav  Company  to 
perform  its  full  function  as  a  trans])ortation  utility  endowed  with  jjerpetual  and. 
to  all  intents  and  ])uri)oses,  exclusive  franchise  rights  in  the  public  streets  of  140 
nninicipalities.  Under  these  circumstances,  and  within  a  year  after  Dean  Cooley 
filed  his  report,  jitney  competition  had  become  a  "godsend"  to  the  Public  Service 
Kailw.iy.  as  Mr.  Danforth  said,  because  of  the  inability  of  the  railway  to  render 
the  retjuired  service. 


Transportation  Issues  in  New  Jersey  681 

It  is  obvious  that  the  Public  Service  Railway  is  not  entitled  to  a  complete 
monopoly  on  the  score  of  the  transportation  facilities  and  service  which  it  has 
heretofore  furnished. 


III. 

CONFLICTING    THEORIES    OF    VALUATION    AND    THE    RESULTS 

THEY    BRING 

I  have  referred  to  adequacy  of  street  railway  service  as  the  first  test  of  the 
effectiveness  of  public  regulation  where  monopoly  is  to  be  recognized. 

The  second  fundamental  test  of  regulation  comes  in  the  establishment  of  the 
value  of  the  property  devoted  by  the  utility  to  public  use.  This  is  everywhere 
the  crucial  question  in  the  adjustment  of  the  public  relations  of  a  street  railway 
or  any  other  public  utility  company.  Without  a  determination  of  the  value  that 
the  public  is  bound  to  recognize,  there  is  no  proper  basis  for  the  determination 
of  reasonable  rates  and  no  proper  basis  for  the  control  of  capitalization,  there  is 
no  criterion  for  fixing  the  burdens  of  ta.xation,  and  above  all  no  measure  of  the 
community's  ultimate  obligation  to  the  investors  in  case  it  should  become  neces- 
sary to  transfer  the  utility  from  private  to  public  ownership. 

Escape  from  Five-Cent  Fare  Limitation  Looked  Forward  to  for  Years 

The  Public  Service  Railway  Company  is  the  heir  of  a  numerous  and  motley 
group  of  street  railway  corporations.  It  has  119  names  in  its  family  tree.  From 
the  predecessor  companies  to  which  the  municipalities  had  given  franchises  it 
inherited  the  privileges  and  the  obligations  of  the  5-cent  fare  and  the  free  trans- 
fer. The  aggregate  price  paid  for  the  consolidation  of  street  railway  properties 
from  the  bank  of  the  Hudson  opposite  New  York  to  the  bank  of  the  Delaware 
opposite  Philadelphia  into  a  single  operating  unit  was  enormous.  The  rental 
burdens,  assumed  for  periods  ranging  from  900  years  to  perpetuity,  amount  to 
more  than  $2,800,000  a  year,  and,  coupled  with  the  interest  charges  on  bonds 
secured  by  the  property  of  the  constituent  companies,  make  up  a  total  of  more 
than  $5,000,000  a  year  of  fixed  charges.  With  these  heavy  burdens  upon  its 
back,  the  Public  Service  Railway  Company  began  to  feel  years  ago  the  limitation 
of  the  5-cent  fare,  and  it  was  a  hope  of  the  Public  Service  Corporation  that  state 
regulation  as  established  by  the  Utilities  Act  of  1911  would  eventually  result  in 
the  release  of  the  Railway  Company  from  the  fare  limitations  contained  in  the 
municipal  contracts.  For  several  years  the  Public  .Service  family  watched  quietly 
but  expectantly  the  development  of  regulatory  policies  as  outlined  by  the  Utilities 
Board  and  as  prescribed  by  the  courts. 

The  Cooley  Valuation  Procured  in  Anticipation  of  the  Opportunity  to  Use  It 

In  1915,  without  any  particular  purpose,  as  Mr.  McCarter  subsequently 
maintained,  but  still  with  an  eye  to  the  time  when  the  jurisdiction  of  the  Utilities 
Board  over  the  rates  of  fare  prescribed  by  the  franchise  contracts  should  be 


682  Appendix  A 

established,  the  Public  Service  Corporation  determined  to  have  a  valuation  made 
of  the  railway  property  owned  or  controlled  by  the  Public  Service  Railway  Com- 
pany. Without  waiting  for  a  rate  proceeding,  the  Corporation  engaged  the  ser- 
vices of  Professor  Mortimer  E.  Cooley,  Dean  of  the  Colleges  of  Engineering  and 
Architecture  of  the  University  of  Michigan. 

Cooley's   History  and  Characteristics   as  an   Appraisal   Engineer 

Dean  Cooley  is  a  celebrated  engineer  whose  career  as  a  street  railway  ap- 
praiser was  initiated  more  than  twenty  years  ago  in  the  valuation  of  a  portion 
of  the  Detroit  Street  Railway  property  for  the  municipal  ownership  commission, 
of  which  Hazen  S.  Pingree  was  the  head.  It  is  noteworthy  that  while  Tom 
Johnson  was  still  a  street  railway  corporation  magnate,  Pingree  was  fighting  the 
public's  battle  for  low  fares  and  municipal  ownership  in  Detroit,  and  it  was  in 
the  Pingree  school  that  Dean  Cooley  got  his  start.  However,  since  1899  he  has 
come  to  have  a  very  keen  and  sympathetic  interest  in  the  point  of  view  of  the 
corporations.  In  his  testimony  before  the  Federal  Electric  Railways  Commis- 
sion, where  he  api)eared  as  a  witness  for  the  American  Electric  Railways  Asso- 
ciation on  July  17,  1919,  he  made  the  following  statement : 

"There  is  not  ver)-  much  trouhle  now  in  valuing  a  property.  Valuation  has  been  very 
much  simplified,  very  much  organized,  and  it  is  not  a  difficult  matter  to  procure  results  and 
they  are  reasonably  accurate;  but  the  great  difficulty — and  I  myself  think  it  is  the  keynote 
of  all  our  trouble  today — is  ignorance,  sheer  ignorance  and  lack  of  understanding  by  the 
public,  veo'  largely,  but  not  confined  to  the  public — a  lack  of  understanding  by  the  railroads 
themselves  of  the  fundamental  principles  that  are  involved  in  all  questions  of  \-aluing  prop- 
erty, and  especially  all  <iuestions  that  are  involved  in  fixing  rates.  If  we  could  have  a 
campaign  of  education  which  would  make  perfectly  clear  these  things  that  are  now  misunder- 
stood,   I    think   the  trouble   would   di.->appear   almost    wholly. 

"I  am  convinced  of  that,  and  1  have  twen  trying  to  do  my  part  in  dispelling  that 
ignorance,  but  it  is  ver>-  difficult.  The  attitude  of  the  public  mind  is  such  that  you  cannot 
approach  them;  you  cannot  make  them  listen  to  you;  they  won't  believe  you,  and  I  do  not 
know  that  they  arc  to  be  altogether  blamed  for  it,  because  they  have  been  sorely  tempted 
in  the  past.  I  think  the  public  utility  companies  all  admit  today  that  their  own  conduct  in 
the  past  has.  to  some  extent,  merited  the  difficulties  that  they  now  find  themselves  in.  I  make 
no  defense,  and  the  utilities  themselves  make  no  defense,  of  the  mistakes  that  they  have  made 
in  the  past,  but  the  utility  companies,  as  a  nilc,  now  see  what  mistakes  they  have  made,  and 
are  trying  their  lx.'st  to  remedy  them.  Hut  the  public  is  not  yet  willing  to  meet  them  any- 
where near  half  way;  and  so  I  say  it  is  a  case  of  ignorance — a  greater  amount  of  ipiorance 
on  the  part  of  the  public  than  it   is  on  the  side  of   the  utility." 

Further  on  in  this  same  testimony  Dean  Cooley  dwells  at  considerable  length 
upon  the  expenses  preliminary  to  the  commencement  of  construction  and  the 
losses  and  expenses  subsequent  to  the  completion  of  original  construction,  about 
which  he  conceives  the  public  to  be  ignorant.  He  refers  to  the  profits  of  the 
general  contractor  and  of  the  sub-contractors;  to  liability  and  fire  insurance  ex- 
penses, and  to  interest  and  taxes  during  construction.  He  ])oints  out  that  "there 
are  profits  going  to  somebody  all  the  way  through  the  building  of  this  property," 
but  says  that  the  public  does  not  understand  this  and  that  it  does  not  "want  any- 
body to  get  a  profit."  Continuing  the  discussion  of  so-called  overhead  expenses, 
he  says: 

"The  question  of  the  promotion  of  an  enterprise  and  of  promoter's  profits  is  another  red 
rag  to  the  bull,  and  it  is  in  connection  with  these  promotion  costs  and  promoter's  profits 
that  the  public  thmks  that  a  gox]  deal  of  the  water  has  gotten  into  the  capital  account." 


Transportation  Issues  in  New  Jersey  683 

He  says  that  when  all  of  the  items  of  overhead  expenses  in  connection  with  the 
construction  of  a  railway  are  added  in,  they  actually  come  up,  in  certain  instances, 
to  as  much  as  50  or  60  per  cent  on  the  base  cost. 

Cooley  Admits  Actual  Investment  is  Proper  Basis  for  Valuation 

Dean  Cooley 's  attitude  with  respect  to  the  fundamental  basis  of  valuation  is 
emphasized  by  his  testimony  given  on  April  30,  1919,  before  the  New  Jersey 
Utilities  Board,  where  he  was  referring  to  his  own  appraisal  of  the  Public  Ser- 
vice Railway  property.  In  discussing  the  relation  between  reproduction  cost  and 
actual  or  historical  cost,  he  said  that  in  his  opinion  the  actual  cost,  if  it  could  be 
ascertained,  would  far  exceed  the  reproduction  cost  as  he  found  it. 

"Because  of  the  fact  that  it  is  impossible  in  most  cases  to  determine  the  actual  money 
invested  in  the  property,"  said  he,  "we  have  to  approximate  to  it  and  the  best  approximation 
that  any  of  us  know  about  is  the  cost  of  reproduction,  and  the  cost  of  reproduction  is 
assumed  among  engineers  to  be  the  nearest  approximation  to  the  actual  money  in  the  property. 


"By  investment  in  this  case,  as  I  have  it  in  mind.  I  mean  the  expenditures  of  money 
from  the  time  the  original  properties  were  conceived,  all  of  the  moneys,  down  to  the  present 
time,  including  not  only  the  money  put  into  construction,  that  is,  into  the  construction  of  the 
physical  property,  but  including  the  moneys  that  were  required  to  develop  tlie  property  and 
make  it  a  going  concern  and  including  the  moneys  that  were  lost  by  obsolescence  and  super- 
sedence of  old  elements  by  new  elements  due  to  the  development  of  the  art;  including  all 
of  the  elements,  all  of  the  moneys  that  have  been  expended  for  one  purpose  or  another 
from  the  time  the  properties  were  conceived  down  to  the  present  time.  \\'hen  you  have 
aggregated  all  those  I  am  very  certain,  as  certain  as  I  can  be,  that  the  aggregate  of  those 
costs  would  far  exceed  the  reproduction  cost  today." 

A  perusal  of  Dean  Cooley's  testimony  before  the  New  Jersey  Utilities  Board 
and  the  Federal  Electric  Railways  Commission  leaves  the  impression  that,  as  a 
result  of  his  wide  experience  and  his  many  contacts,  he  has  developed  a  state 
of  mind  where  he  always  feels  that  valuations  are  too  low,  that  something  has 
been  missed,  that  a  company's  property  represents  a  greater  actual  investment 
than  any  figp.ire  that  can  be  arrived  at  by  the  reproduction-cost  method  in  nor- 
mal times. 

The  Cooley  Appraisal  Purely  Ex  Parte 

.■\.t  any  rate,  and  irrespective  of  the  qualifications  or  characteristic  tendencies 
of  the  engineer  engaged  to  do  the  work,  the  Public  Service  Corporation,  without 
the  official  knowledge  of  the  Utilities  Board  or  of  the  Municipalities,  and  with- 
out seeking  their  cooperation  or  approval  in  any  way,  proceeded,  in  1915,  to 
procure  for  its  own  purposes  an  elaborate  valuation  of  the  Public  Service  Rail- 
way property,  a  project  upon  which  it  is  said  to  have  expended  in  the  neighbor- 
hood of  $150,000.  The  summary  of  this  valuation,  contained  in  Dean  Cooley's 
report  to  Thomas  N.  McCarter,  president  of  the  Public  Service  Corporation, 
comprises  149  typewritten  pages.  The  summary  itself  is  not  dated,  but  internal 
evidence  shows  that  it  must  have  been  filed  some  time  subsequent  to  July  12, 
1916.  The  appraisal  to  which  it  relates  was  made  as  of  December  31,  1915,  and 
is  alleged  to  have  been  based  upon  average  unit  prices  extending  over  the  five- 
year  period  from  1911  to  1915,  inclusive.     The  details  of  this  appraisal  are  con- 


684  Appendix  A 

tained  in  upwards  of  80  volumes,  more  than  filling  three  sections  of  a  bookcase 
kept  in  the  Public  Service  Railway  offices  in  the  Newark  Terminal  Building. 

A  year  and  a  half  after  the  comjjletion  of  this  appraisal,  the  event  that  had 
been  foreseen  and  prepared  for  took  place.  The  highest  court  in  New  Jersey 
held  that  the  Utilities  Board  was  not  bound  to  respect  the  rates  which  had  been 
established  in  municipal  franchise  contracts.     The  hour  had  come! 

Emergency  Relief  Without  Valuation  in  1918 

But  when  the  Public  Service  Railway  Company  in  March,  1918,  startled  the 
State  of  New  Jersey  by  a  demand  for  a  7-cent  cash  fare  with  a  charge  of  2  cents 
for  each  initial  transfer  and  1  cent  for  a  transfer  on  a  transfer,  the  company  took 
the  position  that  immediate  financial  relief  was  imperative  and  that  it  could  not 
wait  for  the  slow  ])rocesses  of  valuation  and  a  regular  rate  proceeding.  At  that 
time,  in  his  testimony  before  the  Utilities  Board,  Mr.  McCarter  said: 

"Tlie  difficulty  experienced  by  public  utilities  in  readily  readjusting  their  affairs  lies  in 
the  fact  that  the  ordinary  proceclure  for  securing  permission  for  changes  in  rate  schedules 
is  necessarily  subject  to  delays  and  fro(|ueiitly  involves  expensive  valuations,  and  unless  some 
way  can  be  found  to  readily  restore  the  normal  proportion  lietween  cost  of  producing  service 
and  the  price  for  which  it  is  sold,  the  ability  of  the  utilities  for  meeting  these  war-time 
demands    for   service   will    be   seriously    impaired. 


"Some  way  should  t>e  found  of  readjusting  the  rates  of  the  utilities  on  a  basis  designed 
solely  to  meet  the  increased  cost  of  doing  business.  If  these  readjustments  are  directed 
solely  to  meeting  increased  cost  of  producing  service,  they  can  be  speedily  and  properly 
made  effective   without   recourse  to  the   more   exhaustive   in(|uiries." 

Up  to  that  time  the  Public  Service  Railway  Company  had  paid  dividends 
ranging  from  %  of  1  per  cent  in  1908  to  a  ma.xinuim  of  3  per  cent  in  1916.  The 
company's  <lemand  in  the  emergency  case  was  that  it  be  restored  to  the  financial 
condition  of  its  banner  year.  1916.  without  the  expense  and  delay  of  a  valuation 
and  a  regular  rate  proceeding.  The  Utilities  Board,  however,  had  unofficial 
knowledge  of  the  existence  of  the  Cooley  valuation,  and  it  was  ujwn  the  reciuest 
of  the  Board,  not  upon  the  initiative  of  the  company,  that  the  summarv  of  the 
appraisal  was  offered  by  Mr.  McCarter,  Init  without  the  usual  proofs.  The  nuini- 
cipalitics  not  only  criticized  the  Cooley  appraisal  on  its  merits,  but  objected  to  its 
consideration  by  the  Board  in  the  absence  of  any  testimony  by  the  appraiser  him- 
self. In  the  se(|uel,  the  Board  accepted  the  theory  of  emergency  jurisdiction, 
disregarded  the  appraisal,  and  gave  the  company  such  temporary  relief  as  in  the 
Board's  judgment  was  necessary  to  enable  the  conip.iny  to  function. 

Cooley's  Appraisal  the  Only  One  Made 

At  the  same  time  the  Hoard  directed  the  c(im|):my  to  make  a  study  of  the 
zone  system  and  to  submit  later  on  a  scheme  of  zone  fares  calculated  to  give  a 
better  distribution  of  transportation  charges,  in  proportion  to  the  costs  of  service, 
among  the  different  classes  of  riders.  The  company's  zone  report  was  filed  in 
March,  1919,  and  at  the  same  time  a  new  schedule  of  rates,  based  upon  the  zone 


Transportation  Issues  in  New  Jersey  685 

plan,  was  filed  to  become  effective  April  1,  unless  suspended  for  a  period  of  three 
months  by  the  Utilities  Board  acting  under  the  provisions  of  the  utilities  law. 
The  new  rates  were  in  fact  suspended  and  hearings  were  commenced,  with  the 
company  and  the  Board  in  evident  agreement  that  the  proceeding  was  to  be  treated 
no  longer  as  an  emergency,  but  was  to  take  the  regular  course  for  the  establish- 
ment of  permanent  rates  on  the  basis  of  a  valuation  of  the  property.  Dean  Cooley 
and  his  chief  assistant,  Professor  Henry  C.  Anderson,  were  brought  on  from 
Ann  Arbor  and  put  on  the  witness  stand  to  prove  the  valuation.  It  was  assumed 
that  the  new  rates  could  be  put  into  effect  by  the  company  on  July  1,  1919,  unless 
the  Utilities  Board  reached  a  decision  in  the  case  before  that  time.  Under  the 
circumstances,  the  municipalities  found  themselves  taken  by  surprise  and  unpre- 
pared with  a  valuation  of  the  railway  property  to  set  up  against  the  ex  parte 
valuation  which  had  been  made  by  Dean  Cooley.  The  time  available  before  the 
first  of  July  made  it  absolutely  impossible  to  think  of  duplicating  the  work  which 
Cooley  and  his  staff  had  taken  about  a  year  to  do  under  the  most  favorable  condi- 
tions. The  Utilities  Board  itself  took  no  steps  to  make  an  independent  valua- 
tion. As  the  matter  turned  out,  the  time  for  the  presentation  of  evidence  by  the 
Alunicipalities  was  extended  through  the  courtesy  of  the  Public  Service  Railway 
Company,  but  the  assurance  that  the  zone  rates  would  not  be  put  into  effect  on 
July  1  was  not  given  until  shortly  before  that  date.  From  these  circumstances 
the  result  was,  and  still  is,  that  no  inventory  and  appraisal  of  the  Public  Service 
Railway  property,  other  than  the  Cooley  appraisal,  has  been  made  by  anybody, 
and  all  the  calculations  of  reproduction  cost  by  the  experts  for  the  Utilities  Board, 
by  the  experts  for  the  Associated  Municipalities,  and  by  the  later  e.xperts  for  the 
Public  Service  Railway  Company  itself  hark  back  to  Cooley's  work.  This  is  a 
fundamental  fact  that  must  be  constantly  kept  in  mind  in  a  discussion  of  the 
Public  Service  Railway  Rate  Case  and  the  issues  that  it  involves. 

The  only  other  fundamental  valuation  studies  made  in  connection  with  the 
case  were  the  study  of  actual  cost  taken  from  the  books  of  the  company,  and 
the  analysis  of  the  capitalization  of  the  company  and  its  constituent,  underlying 
and  predecessor  companies,  both  of  which  were  made  by  Accountant  Mark 
Wolff  on  behalf  of  the  municipalities.  Therefore,  the  fundamental  elements  of 
proof  offered  in  evidence  as  to  the  value  of  the  Public  Service  Railway  property 
were  three : 

(1)  Cooley's  reproduction  cost  appraisal  as  of  December  31,  1915; 

(2)  Wolff's  actual  cost  study  up  to  March  31,  1919;  and 

(3)  Wolff's  analysis  of  capitalization  up  to  December  31,  1918. 

Each  of  these  was  a  datum  from  which  different  witnesses  started  in  the  develop- 
ment of  their  final  estimates  and  conclusions. 

In  general  it  may  be  said  that  a  reproduction-cost  appraisal  is  always  highly 
theoretical  and  speculative  and  that  the  reproduction-cost  method  for  that  reason 
is  especially  conducive  to  wide  differences  of  opinion  and  to  extremely  divergent 
results.  If  a  company's  books  of  account  had  always  been  properly  kept  from 
the  beginning,  an  actual  cost  study  and  an  analysis  of  capitalization  would  be 
much  less  subject  to  hypothesis,  speculation  and  estimate  than  a  reproduction- 
cost  study  necessarily  is.     In  the  case  of  the  Public   Service  Railway   system, 


686  Appendix  A 

however,  the  companies  in  the  system  had  not  kept  their  books  in  a  uniform 
manner  and  many  of  the  construction  cost  records  were  missing.  For  this  reason 
the  actual  construction  cost  data  taken  from  the  books  had  to  be  supplemented,  in 
certain  cases,  by  recourse  to  taxation  reports  and  miscellaneous  sources  of  in- 
formation. Mr.  Wolflf's  analysis  of  capitalization,  for  similar  reasons,  was  neces- 
sarily incomplete  in  certain  details. 

Basic  Figures  Resulting  from  Three  Valuation  Studies 

The  general  results  of  the  three  fundamental  studies  may  be  briefly  stated 
as  follows : 

Reproduction  cost  new  of  the  exii?ting  physical  property  as  found  by  Cooley 
as  of  December  31,  1915.  plus  the  additions  to  capital  from  that  date  to  January 
31.  1920.  $.^8,165,858. 

Actual  cost  new  (partly  estimated)  of  both  superseded  and  existing  physi- 
cal property  as  found  by  Wolff  from  the  beginning  of  street  railway  construc- 
tion in  New  Jersey  up  to  March  31,  1919,  less  such  "withdrawals"  as  had  been 
written  out  of  capital  account  by  the  companies  themselves,  $93,662,873. 

Total  net  capitalization  of  the  Public  Service  Railway  Company  and  its  con- 
stituent, underlying  and  predecessor  companies  as  found  bv  Wolff  on  December 
31,  1918.  $160,514,150. 

In  dealing  with  these  fundamental  figures,  the  methods  used  and  the  claims 
made  on  behalf  of  the  Municipalities  differed  radically  from  the  methods  used 
and  the  claims  made  on  behalf  of  the  Public  Service  Railway  Company. 

The  Original  Cooley  Appraisal  Completed  to  Date 

Cooley's  reproduction-cost  appraisal  was  the  storm  center  of  the  case.  The 
original  figure  for  the  property  contained  in  the  inventory  of  December  31,  1915. 
was  $79,318,040.  This  included  the  land  upon  which  the  Public  Service  Newark 
Terminal  is  built,  but  not  the  Terminal  Building  itself.  The  additions  to  the 
capital  account  of  the  Public  Service  Railway  Company  from  the  date  of  the  ap- 
praisal up  to  January  31,  1920,  including  the  cost  of  the  Terminal  Building, 
amounted  to  $8,847,818.  Cooley  and  .\nderson  themselves,  and  the  other  wit- 
nesses for  the  company,  took  the  1915  reproduction-cost  figure  as  a  base,  but  used 
the  actual  cost  in  dealing  with  the  additions  to  property  subsequent  to  that  date, 
and  thus  adopted  a  combination  of  reproduction  cost  and  actual  cost  in  arriving  at 
their  final  figures.  ( )n  the  basis  of  the  original  pre-war  reproduction-cost  ap- 
praisal, plus  actual  additions  to  capital  subsequent  to  December  31,  1915,  the 
Cooley  and  Anderson  figure  for  the  physical  property  comes  up  to  the  $88,165,858 
to  which  I  have  referred.  To  this  they  added  30  per  cent  to  represent  intan- 
gibles under  the  name  of  development  cost.  In  this  way  is  reached  the  first  and 
most  conservative  final  result  presented  by  any  of  the  witnesses  for  the  company 
based  upon  the  reproduction-cost  method.  This  figure  is  $114,615,615.  If 
Cooley's  inventory  and  the  fundamental  assumptions  and  methods  used  by  him  in 
his  ()rigin.il  appraisal  arc  accepted  as  fully  correct,  then  this  figure  represents 
reproduction  cost  new  of  the  Public  Service  Railway  plant  and  business  on  the 


Transportation  Issues  in  New  Jersey  687 

basis  of  average  prices  from  1911  to  1915  inclusive,  with  actual  cost  new  for 
additions  to  physical  property  since  1915. 

Cooley's  Figures  Revised  to  Take  Account  of  War  Prices 

In  view  of  the  economic  changes  due  to  the  great  increase  in  prices  that  took 
place  subsequent  to  1915,  Cooley  and  Anderson  saw  fit  to  present  certain  other 
and  higher  figures.  In  the  first  place,  they  adjusted  the  original  appraisal  by  the 
modification  of  the  unit  prices  to  an  average  for  a  new  five-year  period  extend- 
ing from  1914  to  1918  inclusive.  With  this  adjustment  a  figure  of  $100,272,168 
is  reached  for  the  physical  property,  to  which  a  30  per  cent  or  $30,081,650  is 
added  for  intangibles  or  development  cost.  The  resulting  final  figure,  $130,- 
353,818,  represents  the  reproduction  cost  new  of  the  plant  and  business  of  the 
company  on  the  basis  of  assumed  average  prices  covering  both  the  pre-war  and 
the  war  periods. 

Cooley  and  Anderson  also  made  an  adjustment  of  the  original  appraisal  on 
the  basis  of  average  unit  prices  for  the  five-year  period  extending  from  1915  to 
1919  inclusive,  the  result  being  a  figure  of  $107,796,149  for  the  physical  property 
and  $32,338,844  for  intangibles,  making  a  total  of  $140,134,993,  representing  the 
reproduction  cost  new  of  the  plant  and  business  on  the  basis  of  prices  averaged 
over  a  period  including  pre-war,  war  and  post-war  years. 

Still  another  adjustment  of  their  original  appraisal  was  made  by  Cooley 
and  Anderson  on  the  basis  of  prices  as  they  prevailed  in  the  year  1918,  applied 
to  the  property  contained  in  the  inventory  of  December  31,  1915,  plus  the  actual 
additions  to  capital  subsequent  to  that  date.  On  this  basis  the  result  is  a  figure 
of  $126,738,347  representing  the  reproduction  cost  new  of  the  physical  property 
at  strictly  war  prices,  and  a  figure  of  $38,021,504  for  development  costs,  making 
a  total  of  $164,759,851. 

In  addition  to  this,  the  land  experts  who  valued  the  real  estate  in  the  original 
Cooley  appraisal  testified  to  a  subsequent  increase  of  $1,401,212  in  its  value  up 
to  the  end  of  1919,  and  it  was  claimed  by  the  company  that  this  alleged  increase 
in  the  value  of  the  land  should  be  added  to  the  figures  presented  above. 

New  Experts  Called  to  Prove  Cooley  Conservative 

In  rebuttal  to  the  testimony  off'ered  on  behalf  of  the  Municipalities  the  Pub- 
lic Service  Railway  Company  produced  certain  additional  valuation  experts, 
namely,  William  H.  Blood,  Jr.,  of  Boston,  connected  with  the  Stone  &  Webster 
Corporation ;  Harold  Almert,  of  Oiicago,  formerly  connected  with  H.  M.  Byl- 
lesby  &  Company;  Horace  L.  Howell,  representing  the  late  George  Weston,  who 
at  the  time  of  his  death  was  connected  with  the  Philadelphia  Rapid  Transit  Com- 
pany; Howard  H.  Crowell,  of  the  Electric  Bond  and  Share  Company,  of  New 
York;  and  Martin  Schreiber,  chief  engineer  of  the  Public  Service  Railway  Com- 
pany and  member  of  the  Valuation  Committee  of  the  American  Electric  Railways 
Association. 

Mr.  Blood  took  the  Cooley  and  Anderson  figure  for  reproduction  cost  new 
of  the  physical  property  at  1918  prices  and  added  10  per  cent  to  it  to  get  the 


ggg  Appendix  A 

cost  at  1919  prices.  Thus  he  arrived  at  $139,326,709  for  the  reproduction  cost 
new  of  the  physical  property,  with  $41,798,012  for  intangibles  or  development 
cost,  getting  a  final  figure  of  5181.124.721  representing  his  idea  of  what  it  would 
have  cost  to  reproduce  the  plant  and  business  under  1919  price  conditions.  In 
his  testimony,  he  adopted  the  round  figure  of  $180,000,000. 

Mr.  Almert.  for  the  physical  property,  took  Cooley's  reproduction-cost  figure 
based  on  1918  prices,  namely,  $125,883,621,  and  a  '•parallel"  figure  of  his  own 
amounting  to  $132,073,000;  added  30  per  cent  to  each  of  them  for  development 
cost,  and  then  compromised  on  a  final  figure  of  $165,000,000,  as  his  estimate  of 
the  reproduction  cost  of  the  Public  Service  Railway  plant  and  business  on  the 
basis  of  war  prices.  He  states,  however,  that  this  includes  only  a  portion  of 
the  development  costs.  If  he  had  put  them  all  in,  he  would  have  gotten  a  final 
figure  of  from  $215,000,000  to  $230,000,000.  He  thought  that  such  a  figure 
would  be  higher  than  the  company  would  consider  fair  and  that  it  might  em- 
barrass the  commission  to  use  it. 

The  results  reached  by  the  late  Mr.  Weston  were  presented  by  Mr.  Horace 
L.  Howell,  one  of  his  assistants,  who  testified  that  Mr.  Weston,  taking  the  original 
Cooley  appraisal  of  1915  as  a  basis,  redistributed  it  to  correspond  with  the  classi- 
fication in  a  recent  Chicago  appraisal  with  which  he  was  most  familiar;  added 
certain  percentages  to  the  difltercnt  classes  of  property  to  represent  the  increase 
in  cost  up  to  1919.  and  arrived  at  $139,734,713  as  the  reproduction  cost  new 
of  the  physical  property  included  in  the  original  Cooley  appraisal  of  1915,  to 
which,  if  he  had  lived,  he  would  have  added  his  estimate  of  going  value.  Pre- 
sumably, also,  he  would  have  added  the  money  invested  subsequent  to  1915  in 
additions  and  bettennents  amounting  to  $8,847,818,  and  the  increase  of  $1,401,212 
in  the  value  of  the  real  estate  to  which  the  company's  land  appraisers  testified. 
This  would  have  given  him  approximately  $150,000,000  for  the  physical  property, 
and  if  he  had  used  30  per  cent  for  development  cost  or  going  value,  following 
Dean  Cooley's  lead,  his  total  value  would  have  reached  approximately  $195,000,000 
on  the  basis  of  reproduction  cost  new  of  the  plan  and  business  under  1919 
conditions. 

Mr.  Howard  H.  Crowell,  taking  the  reproduction  cost  of  the  physical  prop- 
erty on  the  basis  of  average  unit  prices  for  the  five-year  period  from  1915  to 
1919  as  estiniated  by  Cooley  and  .Anderson,  namely,  $106,941,423.  said  that  he 
would  add  to  this  sum  $9,500,000  for  consolidation  value  and  $23,841,764  for 
development  cost.  This  would  give  him  a  little  more  than  $140,000,000,  which 
he  said  would  be  less  than  the  true  rei)roduction  cost  value,  as  there  were  certain 
additional  elements,  with  respect  to  which  he  had  no  data,  that  should  be  taken 
into  consideration.  The  item  of  development  cost  used  bv  Mr.  Crowell  was  the 
item  of  alleged  losses  to  the  Public  Service  Railway  Company  and  its  constituent 
companies  subsequent  to  May  31,  1^*03.  when  the  Public  Service  Corporation  first 
came  into  control  of  the  system.  It  will  be  seen  that  Mr.  Crowell  did  not  include 
development  cost  as  such  for  the  period  prior  to  1903.  but  put  in  $9,-^00,000  for 
the  value  of  the  consolidations  that  were  brought  about  during  that  period. 


Transportation  Issues  in  New  Jersey  689 

Public  Service  Railway  Claims  "Created  Value" 

Mr.  Martin  Schreiber  did  not  attempt  to  set  up  a  final  valuation  figure, 
either  independently  or  on  the  basis  of  Cooky's  original  appraisal.  His  testi- 
mony was  directed  toward  the  proof  of  valuation  methods  as  set  forth  in  the 
report  of  the  Committee  on  Valuation  of  the  American  Electric  Railway  Asso- 
ciation of  which  Philip  J.  Kealy,  President  of  the  Kansas  City  Railways  Com- 
pany, was  chairman.  Mr.  Schreiber  read  copious  extracts  from  this  report  into 
the  record  and  stated  that  they  represented  his  own  opinions.  Among  other 
things,  he  put  forward  as  his  own  the  claims  made  by  the  Committee  that  the 
"cost  of  consolidation"  and  "created  value"  were  elements  in  going  concern  value. 
For  example,  in  the  Committee's  definition  of  created  value,  which  he  accepted 
as  his  own,  the  following  appears : 

"Having  pioneered  the  growth  of  the  city  or  commonwealth  and  enhanced  the  value  of 
both  private  and  pubhc  property,  the  utility  itself  should  be  justly  credited  with  part  at  least 
of  the  value  so  created." 

It  is  obvious  that  the  Public  Service  Railway  experts  entered  upon  a  gen- 
erous rivalry  to  see  which  of  them  could  produce  the  highest  valuation  on  the 
reproduction-cost  basis.  \\'ith  their  estimates  ranging  over  so  wide  a  field,  it  is 
not  easy  to  characterize  and  summarize  in  a  brief  way  the  company's  case.  I 
have  just  referred  to  a  final  element  introduced  by  Mr.  Schreiber  under  the 
name  of  "created  value."  No  definite  figure  representing  this  item  was  pro- 
duced in  the  case,  but  it  illustrates  perhaps  as  well  as  anything  could  the  attitude 
assumed  by  the  company  toward  the  valuation  of  its  property.  "The  sky  is  the 
limit"  seems  a  conservative  characterization  of  the  company's  claims.  The  theory 
of  "created  value"  is  that  the  street  railways  have  been  pioneers  in  the  building 
up  of  the  urban  communities  of  the  state,  and  that  their  construction  has  resulted 
in  a  vast  increase  in  the  value  of  real  estate  in  the  communities  which  they  serve. 
The  Public  Service  Railway  Company  says :  "See,  we  made  the  State  of  New 
Jersey.  We  created  these  land  values.  They  ought  to  belong  to  US7— of  least 
in  part."  And  so  the  company's  chief  engineer  was  put  forward  as  an  expert 
witness  to  describe  the  work  of  the  V'aluation  Committee  of  the  American  Elec- 
tric Railway  Association,  and  to  spread  upon  the  record  the  wonderful  qualifica- 
tions of  each  member  of  that  committee,  and  seriously  to  press  upon  the  Utilities 
Board  the  validity  of  the  valuation  methods  and  claims  for  which  the  Association 
as  a  whole  stands,  including  as  a  climax  of  fatuous  arrogance  this  item  of 
"created  value."  While  certain  parties  might  still  question  the  allegation  that 
the  Public  Service  Corporation  and  the  Public  Service  Railway  Company  own  the 
State  of  New  Jersey,  they  can  no  longer  question,  in  the  light  of  this  testimony, 
that  these  companies  claim  to  own  it. 

Although  the  definite  figures  set  up  by  the  different  witnesses  for  the  com- 
pany, as  a  result  of  their  computations  of  value,  differed  among  themselves  by 
a  great  many  millions  of  dollars,  there  were  certain  continuous  threads  of  approx- 
imate consistency  running  through  the  company's  case  as  presented,  and  by  pick- 
ing up  these  threads  we  may  perhaps  get  a  general  picture  of  what  valuation  looks 
like  from  the  Public  Service  Railway  Company's  point  of  view.     Here  again  we 


690  Appendix  A 

have  to  go  back  to  Dean  Cooley,  who  may  be  described  as  the  bell  wether  among 
the  company's  valuation  experts,  although  it  must  be  said  that  in  this  case  a  num- 
ber of  the  youngc-r  wethers  either  in  a  spirit  of  frolicsomeness  or  in  a  desire  to 
demonstrate  their  right  to  the  succession  when  the  time  comes  for  the  bell  to  be 
hung  on  another  neck,  went  quite  beyond  their  leader. 

Company  Claims  That  Fair  Present  Value  is  Identical  with  Reproduction 

Cost  New 

The  tirst  fundamental  claim  put  forward  by  the  company's  witnesses  is  that 
fair  value  or  present  value  is  synonymous  with  reproduction  cost  new  at  present 
prices.  This  is  the  tirst  great  fundamental  issue  in  the  determination  of  the 
method  to  be  followed  in  making  a  valuation  of  public  utility  property  for  rate 
purposes.  The  question  is :  Shall  the  value  be  determined  by  the  amount  of 
money  actually  invested  by  the  company  and  its  predecessors  in  proper  capital 
expenditures  in  connection  with  the  enterprise?  Or,  shall  it  be  determined  by 
the  estimated  cost  of  reproducing  or  replacing  the  existing  property?  On  this 
point  Dean  Cooley  wavered  a  little,  as  will  be  seen  from  his  testimony  in  the 
Public  Service  Railway  Rate  Case,  on  April  16,  1919,  as  follows: 

"Now,  if  we  could  get  that  actual  hi.'itorical  cost  we  would  do  it,  we  would  be  glad 
to  do  it.  Because  we  cannot  do  it  we  get  the  repro<hiction  cost  which  we  assume  is  the 
nearest  thing  to  the  historical  cost  that  is  possible  and  it  stands  for  the  historical  cost  in 
the  absence  of  some  other   figures." 

A  little  further  on  Mr.  Herrmann,  counsel  for  the  Utilities  Board,  asked  this 
question : 

'■^'ou  think  the  criterion  of  value,  then,  is  the  present  value  or  cost  to  reproduce  regardless 
of   what    was  actually   put    into  the   property?" 

To  this  Dean  Cooley  made  the  following  reply : 

"No,  1  tried  to  make  an  explanation  a  moment  ago  that  the  money  that  has  actually  gone 
into  the  property,  that  has  honestly  gone  into  the  projK-rty,  is  the  proper  Irasis.  Now.  we 
do  not  know  what  that  money  is,  we  cannot  find  out,  and  we  tried  to  do  our  best  to  find  out, 
and  we  substitute  for  it  the  cost  of  reproduction,  which  we  can  find  out.  We  base  that 
cost  of  reproduction  not  uixin  any  particular  date  which  may  involve  low  prices  or  which 
may  involve  high  prices,  but  we  try  to  take  it  over  a  jieriod  which  will  properly  represent 
the  time  and  conditions,  fair  conditions.  We  tried  to  be  fair,  in  other  words,  in  determining 
what  is  the  cost  of  reproduction  of  this  property  and  in  this  particular  instance  we  took 
five  years." 

I  have  already  quoted  Dean  Cooley's  testimony  in  the  New  Jersey  case  to  the 
effect  that  in  his  opinion  the  actual  cost,  if  all  the  elements  could  be  found,  would 
he  greater  than  the  reproduction  cost.  On  July  17,  1919,  he  was  testifying  on 
this  same  subject  before  the  Federal  Electric  Railways  Commission.  He  was 
explaining  his  view  of  the  necessity  for  a  contingency  item  in  a  reproduction  cost 
appraisal.  He  had  remarked  that  he  "could  talk  for  hours  on  the  things  that 
happen  that  make  a  contingency  item  necesary."  His  attention  was  then  called 
to  the  fact  that  the  Interstate  Commerce  Commission  in  its  railroad  valuation 
work,  after  the  (|uestion  of  contingencies  had  been  argued  for  a  long  time,  de- 
cided against  making  any  allowance  for  the  item.     He  admitted  that  he  had  not 


Transportation  Issues  in  New  Jersey  691 

been  aware  of  this  ruling,  but  when  his  attention  was  called  to  it,  he  apparently 
jumped  to  the  conclusion  that  the  I.  C.  C.  valuations  are  based  upon  actual  cost, 
for  he  made  the  following  comment : 

"You  would  not  have  to  fix  any  contingency  item  at  all  if  you  could  get  the  historical 
cost  of  the  property,  if  you  knew  what  the  property  first  cost,  starting  from  the  very  begin- 
ning. You  can  take  that  cost  out  of  the  books,  and  that,  of  course,  is  the  thing  to  take, 
because  it  represents  the  money  invested ;  but,  unfortunately,  you  cannot  do  that  with  the 
old  properties,  at  least.  You  may  do  it  with  the  newer  properties.  So,  we  proceed  in  the 
best  way  we  know  how,  to  approximate  that  cost,  and  it  is  my  belief  that  this  so-called  cost 
of  reproduction  method  is  the  fairest  appro.ximation  to  what  would  have  been  the  book  costs 
if  you  could  have  had  them,  if  you  could  get  them. 


"  *  *  *  *  In  making  the  statement  that  I  just  now  made.  I  was  assuming  normal 
times,  normal  conditions,  conditions  that  existed  well  before  the  war,  and  did  not  have  in 
mind  the  extreme  costs  of  labor  and  materials  that  we  now  have  to  bear." 

Historical-Cost  Method  Rejected  on  "Mexican  Dollar"  Theory 

Thus  it  will  be  seen  that  Dean  Cooley  wavers  back  again  on  this  question  of 
the  use  of  the  reproduction-cost  method.  He  used  it  in  his  original  Public  Service 
Railway  appraisal  as  a  substitute  for  historical  cost  on  the  ground  that  it  was 
impossible  to  ascertain  from  the  books  just  what  the  investors  had  put  into  the 
property.  At  the  same  time,  to  prove  the  conservatism  of  his  method,  he  an- 
nounces with  great  positiveness  his  conviction  that  if  all  of  the  actual  costs  en- 
tering into  the  development  of  the  property  could  be  ascertained  they  would  be 
immeasurably  greater  than  the  reproduction  cost.  Then  in  his  statement  before 
the  Federal  Electric  Railways  Commission  he  qualifies  this  opinion  by  saying  that 
it  refers  only  to  normal  times,  not  to  the  present  period  of  extreme  prices.  What 
then  does  he  suggest  as  the  proper  valuation  method  to  be  followed  at  the  present 
time? 

In  his  testimony  before  the  Utilities  Board,  and  again  in  his  testimony  before 
the  Federal  Commission,  he  calls  attention  to  the  extraordinary  price  conditions 
that  now  prevail  as  a  result  of  the  war,  and  takes  the  position  that  under  these 
exceptional  conditions  historical  cost  would  not  be  a  proper  criterion  of  present 
value.  In  this  connection  he  introduces  his  spectacular  "Mexican  dollar"  theory, 
and  states  that  in  view  of  the  decline  in  the  purchasing  power  of  money  either 
the  pre-war  valuation  of  a  public  utility  property  should  be  doubled,  or  else  the 
pre-war  rate  of  return  should  be  doubled,  in  order  that  the  investors  may  con- 
tinue to  receive  a  return  having  the  same  effective  purchasing  power  that  they 
received  before  the  war. 

Thus  Dean  Coole\'  raises  a  most  extraordinary  issue  in  connection  with  the 
valuation,  under  present  conditions,  of  a  street  railway  property  for  rate  pur- 
poses. In  one  breath  he  maintains  that  the  reproduction  cost  method  and  the 
historical  cost  method  should  produce  about  the  same  results,  but  in  the  next 
breath  he  asserts  that  in  normal  times  the  actual  historical  cost,  if  you  could  get 
all  of  it,  would  be  immeasurably  greater  than  the  reproduction  cost  new  of  the 
existing  property.  In  the  third  breath  he  tnaintains  that  in  this  abnormal  period 
the  historical  cost  method  should  be  chucked  overboard   in   order  to   give   the 


692  Appendix  A 

investors  the  benefit  of  the  war  prices  as  reflected  in  reproduction  cost  at  the 
present  time. 

Shall  Utilities  Board  Underwrite  Purchasing  Power  of  the  Dollar? 

All  ])arties  admit,  as  they  must,  that  the  necessary  increase  in  the  cost  of 
operating  a  street  railway,  resulting  from  higher  wages  and  from  higher  costs 
of  materials,  consumed  in  maintenance  and  operation,  must  be  recognized  and 
provided  for  as  a  part  of  the  cost  of  service.  Current  expenses,  beyond  a  doubt, 
actually  and  properly  reflect  fluctuations  in  wages  and  material  prices,  whether 
such  fluctuations  be  due  to  the  law  of  supply  and  demand,  to  changes  in  the  pur- 
chasing power  of  money,  or  to  other  causes  beyond  the  control  of  either  the  op- 
erating company  or  the  regulatory  authorities.  This  leaves  the  question  open  as 
to  the  treatment  of  invested  capital.  The  Public  Service  Railway  Company  in- 
troduced the  evidence  of  a  Chicago  engineer.  Cecil  Frederick  Elnies.  to  show  that 
the  general  purchasing  power  of  the  dollar,  as  shown  by  the  index  of  wholesale 
commodity  prices  issued  by  the  Department  of  Labor,  decreased  from  100  cents 
in  1913  to  42  cents  in  December,  1919.  By  the  same  token,  the  index  for  March, 
1920.  shows  that  the  value  of  the  dollar  had  dropped  below  -K)  cents.  It  is  clear 
that  on  this  basis  the  security  holders  of  the  Public  Service  Railway  Company 
who  received  $100  in  interest  and  dividends  prior  to  the  war,  while  now  receiv- 
ing the  same  number  of  dollars,  will  be  getting  only  about  40  per  cent  as  much 
purchasing  power  as  they  did  six  years  ago.  The  question  is  this :  Shall  the 
investors  in  a  street  railway  property  receive  a  guaranty  at  the  hands  of  the  pub- 
lic through  the  process  of  regulation  so  as  to  protect  them  from  losses  which  they 
incur  through  a  decrease  in  the  purchasing  power  of  money?  The  Public  Service 
Railway  and  its  witnesses  in  a  vibrant  chorus  answer.  "Yes." 

Fixed  Investments  Shrink  or  Swell  With  Changes  in  Value  of  Money 

It  is  not  doubted  by  anyone  familiar  with  economic  laws  that  persons  having 
capital  invested  in  bonds  or  guaranteed  stocks  bearing  a  fixed  rate  of  interest 
over  a  long  period  of  years  or  in  perpetuity  automatically  lose  a  part  of  their 
capital  through  a  decrease  in  the  value  of  money.  Nominally,  thev  have  as 
much  property  as  before,  but  actually  the  dollars  by  which  tiie  property  is  mea- 
sured are  not  worth  so  much.  It  cannot  be  denied,  either,  that  the  inunense 
shrinkage  in  the  intrinsic  value  of  all  fixed  investments,  arising  out  of  such  a 
tremendous  economic  upheaval  as  the  world  has  been  going  through  during  the 
past  few  years,  results  in  great  and  undeserved  losses  to  individuals.  Yet,  credit 
has  its  basis  in  contract,  and  rather  than  destroy  credit  by  starting  a  general 
disturbance  of  contractual  relations,  it  would  appear  that  any  solution  of  the 
problem  of  stability  in  values  must  lie  with  the  general  government  through  some 
process  of  stabilizing  the  dollar,  as  suggested  by  Professor  Irving  Fisher.  It  is 
wholly  inipracticablc  for  special  authorities  like  the  Utilities  Board  or  other  jmb- 
lic  or  private  institutions  dealing  with  ])roperty  rights  established  under  special 
contractual  relations  to  try,  in  a  hit  or  miss  fashion,  to  guarantee  the  purchasing 
|)Ower  of  money.     When  the  value  of  the  dollar  depreciates  the  bondholder  and 


Transpoktatiox  Issues  in  New  Jersey  693 

the  guaranteed  stockholder  suffer  a  shrinkage  in  their  investments.  They  do  not 
have  to  wait  for  somebody  to  act.  The  shrinkage  takes  place  and  they  are  the 
losers.  If.  on  the  other  hand,  the  dollar  appreciates  in  value,  a  bondholder  or  a 
guaranteed  stockholder  takes  a  profit  because  the  dollars  to  which  he  is  entitled 
under  his  contract  are  worth  more  than  they  were  when  the  contract  was  made. 
This  applies  to  the  principal  of  the  investment,  in  case  it  is  liquidated  at  a  time 
w-hen  there  has  been  a  change  in  the  value  of  money,  and  also  to  the  interest 
and  dividends  received  as  the  annual  return  upon  the  investment.  Everywhere 
the  holders  of  bonds,  mortgages,  preferred  stocks  and  securities  guaranteed  by 
lease,  lose  or  gain  as  the  value  of  the  dollar  goes  down  or  up.  On  the  other 
hand,  the  owners  of  the  equity  in  a  property  are  affected  in  exactly  the  reverse 
way.  Suppose,  for  example,  a  street  railway  with  an  actual  investment  of  $100,- 
000.000,  of  which  $75,000,000  was  furnished  by  the  bondholders  and  $25,000,000 
by  the  stockholders.  See  how  values  are  switched  from  one  class  of  security- 
holders to  the  other  by  fluctuations  in  the  purchasing  power  of  the  dollar : 

Bondholders'  Stockholders' 

Total  Interest  Interest 

Original    cost    $100,000,000  $75,000,000  $25,000,000 

Value  when  purchasing  power  of  money  is  cut 

in    two 200.000,000  75,000,000  125,000,000 

Value    when    purchasing   power   of    money    is 

doubled   '. . . .        50,000,000  75,000,000  Wiped  out 

It  cannot  be  doubted  that  a  violent  change  in  the  purchasing  power  of  money 
such  as  has  taken  place  during  the  past  five  years  has  the  result,  in  unregulated 
industries,  of  switching  enormous  values  from  one  set  of  security-holders  to 
another.  The  adjustment  proposed  by  Dean  Cooley  and  the  other  witnesses  for 
the  Public  Service  Railway  Company  would  produce  this  same  effect  in  a  regu- 
lated industry.  No  one  denies  that  this  result  is  deplorable  and  that  the  welfare 
and  orderly  development  of  society  demand  a  greater  stabilization  of  values,  if 
that  is  possible  of  attainment.  But  the  Cooley  plan  would  not  stabilize  values 
at  all  so  far  as  individual  security  holders  are  concerned.  It  would  be  different 
if  the  Public  Service  Railway  property  were  owned  by  a  single  corporation,  with 
the  lessor  companies  entirely  eliminated,  and  with  no  bonds  or  preferred  stock 
outstanding  against  the  property.  Then  we  should  have  a  situation  where,  upon 
the  assumption  that  the  dollar's  purchasing  power  has  shrunk  one-half,  either  a 
doubling  of  the  pre-war  valuation  or  a  doubling  of  the  pre-war  rate  of  return 
would  tend  to  reestablish  the  effective  value  of  the  property  in  the  hands  of  its 
real  owners,  the  common  stockholders.  But  even  under  such  ownership  the  rate 
of  return  would  need  to  be  readjusted  continually  to  keep  pace  with  the  fluctua- 
tions in  the  dollar's  purchasing  power,  if  stability  in  values  was  to  be  maintained. 

Results  of   "Mexican   Dollar"  Theory   Applied   to    Public   Service    Railway 

Valuation 

As  a  matter  of  fact,  on  December  31,  1915,  the  date  as  to  which  Dean  Cooley 
found  the  reproduction  cost  new  of  the  physical  property  of  the  Public  Service 
Railway  to  be  $79,318,040,  there  were  bonds  and  guaranteed  rental  stocks  out- 
standing against  this  property  amounting  to  nearly  $103,000,000.     In  this  case, 


694  Appendix  A 

tlie  common  stock,  held  by  the  PubHc  Service  Corporation  of  New  Jersey,  repre- 
sented a  negative  or  minus  equity  of  more  than  $23,000,000.  if  the  rental  stocks 
and  the  bonds  be  taken  at  their  par  value.  The  only  basis  upon  which  the  Public 
Service  Corporation  could  claim  any  value  whatever  for  the  stock  of  the  F'ublic 
Service  Railway  Company  which  it  owned  at  the  time  of  the  original  Cooley 
appraisal  would  be  the  existence  of  intangible  values  over  and  above  S23.00O.00O. 
or  capitalized  earning  power  in  excess  of  bond  interest  and  fixed  rentals.  I  do 
not  say  that  the  Public  Service  Corporation  put  no  money  into  the  Public  Service 
Railway  Company.  What  I  say  is  that  whatever  cash  it  may  have  invested  in 
the  purchase  of  Public  Service  Railway  common  stock  or  in  contributions  to  the 
Public  Service  Railway  Company's  capital  account  went  to  make  good  the  prop- 
ertv  of  the  underlying  security  holders,  either  to  the  extent  that  the  underlying 
securities  were  originally  excessive,  or  to  the  extent  that  the  property  represented 
by  them  had  been  subsequently  depleted. 

I  have  referred  to  the  figure  $79,318,040,  as  the  reproduction  cost  new  of 
the  l^liysical  property  as  found  by  Dean  Cooley  as  of  December  31.  1915.  An 
analysis  of  the  Cooley  appraisal  reveals  the  fact,  however,  that  cash  working 
capital  of  $926,403.  and  "promoter's  remuneration."  "cost  of  money"  and  "organ- 
ization and  development  of  the  project."  which  are  commonly  treated  as  intan- 
gibles, to  the  amount  of  $8,633,132,  were  included  in  this  figure.  It  also  reveals 
that  in  arriving  at  the  value  of  land  used  for  rights  of  way  Dean  Cooley's  ap- 
praisers had  in  most  cases  found  the  market  value  of  adjoining  lands,  and  then 
multiplied  it  by  two  and  a  half  to  get  the  assumed  value  of  the  right  of  way  lands 
for  railway  purposes,  thus  adding  nearly  $2,000,000  in  excess  of  the  market  value 
as  found  by  themselves.  The  analysis  also  shows  that  Dean  Cooley  and  his  staff, 
following  the  methods  which  they  themselves  laid  down,  found,  upon  examination 
of  the  property,  an  accrued  depreciation  amounting  to  $8,543,426.  This  was 
pure,  observed,  physical  depreciation,  and  included  nothing  on  account  of  obso- 
lescence. It  did  not  even  include  depreciation  of  the  labor  elements  entering 
into  track  and  roadway  construction,  although  Dean  Cooley  himself  admitted  on 
cross-examination  that  labor  ought  to  be  depreciated  along  with  the  materials 
going  to  make  u])  the  physical  property.  Beyond  the  shadow  of  a  doubt,  the 
amount  of  accrued  dejircciation  revealed  by  Cooley's  appraisal  was  much  too 
low,  and  yet  not  a  dollar  was  deducted  from  reproduction  cost  new  on  that 
account. 

It  is  perfectly  clear  that  the  value  of  the  physical  property,  by  a  proper 
application  of  the  reproduction-cost  theory,  with  depreciation  deducted,  even  on 
tl>e  basis  of  Cooley's  inventory  and  unit  prices,  was  under  $60,000,000.  although 
the  bonds  and  guaranteed  rental  stocks  outstanding  against  it  were,  as  we  have 
seen,  nearly  $103.00X000.  Surely,  under  these  conditions,  the  position  of  the 
Public  Service  Corporation  as  the  holder  of  the  comiuon  stock  of  the  Public 
Servii'e  Railway  Company  was  hopeless  under  ]ire-war  conditions. 

Losses  Incurred  by  Underlying   Security  Holders 

Now  let  us  see  what  the  application  of  Dean  Cooley's  theory  would  result  in. 
In  his  testimony  before  the  Utilities  lioard  on  Mav  9.  1910,  Mr.  McCartcr  him- 


Transportation  Issues  in  New  Jersey  695 

self  introduced  two  exhibits  showing  the  outstanding  bonds  and  guaranteed  ren- 
tal securities  with  an  estimate  of  their  market  value  on  December  31,  1915,  and 
again  on  May  1,  1919.  The  par  value  of  these  securities  as  shown  was  $103,- 
445,650.  Their  market  value,  on  December  31,  1915,  was  given  as  $93,004,555, 
and  their  market  value  on  May  1,  1919,  as  $75,116,665,  showing  a  shrinkage 
during  the  war  period  of  $17,887,890.  It  appears,  therefore,  that  the  holders  of 
these  contract  securities  lost,  in  terms  of  market  value,  nearly  $18,000,000  during 
the  three  years  and  four  months  following  the  date  of  the  original  Cooley  ap- 
praisal. But  this  does  not  in  any  degree  measure  the  actual  loss  of  these  security- 
holders resulting  from  the  depreciation  of  money  during  the  war  period.  If  they 
had  sold  their  securities  on  May  1,  1919,  they  would  have  received  nearly  $18,- 
000.000  less  in  money  than  they  would  have  received  for  them  on  December  31, 
1915;  but  still  more  important  is  the  fact  that  each  dollar  received  in  1919  would 
have  been  a  depreciated  dollar,  with  only  half  the  purchasing  power  of  the  dollar 
of  1915.  This  means  that  the  market  value  of  these  underlying  Public  Service 
Railway  securities  on  May  1,  1919,  represented  a  purchasing  power  of  less  than 
$40,000,000  measured  in  the  money  of  1915,  as  compared  with  the  $93,000,000 
representing  their  market  value  at  the  earlier  period. 

Truly  these  are  great  losses,  and  by  them  the  holders  of  inflated  stocks  and 
bonds  have  expiated  a  multitude  of  sins.  Yet  the  Public  Service  Railway  Com- 
pany has  at  all  times  refused  to  admit  that  the  rentals  paid  for  the  underlying 
properties  were,  in  the  pre-war  days,  unjust  or  unreasonable.  From  its  point 
of  view,  therefore,  if  Dean  Cooley's  theory  is  correct,  the  bondholders  and  the 
guaranteed  stockholders  ought  to  receive,  under  post-war  conditions,  the  same 
purchasing  power  in  the  return  upon  their  investment  that  they  received  before 
the  war.  It  is  said  that  the  valuation  of  the  entire  property  comprised  in  the 
Public  Service  Railway  system  should  be  doubled  for  rate  purposes,  or  else  that 
the  rate  of  return  should  be  doubled.  At  one  point  in  his  cross-examination. 
Dean  Cooley  assented  to  the  proposition  that  the  leases  by  which  these  under- 
lying stocks  and  bonds  are  secured  should  be  modified  and  the  rentals  increased 
for  the  purpose  of  protecting  the  holders  of  these  securities  from  the  losses  in- 
curred by  them  through  the  depreciation  of  the  currency.  But  Mr.  McCarter 
and  the  Public  Service  Railway  Coiripany  proved  cold  to  this  suggestion,  and  it 
was  not  pressed. 

Minus  $23,000,000  in  1915  Becomes  Plus  $57,000,000  in  1920 

Let  us  assume  that  the  value  of  all  the  property  owned  and  used  by  the 
Public  Service  Railway  Company  in  1915  was  in  round  figures  $80,000,000,  ac- 
cording to  Dean  Cooley's  estimate  of  reproduction  cost,  and  let  us  further  assume 
that  on  account  of  the  depreciation  in  the  currency  this  same  property  is  now 
worth,  in  the  "Mexican  dollars"  of  today,  double  this  sum,  and  that  $160,000,000 
is  now  to  be  established  as  the  basis  for  rate  making,  as  against  the  $80,000,000 
which,  under  this  assumption,  would  have  been  correct  six  years  ago.  Who  gets 
the  benefit  of  the  stabilization  of  values  for  which  Dean  Cooley  and  the  other 
Public  Service  Railway  witnesses  contend?  Obviously,  the  entire  benefit  falls 
into  the  lap  of  the  Public  Service  Corporation  as  the  holder  of  the  common  stock 


696  Appendix  A 

of  the  Railway  Company.  As  we  have  seen,  this  stock,  according  to  Cooley's 
valuation,  represented  a  negative  or  minus  equity  of  about  $23,000,000  in  the 
money  of  1915,  but  by  the  automatic  legerdemain  of  a  depreciation  in  the  currency 
it  is  now  proposed  that  this  negative  equity  shall  be  transformed  into  a  positive 
equity  of  $57,000,000  in  the  money  of  1920.  Thus  the  Public  Service  Railway 
Company  as  a  whole  would  be  protected  against  the  losses  resulting  from  a 
decrease  in  the  purchasing  power  of  money,  but  the  bondholders  and  guaranteed 
rental  stockholders  would  have  no  share  in  this  protection.  Under  this  plan  the 
benefits  conferred  upon  the  investors  by  an  attempt  of  the  Utilities  Board  to 
stabilize  the  intrinsic  value  of  the  Railway  property,  and  thus  overcome  the 
shrinkage  in  the  purchasing  power  of  money,  would  be  "hogged"  by  the  Public 
Service  Corporation,  and  the  real  owners  of  the  property,  namely  the  bond- 
holders and  the  stockholders  of  the  lessor  companies,  would  be  left  to  "stew  in 
their  own  juice."  The  contracts  which  they  made  under  entirely  different  eco- 
nomic conditions  would  be  held  inviolable,  while  the  5-cent  fare  contracts  with 
the  municipalities,  made  under  conditions  just  as  dissimilar  from  present  con- 
ditions, have  already  been  abrogated  for  the  benefit  of  the  Corporation.  When 
the  investments  were  originally  made  uiuler  public  authorization  and  for  public 
use,  there  was  an  implied  contract  to  the  cttect  that  the  return  to  capital  should 
be  based  upon  the  amount  of  the  investment  as  measured  in  dollars.  This  con- 
tract also,  under  Dean  Cooler's  theory,  would  be  abrogated  in  favor  of  the  Cor- 
poration by  the  substitution  of  reproduction  cost  new  at  war  prices  for  actual 
or  historical  cost. 

Mr.  McCarter's  Share  in  Proposed  War  Profit  $1,333,000 

In  the  zone  fare  case  in  April.  1919,  Mr.  Thos.  N.  McCarter  testified  that 
he  personally  owned  approximately  5.000  shares  of  the  stock  of  the  Public 
Service  Corporation.  These  shares  have  a  par  value  of  $100  each,  so  that  Mr. 
McCarter's  holdings  in  the  Corporation  amount  to  a  total  of  appro.xiniately 
$500,000.  Moreover,  he  stated  that  for  every  share  which  he  held  he  had  paid 
$100  or  more,  but  he  did  not  say  whether  the  payments  were  in  cash,  in  property 
or  in  services.  As  the  securities  of  the  Corporation  are  not  issued  under  the 
supervision  of  the  Utilities  Board,  and  as  the  Corporation's  books  are  not  open 
to  public  inspection,  the  record  in  the  rate  proceedings  does  not  show  to  what 
e.xtent  the  Corporation's  stock  represents  a  cash  investment.  But  it  is  clear  that 
any  switching  of  value  from  the  underlying  securities  of  the  Public  Service  Rail- 
way Company  and  its  subsidiaries  to  the  common  stock  held  by  the  Public 
Service  Corporation  would  directly  benefit  Mr.  McCarter  to  the  extent  of  his 
interest  in  the  common  stock  of  the  Corporation.  On  December  31,  1919,  the 
amount  of  this  stock  outstanding  was  $29,999,600.  If  Mr.  McCarter's  half 
million  dollars  was  common  stock,  it  represented,  therefore,  a  one-sixtieth  in- 
terest in  the  Corporation.  I'nder  Dean  Cooley's  theory  of  valuation  on  the 
basis  of  war  prices,  to  be  used  for  the  purpose  of  stabilizing  the  investors'  hold- 
ings, .something  like  $SO,000.000  of  value,  as  measured  in  the  currency  of  today, 
would  be  switched  from  the  underlying  security  holders  to  the  Public  Service 
Corj)oration,  and  Mr.   McCarter's  personal  share  in  this  "war  profit"  would  be 


Transportation  Issues  in  New  Jersey  697 

approximately  one  and  one-third  million  dollars.  Obviously,  the  public  and  the 
regulatory  authorities  must  take  with  a  grain  of  salt  the  valuation  theories  ad- 
vanced by  Mr.  AlcCarter  and  the  witnesses  employed  by  him. 

Cooley's  Theory  of  Valuation  Disproved  by  Market 

Under  the  public  utility  law  of  New  Jersey,  and  under  the  Constitution  of 
the  United  States,  the  owners  of  the  Public  Service  Railway  property  have  cer- 
tain rights  that  are  guaranteed  against  invasion  by  the  public.  It  has  already 
been  determined  that  the  Utilities  Board  is  not  bound  by  the  municipal  contracts 
limiting  rates  of  fare,  and  the  Public  Service  Railway  Company,  therefore, 
claims  its  legal  right  to  insist  that  the  contracts  be  disregarded  and  that  rates  be 
established  which  will  enable  the  company  to  earn  a  fair  return  upon  the  present 
value  of  its  property.  Against  the  violation  of  this  right  by  adverse  action  of 
the  Board,  the  company  can  appeal  to  the  courts  of  New  Jersey  and  ultimately 
to  the  Supreme  Court  of  the  United  States  for  protection.  One  would  suppose 
that  under  these  circumstances,  if  Dean  Cooley's  theories  of  valuation  are  cor- 
rect, the  securities  of  the  Public  Service  Corporation  would  even  now  reflect 
the  increased  value  of  its  holdings  in  the  common  stock  of  the  Public  Service 
Railway  Company.  Yet,  as  a  matter  of  fact,  not  only  have  the  bonds  and  guar- 
anteed stocks  of  the  underlying  companies  depreciated  in  value  since  1915,  but 
also  the  common  stock  of  the  Public  Service  Corporation  has  suffered  a  big 
slump.  It  was  quoted  at  116  on  December  31,  1915,  the  date  of  the  original 
Cooley  appraisal;  by  May  1,  1919,  it  was  down  to  83,  by  December  15,  1919, 
down  to  65,  and  now  (July,  1920)  it  is  down  to  55.  Obviously,  a  fall  from  116 
in  100-cent  dollars  to  55  in  50-cent  dollars  in  four  and  a  half  years  does  not 
indicate  the  increase  in  the  intrinsic  value  of  the  stock  that  ought  to  be  reflected 
in  its  market  value  if  Dean  Cooley's  valuation  theories  were  sound  and  if  the 
courts  of  the  country  were  dependable  as  protectors  of  vested  interests. 

The  fact  is  that,  under  the  abnormal  conditions  of  the  present  time,  the  use 
of  the  reproduction-cost  method  on  the  basis  of  present  prices  as  a  means  of 
fixing  value  for  rate  purposes  is  absurd  in  theory  and  grotesque  in  results. 
Dean  Cooley's  statement  before  the  Utilities  Board  and  also  before  the  Federal 
Electric  Railways  Commission  that  rejiroduction  cost  in  normal  times  is  taken 
as  the  best  possible  substitute  for  historical  cost,  where  the  latter  cannot  be  ac- 
curately ascertained  by  recourse  to  the  books  of  account,  has  merit.  But  his  re- 
jection of  historical  cost  at  the  present  time,  and  his  contention  that  reproduc- 
tion cost  at  war  prices  should  be  used  as  the  basis  for  fixing  value  for  rate  pur- 
poses, lead  to  results  that  are  astonishingly  unjust  and,  therefore,  unsound. 
Yet  the  Public  Service  Railway  Company  was  able  to  produce  in  February, 
1920,  the  other  expert  witnesses  referred  to.  who  not  only  valiantly  supported 
Dean  Cooley  but  even  went  considerably  beyond  him  in  their  valuation  fallacies. 

Old  Property  Worth  as  Much  as  New,  According  to  Company's  Experts 

I  have  referred  to  the  fact  that  Dean  Cooley  and  his  staff  found  upwards 
of  $8,000,000  of  accrued  depreciation  in  their  survey  of  the  Public  Service  Rail- 


698  Appendix  A 

way  property  in  1915.  When  Cooley  came  to  testify  in  the  rate  proceeding  he 
was  hard  put  to  it  to  explain  why  he  had  found  any  depreciation  at  all.  He 
stoutly  maintained  that  so  far  as  the  public  was  concerned  there  was  no  depre- 
ciation; that  the  property  was  in  a  100  per  cent  condition.  Apparently  his  find- 
ing of  depreciation,  or  "deterioration,"  as  he  preferred  to  call  it,  was  one  proof 
of  the  claim  that  neither  he  nor  the  company  had  any  particular  purpose  in  mind 
when  the  valuation  was  made.  Certainly,  if  he  had  supposed  that  it  was  to  be 
used  for  rate  purposes,  he  would  have  protected  himself  from  the  "misrepresen- 
tation" that  appears  to  be  natural  where  an  appraiser  sets  down  certain  figures 
which  purport  to  represent  a  substantial  difYerence  between  reproduction  cost 
new  and  reproduction  cost  new  less  depreciation,  and  then  proceeds  to  deny  the 
existence  of  any  such  difference  so  far  as  the  value  of  the  property  for  public 
use  is  concerned ! 

All  the  experts  produced  by  the  Public  Service  Railway  Company  were  em- 
phatic in  their  declaration  that  a  well-maintained  street  railway  property  should 
be  regarded  as  in  a  100  per  cent  condition  in  a  determination  of  value  for  rate 
purposes.  The  Valuation  Committee  of  the  American  Electric  Railway  Asso- 
ciation, whose  report  was  introduced  in  evidence  by  Mr.  Schreiber,  states  that 
it  "wishes  to  emphasize  its  conclusions  with  respect  to  the  subject  of  accrued 
depreciation  in  the  strongest  manner  possible,  as  follows:  Where  a  property 
has  been  maintained  in  good  operating  condition  and  an  appraisal  is  being 
made  to  determine  investment  value  for  rate-making  or  for  sale  to  municipality, 
state  or  government,  no  deduction  should  be  made  for  accrued  depreciation." 
It  thus  appears  that  in  spite  of  the  emphatic  rulings  of  the  United  States  Supreme 
Court  in  the  Knoxville  Water  Case,  the  Miimesota  Rate  Cases,  and  other  leading 
cases,  with  respect  to  accrued  depreciation,  tiie  Public  Service  Railway  Com- 
pany and  its  experts  are  still  of  the  ojjinion  that  an  old,  jiartly  worn-out  and 
partly  obsolete  street  railway  property  is  worth  as  much  as  a  brand  new  one. 
And  this  doctrine  extends  not  merely  to  valuation  for  rate  purposes,  but  to 
valuation  for  sale  to  a  municipality  or  state.  It  is  hardly  necessary  to  argue 
the  point  except  to  call  attention  to  the  fact  that  the  public  utility  companies 
throughout  the  country  for  several  years  have  been  making  a  tremendous  drive 
upon  commissions  and  courts  in  valuation  proceedings  to  get  recognition  for 
this  fine  fallacy  that  accrued  depreciation  is  a  myth.  It  is  one  of  the  big.  vital 
issues  that  Dean  Cooley  and  the  other  Public  Service  Railway  experts  pushed 
into  the  very  forefront  of  their  testimony  in  the  rate  proceedings. 

Superseded  Property  Excluded  From  Inventory  Reappears  in  the  Intangibles 

The  physical  property  ct)vcred  by  a  reproduction-cost  ajipraisal  obviously 
must  be  limited  to  the  property  in  existence  at  the  time  the  appraisal  is  made. 
Horses  and  mules  that  have  been  dead  for  the  past  thirty  years,  cars  that  have 
been  dismantled  and  burned,  buildings  that  have  been  torn  down,  machinery 
that  has  been  sold  for  scrap,  and  all  the  other  elements  of  physical  property 
once  used  and  useful  in  the  street  railway  business,  but  long  since  worn  out, 
abandoned  or  supcrsedeil  because  of  their  unfitness  for  contiimed  service,  form 
no  part  of   the  inventory   in  a   reproduction-cost   appraisal.     Yet   the  valuation 


Transportation  Issues  in  New  Jersey  699 

experts  for  the  companies  hate  to  leave  them  out  entirely.  For  appraisal  pur- 
poses, they  conceive  the  fine  idea  that  these  ancient  items  of  property,  though 
no  longer  discernible  to  any  of  the  five  senses  of  men,  are  still  with  us,  having 
attained  a  sort  of  spiritual  immortality  in  the  realm  of  the  intangible,  far  beyond 
the  wear  and  tear  and  decay  that  are  characteristic  of  earthly  use.  And  so, 
the  reproduction-cost  theorists  include  in  their  appraisals  not  merely  the  visible, 
tangible,  physical  plant  of  the  utility,  but  also  its  "business."  They  assume 
that  to  reproduce  the  business,  it  would  be  necessary  to  invest  in  the  mules, 
the  horse  cars,  the  primitive  motors,  and  all  the  other  items  of  superseded  prop- 
erty which  long  years  ago  ceased  to  be  useful  in  the  operation  of  street  railways. 

Development  Costs,  Known  and  Unknown 

Dean  Cooley,  possibly  with  an  eye  to  the  precedent  established  by  the  Utili- 
ties Board  in  the  Passaic  Gas  Case,  reached  the  conclusion  that  30  per  cent  was  a 
very  fine,  attractive,  and,  for  that  matter,  conservative,  percentage  to  add  to  the 
reproduction  cost  new  of  the  physical  property  of  the  Public  Service  Railway 
— in  which  he  included  working  capital,  promoter's  remuneration,  cost  of  money, 
and  what  not — in  order  to  arrive  at  the  full  present  cost  of  reproducing  the 
plant  and  business  of  the  company.  He  felt  pretty  sure  that  it  ought  to  be  more 
than  30  per  cent,  but  was  willing  to  let  it  go  at  that  in  order  to  prove  how 
moderate  he  was.  The  Public  Service  Railway  Company  handed  him  certain 
figures  purporting  to  show  that,  from  1903  on,  deficiencies  had  been  incurred 
aggregating  $16,247,369.  These  were  arrived  at  by  assuming  that  all  the  com- 
pany's operating  expenses  and  fixed  charges,  including  the  rentals  on  the  in- 
flated securities  of  the  consolidation  era,  were  necessary  and  proper,  and  that 
the  Public  Service  Corporation  was  entitled  to  receive  8  per  cent  per  annum 
on  the  money  it  invested  in  the  Public  Service  Railway.  Whenever  the  revenues 
for  any  year  were  insufficient  to  satisfy  these  requirements,  the  deficiency  was 
to  be  capitalized  and  to  form  the  basis  for  a  return  during  succeeding  years. 
In  this  way,  any  deficiencies  or  alleged  deficiencies  below  an  8  per  cent  return 
were  counted  as  cash  investments,  and  were  cumulated  at  8  per  cent  compound 
interest  to  furnish  a  measure  of  development  cost. 

By  this  process  the  company  claimed  that  it  had  proven  the  figure  $16,247,- 
369,  and  so  Cooley  put  this  amount  down  in  his  valuation  table  as  the  "known 
development  costs  1903-1918."  Dean  Cooley  testified  that  he  did  not  know  what 
the  development  costs  before  1903  were,  but  that  in  his  judgment  they  must 
have  been  even  greater  than  subsequent  to  1903.  However,  he  took  the  30  per 
cent  to  cover  development  costs  both  before  and  after  the  Public  Service  Cor- 
poration assumed  control.  Having  accepted  without  question  the  company's 
definite  figure  for  development  costs  subsequent  to  1903,  he  was  compelled  to 
lump  of?  the  balance  of  his  30  per  cent  as  "additional  development  costs,"  or, 
as  he  should  have  put  it,  "unknown  development  costs." 

Dean  Cooley's  method  of  treatment  produced  most  astonishing  results.  The 
exhibit  introduced  by  him  setting  up  in  three  columns  the  reproduction  cost 
new  of  the  property,  first,  on  the  basis  of  unit  prices  for  1911  to  191.S;  second, 
on  the  basis  of  unit  prices  for  1914  to   1918;  and  third,  on  the  basis  of  unit 


700  Appendix  A 

prices  for  1918  alone,  shows  the  "known  development  costs  1903-1918"  to  be 
precisely  the  same  under  each  assumption,  namely,  $16,247,369.  Inasmuch  as 
this  figure  purported  to  be  an  actual  figure  built  up  from  the  financial  records, 
it  had  to  remain  the  same  no  matter  on  what  basis  the  appraisal  was  figured. 
However,  the  application  of  the  flat  30  per  cent,  to  the  estimated  reproduction 
cost  of  the  physical  property  to  cover  the  entire  development  costs,  "known" 
and  unknown,  had  the  eflFect  of  producing  a  remarkable  variation  in  the  amount 
of  the  development  costs  attributed  to  the  period  before  1903,  while  that  subse- 
quent to  1903  remained  unchanged.  Thus  it  appeared  that  when  the  repro- 
duction cost  was  based  upon  1911  to  1915  prices,  the  development  costs  prior 
to  1903  amounted  to  only  $9,945,970;  but  when  reproduction  cost  was  based 
upon  1918  prices,  the  development  costs  prior  to  1903  amounted  to  $21,517,717, 
although  in  both  cases  the  development  costs  subsequent  to  1903,  being  "known," 
were  precisely  $16,247,369,  no  more  and   no  less. 

"Heads  We  Win,  Tails  You  Lose,"  the  Company's  Program 

Nothing  could  show  more  clearly  the  absurdity  of  the  method  followed  by 
Dean  Cooley  and  the  other  witnesses  for  the  company  in  attempting  to  "lug"' 
into  a  reproduction-cost  appraisal  the  hypothetical  historical  cost  of  developing 
the  company's  business.  The  whole  theory  of  valuation  for  which  they  con- 
tended is,  in  effect,  that  a  public  utility  can  never  lose.  They  assume  that  if  the 
utility  is  to  be  regulated  it  will  be  guaranteed  by  its  constitutional  rights  against 
present  or  future  losses.  They  also  assume  that  if  a  utility  is  now  being  regu- 
lated or  is  to  be  regulated  in  the  future,  the  generous  hand  of  the  community 
must  necessarily  make  good  to  the  present  investors  all  of  the  actual  or  hypo- 
thetical losses  which  they  or  their  predecessors  may  have  incurred  back  to  the 
Year  One.  They  assume  that  any  failure  of  the  early  investors  to  earn  as  high 
a  return  upon  their  money  as  they  hoped  or  expected  to  earn  when  they  put 
their  money  into  the  enterprise  was  an  actual  cash  loss,  which,  cumulated  at 
compound  interest  from  that  time  to  this,  is  to  be  made  good  before  the  com- 
munity's power  of  rate  regulation  can  be  made  effective  for  the  future.  Even 
though  the  utility  may  have  operated  for  fifty  years  under  limited  rates  of  fare 
fi.xed  by  voluntary  contracts  with  the  municipalities;  even  though  during  that 
period  the  holders  of  these  franchise  contracts  may  have  considered  them  almost 
priceless;  nevertheless,  to  whatever  extent  the  investors  at  any  time  during 
these  past  years  may  have  been  disappointed,  these  disappointments  should  now 
\k  retrieved  by  the  present  investors  through  a  public  guaranty.  The  fact  that 
in  the  old  days  investors  and  manipulators  went  into  the  street  railway  business 
as  a  speculation;  the  fact  that  on  realized  or  expected  profits  of  the  five-cent 
fare  they  inflated  the  capitalization  until,  as  Mr.  Ralph  S.  Bauer  would  say, 
the  street  railways  should  have  been  turned  into  steamboat  companies  to  navi- 
gate in  their  own  water— these  facts  make  no  difference  to  Dean  Cooley  and 
his  fellow  experts  for  the  Public  Service  Railway  Company.  They  would  now 
ask  the  public  to  confer  upon  the  present  stockholder— the  Public  Service  Cor- 
poration—the benefits  necessary  to  make  good  an  8  per  cent  retuni  upon  the 
entire   investment    of    .nil    the  underlying   and   predecessor   companies    from    the 


Transportation  Issues  in  New  Jersey  701 

beginning  of  the  street  railway  business  until  now.  The  Cooley  theory  in  its 
practical  application  means  that  a  public  service  corporation,  thanks  to  the 
beneficent  exercise  of  the  police  power  under  modern  regulation,  plays  with  the 
public  the  game  of  "heads  I  win,  tails  you  lose."  It  is  a  prominent  part  of  the 
theory  of  these  experts  that  from  the  very  beginning  the  street  railways  have 
all  of  the  time  been  losing  heavily,  but  that  as  a  condition  of  future  public 
control  these  losses,  cumulated  by  compound  interest  at  a  speculative  rate,  must 
be  capitalized  and  added  to  the  reproduction  cost  new  of  the  physical  property 
as  the  so-called  cost  of  reproducing  the  business,  and  thus  become  a  part  of  the 
rate  base  from  now  until  the  end  of  time.  If  this  theory  could  be  made  good, 
then,  beyond  a  doubt,  it  would  be  greatly  to  the  advantage  of  every  street  rail- 
way company  to  keep  on  losing  money  year  by  year,  and  the  more  the  merrier, 
for  where  else  could  be  found  so  profitable  an  investment  as  an  investment  in 
street  railway  losses  bound  to  accumulate  at  8  per  cent  compound  interest 
forever ! 

The  Unearned  Increment  Plus  150  Per  Cent  on  Rights  of  Way 

Dean  Cooley  and  the  other  witnesses  for  the  Public  Service  Railway  Com- 
pany also  stoutly  maintain  that  a  utility  company  is  entitled  to  capitalize  against 
the  public  the  natural  increase  in  the  value  of  the  lands  used  for  rights  of  way 
and  other  street  railway  purposes.  No  matter  whether  these  lands  may  have 
been  received  as  a  gift  or  may  have  been  acquired  for  a  song,  the  growth  of  the 
community,  which  the  company  and  its  predecessors  were  bound  to  serve,  has 
often  resulted  in  an  immense  increment  of  land  value.  The  private  land  owner 
who  improves  land  or  holds  it  for  a  rise  is  compelled  to  pay  the  interest  on 
the  original  investment,  whatever  it  may  be ;  the  taxes  and  assessments,  and 
all  other  expenses  of  waiting  for  the  increment  to  materialize.  In  the  case  of 
the  street  railways,  however,  all  of  these  expenses  are  met  as  a  part  of  the  cost 
of  operation,  which  is  paid  out  of  the  revenues  received  from  the  riding  public. 
Thus,  gains  and  losses,  merited  or  unmerited,  are  all  equally  effective  in  pro- 
ducing value  against  the  public. 

But  the  Public  Service  Railway  Company  now  claims  not  merely  the  present 
market  value  of  the  land,  including  all  the  increment,  but  in  the  case  of  rights 
of  way  Dean  Cooley 's  appraisers  would  give  to  the  company,  to  be  capitalized 
against  the  public,  150  per  cent  more  than  the  market  value  to  cover  the  assumed 
costs  of  acquisition  if  it  were  necessary  for  the  railway  company  now  to  acquire 
new  rights  of  way  under  present  conditions.  The  "multiple"  method  of  arriving 
at  the  value  of  rights  of  way  for  railway  purposes  was  flatly  repudiated  by  the 
United  States  Supreme  Court  in  the  Minnesota  Rate  Cases,  where  the  opinion 
was  written  by  Justice  Charles  E.  Hughes,  but  this  counts  for  nothing  in  the 
opinion  of  Dean  Cooley  and  his  associates.  Neither  does  it  count  for  anything 
that  the  Supreme  Court  in  these  and  other  cases  explicitly  held  that  accrued 
depreciation  should  be  deducted  in  arriving  at  present  value  for  rate  purposes. 
These  rulings  are  regarded  by  the  Public  Service  Railway  Company's  experts 
as  errors  of  the  court.  Dean  Cooley  was  even  willing  to  admit  that  the  engi- 
neering profession  was  in  part  to  blame  for  the  mistakes  the  court  had  made, 


702  .'VrpENDix  A 

because,  forsooth,  the  engineers  in  their  testimony  in  rate  cases  liad  not  with 
sufticient  unanimity  and  zeal  piled  up  the  companies'  claims  high  enough,  or 
defended  them  with  sufficient  vigor.  As  Dean  Cooley  would  say,  the  engineers 
had  failed  to  place  ail  of  "the  facts"  before  the  court.  He  even  told  the  Util- 
ities Board  that  he  had  had  in  mind  to  call  on  ex-Justice  Hlighes  and  point  out 
to  him  the  mistakes  he  had  made  in  the  Minnesota  Rate  Cases,  but,  unfor- 
tunately, it  was  now  too  late  for  it  to  do  any  good.  .-Knd  Mr.  Almert.  in  his 
testimony  for  the  company,  referred  to  the  deduction  of  accrued  depreciation 
from  reproduction  cost  new  as  "the  one  big  fundamental  error  on  the  part  of 
the  courts." 

Watered  Securities  to  the  Tune  of  $73,000,000,  Claimed  as  Franchise  Value 

Not  satisfied  with  reproduction  cost  at  war  prices;  not  satisfied  with  claim- 
ing that  its  old  property  is  worth  as  much  as  if  it  were  new;  not  satisfied  with 
the  recognition  of  cumulated  hypothetical  deficiencies  as  additions  to  present 
value;  not  satisfied  with  the  unearned  increment  of  land  values,  plus  150  per  cent 
on  rights  of  way.  the  Public  Service  Railway  Company,  at  the  close  of  the  last 
hearing,  came  forward  with  the  explicit  claim  that  franchise  values,  equal  to 
all  the  watered  securities  piled  up  during  the  period  of  manipulation  and  con- 
solidation, should  be  recognized  as  value  upon  which  future  car  riders  must 
pay  an  S  per  cent  return.  The  final  decisions  of  the  N'ew  Jersey  courts  in  the 
Passaic  Gas  Case  are  now  to  be  repudiated.  The  company,  regarding  the  United 
States  Supreme  Court  as  the  final  |)rotector  of  vested  interests,  still  clings  to 
the  forlorn  hope  that  this  ultimate  tribunal  will  sanctify  the  results  of  the  stock 
and  bond  deals  in  the  consolidations  of  25  years  ago.  It  does  not  matter  that 
these  old  consolidations  still  smell  to  heaven  whenever  an  accountant  succeeds  in 
prying  open  the  closet  doors  that  ordinarily  conceal  the  Public  Service  Railway 
Company's  past.  Naively,  the  company  claims  that  the  value  of  the  franchises — 
the  five-cent  franchises — under  which  so  many  millions  of  dollars  of  "losses" 
were  piled  up,  was  accurately  measured  by  the  estimates  of  value  placed  upon 
them  by  the  hopeful  manipulators  who,  according  to  Accountant  Wolff,  injected 
some  $7.^000.000  of  water  in  the  securities  of  the  Public  Service  Railway  system 
back   in  the  nineties. 

Cooley's  methods  were  controverted  on  practically  every  fundamental  issue 
by  Dr.  Milo  R.  M.iltbie.  former  public  service  commissioner  in  New  York,  and 
by  Professor  Kdward  W.  Bemis,  a  distinguished  valuation  expert  on  the  public 
side,  both  of  whom  testified  for  the  Municipalities.  With  respect  to  the  repro- 
duction-cost method,  depreciation,  land  values,  working  capital,  overhead  and 
development  cost,  they  provetl  that  his  theories  were  unsound  and  inconsistent 
with  the  best  precedents  of  valuation  in  rate  proceedings. 

Cooley's  Appraisal  Sampled 

Thus  far  I  have  been  indicating  the  lengths  to  which  Dean  Cooley  and 
the  Public  Service  Railway  experts  generally  had  the  hardihood  to  go  in  their 
general  theories  and  methods  in  the  ascription  of  value  to  the  company's  |)rop- 


Transport ATiox  Issues  in  New  Jersey  703 

erty  on  the  basis  of  reproduction  cost.  As  I  have  said,  neither  the  UtiHties 
Board  nor  the  Municipalities  undertook  to  make  a  new  inventory  or  to  establish 
new  unit  prices  as  the  basis  for  a  reproduction-cost  appraisal  of  this  property. 
Yet  the  experts  for  the  Municipalities  were  able,  within  the  limited  time  at 
their  disposal,  to  check  some  of  Cooley's  detailed  work.  For  example,  Mr. 
Charles  K.  Mohler.  the  engineer,  found  that  46  passenger  cars  retired  from 
sen'ice  as  worn  out  or  obsolete  before  May  31,  1919,  had  been  entered  in  the 
Cooley  appraisal  on  December  31,  1915,  as  being  on  the  average  in  a  61.1  per 
cent  condition,  which  indicated  that  they  were  good  for  15  years  more  instead 
of  3  years.  Under  Cooley's  theory  that  in  a  valuation  for  rate  purposes  there 
is  no  accrued  depreciation,  these  cars  went  in  at  100  per  cent  of  their  repro- 
duction cost.  Mr.  Mohler  found  that  100  General  Electric  No.  57  motors  were 
retired  in  1918,  and  $44,250  was  withdrawn  from  the  fixed  capital  account  as 
the  company's  estimate  of  actual  cost.  Cooley's  appraisal  figure  without  over- 
heads for  100  similar  motors  was  $76,357,  and  with  overheads  $103,225.  Thus 
with  Cooley's  appraisal  of  the  company's  property  substituted  for  book  cost, 
the  capital  account  would  show  $14,725  more  after  the  motors  had  been  scrapped 
than  the  actual  cost  account  showed  when  they  were  new.  Mohler  also  found 
that  Cooley  had  allowed  $10  apiece  "base  cost"  for  removing  25  hypothetical 
willow  trees,  12  feet  high,  assumed  to  have  been  found  on  the  right  of  way 
of  the  Hackensack  line.  With  the  overheads  added,  the  cost  of  removal  was 
$14.67  apiece,  which  at  the  wages  paid  before  the  war  would  be  "going  some" 
for  a  12-foot  willow.  Mr.  Mohler  showed  that  the  land  and  improvements  at 
Wood  Lynne  Park  were  appraised  by  Cooley  at  $57,608  including  the  over- 
heads, but  with  accrued  depreciation  deducted ;  while  this  same  property,  sold 
two  years  later,  brought  a  net  price  of  $14,264.  This  property  at  the  undepre- 
ciated value  claimed  for  rate  purposes  stood  at  $52,644  without  the  overheads, 
and  at  $75,036  with  them.  A  piece  of  property  in  Camden  consisting  of  land 
and  two  residence  blocks  stood  in  Cooley's  appraisal  for  $21,256,  including  the 
overheads,  or,  with  depreciation  deducted,  at  $18,617.  This  property  brought 
$7,000  when  it  was  sold  two  years  after  the  appraisal. 

In  making  his  reproduction-cost  estimate  Cooley  assumed  that  the  entire 
property  being  appraised  was  non-existent  except  for  inventory  purposes,  that 
not  a  wheel  would  be  turned  until  at  the  end  of  a  three-year  construction  period, 
preceded  by  another  year  for  the  acquisition  of  land ;  yet  in  fixing  his  unit  prices 
for  track  work  he  allowed  10  cents  per  lineal  foot  for  the  removal  of  pre-existing 
track,  made  another  allowance  for  the  cost  of  maintaining  street  railway  traffic 
while  the  theoretical  reproduction  of  the  property  was  going  on,  and  even 
assumed  that  the  company  would  be  carrying  the  laborers  to  and  from  their 
work  on  the  cars.  One  of  the  most  extraordinary  discrepancies  brought  to  light 
was  with  respect  to  the  cost  of  grading  job  on  the  Turnpike  line,  which  was 
being  done  right  at  the  time  when  Dean  Cooley  was  making  his  inventory. 
The  reproduction-cost  estimate  that  went  into  the  appraisal  on  account  of  this 
work  was  $65,968  without  overheads,  and  $96,753  with  them.  The  actual  cost 
as  shown  by  the  comjiany's  construction  records,  was  $30,178  without  the  over- 
heads which,  for  the  entire  job  including  the  grading,  were  only  $3,283. 


704  Appendix  A 

Divergent  Results:  $59,000,000  by   Subtraction:   $180,000,000  by   Addition 

The  reproduction-cost  method,  if  carefully  and  sensibly  applied,  may  un- 
doubtedly be  used  to  throw  light  upon  the  question  of  fair  present  value  for 
rate  purposes,  but  the  tremendous  economic  changes  that  have  taken  place  as 
a  result  of  the  war  make  it  especially  difficult  at  the  present  time  to  use  this 
method  in  such  a  way  as  to  be  helpful  to  a  public  authority  bound  to  seek 
a  just  result.  Yet  Cooley's  original  appraisal  made  in  1915,  before  these  eco- 
nomic changes  took  place,  involved  so  many  valuation  vagaries  that  its  use- 
fulness as  a  measure  of  fair  value  for  rate  purposes  needs  to  be  heavily  dis- 
counted. Still,  without  admitting  the  correctness  of  the  Cooley  inventory  in 
all  its  details,  or  the  correctness  of  the  unit  prices  which  Dean  Cooley  set  up 
as  fair  average  prices  for  the  five-year  period  ending  with  1915,  I  thought  it 
possible,  on  the  basis  of  this  inventory  and  of  these  unit  prices,  by  the  elimina- 
tion of  unused  property,  by  the  deduction  of  accrued  depreciation,  by  the  read- 
justment of  the  overhead  allowances,  and  by  certain  other  major  corrections 
of  method,  to  save  the  result  based  on  the  reproduction-cost  theory  from  being 
so  fantastic  as  to  condemn  itself.  As  a  witness  tor  the  Municipalities  I  prepared 
an  analysis  of  the  Cooley  apjjraisal  along  the  lines  indicated,  having  in  mind 
the  sound  principles  of  valualiun  to  which  Dr.  Maltbie  and  Professor  Bemis  had 
already  testified.  .After  making  an  allowance  of  10  per  cent  for  going  value, 
instead  of  the  outrageous  30  per  cent  allowed  by  Dean  Cooley  and  other  com- 
pany witnesses  on  the  unproven  hypothesis  that  this  percentage  would  fairly  and 
conservatively  represent  actual  development  costs,  I  reached  as  my  final  figure 
appro.ximately  $59,000,000.  This  figure  contrasts  with  the  $180,000,000  arrived 
at  by  Mr.  William  H.  Blood,  Jr.,  of  Stone  &  Webster,  and  with  the  intervening 
figures  arrived  at  by  Almert.  Cooley,  and  other  Public  Service  Railway  witnesses. 

Such  an  enormous  variation  in  an  estimate  of  value  based  on  reproduction 
cost,  and  starting  from  the  same  inventory  and  the  .same  unit  prices,  is  calcu- 
lated to  evoke  comment,  to  say  the  least.  The  differences  are  in  part  explained 
by  what  I  have  already  said  about  the  principles  laid  down  and  the  claims  made 
by  the  Public  Service  Railway  Comjiany  witnesses.  1  have  only  touched  the 
high  spots  in  the  analysis.  It  would  be  fruitless  here  to  go  into  the  fine  details 
to  show  further  where  Cooley's  original  valuation  and  the  subsequent  inferences 
from  it  overshot  the  mark.  It  is  worth  while,  however,  to  correct  a  coinnion 
misapprehension  with  respect  to  the  appraisal  process.  F.ven  under  the  best  of 
conditions  a  reproduction-cost  appraisal  presents  a  comple.x  and  difficult  problem, 
but  the  iirulikni  of  determiiiing  fair  present  value  for  rate  purposes  under  the 
rules  laid  down  by  the  I'nited  States  Supreme  Court  is  infinitively  more  complex 
and  difficult.  People  often  assume  that  all  you  have  to  do  to  get  the  value  of  a 
street  railway  is  to  hire  an  engineer  to  go  out  and  look  it  over  and  then  make  a 
few  computations  and  tell  you  what  it  is  worth.  They  assume  that  value  for 
rate  purposes  is  a  fact  to  be  found  by  a  technical  expert,  instead  of  a  judgment 
to  be  rendered  by  a  governmental  authority  clothed  with  responsibility  for  the 
application  of   sound  public  jiolicics  to   rate-making.     .\s   a  matter  of    fact,   as 


Transportation  Issues  in  New  Jersey  705 

proven  by  the  record  in  this  very  case,  a  street  railway  company  can  find  cele- 
brated engineers  and  experts  to  support  any  vakie  that  it  may  desire  to  estabHsh. 

Why  Engineering  Valuations  Differ 

It  is  often  said  that  reputable  engineers  making  a  valuation  of  the  same 
property,  even  though  they  represent  different  interests,  will  come  within  a  very 
small  percentage  of  an  identical  result.  This  is  true  when  all  of  the  conditions 
under  which  the  appraisals  are  to  be  made  are  prescribed  in  great  detail  by 
agreement  or  by  a  supervisory  authority,  but  when  such  an  appraisal  is  com- 
pleted, it  does  not  necessarily  represent  the  value  of  the  property,  but  merely  a 
result  ascertained  by  the  application  of  certain  rules  to  certain  detailed  facts 
about  which  there  can  be  no  dispute.  Obviously,  two  competent  engineers, 
though  acting  independently,  ought  to  be  able  to  agree  in  the  count  of  the  cars 
in  service,  in  the  measurement  of  the  tracks  in  use,  in  the  computation  of  the 
amounts  of  paving  of  different  kinds  that  are  found  in  connection  with  the  road- 
bed, in  the  description  of  the  size  and  type  of  car-barns  and  other  buildings  and 
with  respect  to  all  those  facts  which  are  primarily  matters  of  inventory — of 
count,  measurement  and  description.  Furthermore,  it  is  to  be  expected  that 
competent  engineers,  if  they  are  working  upon  identical  assumptions  as  to  the 
date  of  the  appraisal  and  the  conditions  of  the  work,  will  not  differ  much  with 
respect  to  unit  prices. 

The  application  of  the  unit  prices  to  the  inventory  produces  a  result  that 
engineers  call  "base  cost."  Even  with  respect  to  base  cost  there  are  likely  to 
be  great  differences  in  the  results  obtained,  unless  the  assumptions  and  methods 
upon  which  the  appraisal  is  based  are  identical,  and  there  is  no  likelihood  that 
they  will  be  identical,  unless  steps  are  taken  to  make  them  so.  Under  these  cir- 
cumstances, a  purely  ex  parte  appraisal  made  by.  or  for  the  company  that  owns 
the  property,  hardly  rises  to  the  dignity  of  evidence  in  a  rate  proceeding ;  for 
everything  about  it  depends  upon  the  assumptions  made  and  the  methods  used, 
and,  as  we  have  seen,  the  assumptions  and  methods  of  one  appraiser  are  likely 
to  differ  radically  from  those  of  another.  But  if,  through  cooperation,  through 
strict  supervision  or  through  accident,  different  appraisers  do  reach  results  that 
come  within  a  very  small  percentage  of  being  identical  so  far  as  base  cost  is 
concerned,  then  the  real  troubles  begin.  When  appraisers  representing  one  in- 
terest get  through  with  the  processes  of  addition  and  multiplication,  while  those 
representing  another  interest  get  through  with  the  processes  of  subtraction  and 
division,  the  final  results  are  likely  to  be  as  far  apart  as  the  east  is  from  the 
west.  This  point  is  well  illustrated  by  the  results  in  the  Public  Service  Railway 
Case  as  I  have  already  outlined  them.  Here  the  Cooley  appraisal  was  purely 
ex  parte.  There  was  absolutely  no  agreement  or  attempt  at  agreement  between 
the  company  and  the  commission,  or  between  the  company  and  the  municipalities, 
with  respect  to  the  conditions  under  which  the  appraisal  was  to  be  made  or  the 
rules  to  be  applied.  The  appraisal  was  presented  before  the  Utilities  Board  as 
a  completed  thing.  Without  an  entirely  new  appraisal,  no  substantial  changes 
in  either  the  inventory  or  the  unit  prices  could  be  made,  but  even  on  this  basis 


706  Appendix  A 

the  divergent  results  to  which  I  have  referred  were  reached  through  the  processes 
of  analysis  and  readjustment. 

An  Illustration  from  Pittsburgh 

Another  illustration  will  show  even  more  clearly  the  difficulties  and  uncer- 
tainties of  public  utility  appraisal  work.  The  Public  Service  Commission  of 
Pennsylvania,  in  order  to  minimize  the  difYerences  between  the  street  railway 
companies  and  the  municipalities,  has  adopted  a  policy  of  cooperation  through  the 
establishment  in  each  case  of  a  joint  board  of  engineers  composed  of  appraisers 
representing  the  municipality  and  appraisers  representing  the  company,  with  the 
chief  engineer  of  the  commission  as  chairman.  The  most  notable  application  of 
this  policy  was  in  connection  with  the  appraisal  of  the  Pittsburgh  Railways. 
Here,  an  Engineers  Valuation  Board  was  organized  March  15,  1918.  It  rendered 
its  report  to  the  Public  Service  Commission  in  Augvist,  1919.  It  presented  ap- 
praisals on  seven  different  bases.  The  results,  without  any  deduction  for  depre- 
ciation, ranged  from  $49,324,000  as  the  estimated  cost  of  reproduction  new  of 
the  existing  property  at  prices  ruling  when  each  part  of  the  property  w'as  con- 
structed and  under  the  original  conditions  of  construction,  up  to  $102.S42.000 
as  the  estimated  cost  of  reproduction  new  at  prices  and  under  the  conditions 
prevailing  on  April  1,  1918.  The  Board  of  Engineers  also  indicated  the  amount 
of  superseded  property  included  in  its  historical-cost  estimate  and  the  amount  of 
accrued  depreciation  in  each  of  its  reproduction-cost  estimates.  The  deduction 
of  depreciation  from  the  normal  reproduction  cost  left  $37, 2<S5.000  as  a  definite 
minimum,  as  compared  with  the  $102,842,000  maximum  without  depreciation 
deducted,  both  of  these  figures  being  arrived  at  by  the  reproduction-cost  method. 
With  respect  to  these  figures  the  Board  of  Engineers  was  unanimous,  but  this 
was  not  the  whole  story.  The  Board  reported  that  it  was  unable  to  agree  as  to 
"development  value,  going-concern  value  and  other  elements  of  value." 

Thus,  the  Pennsylvania  Commission,  after  making  every  etTort  to  promote 
cooperation  and  agreement  between  the  City  of  Pittsburgh  and  the  Pittsburgh 
Railways  Company,  found  itself  with  sets  of  agreed-upon  figures  ranging  all  the 
way  from  thirty-seven  millions  to  one  hundred  and  two  millions,  with  no  agree- 
ment whatever  upon  intangibles.  The  commission  ultimately  adopted  an  arbi- 
trary final  figure  of  $r)2, 500,000,  but  this  was  fixed  frankly  as  a  basis  for  reorgan- 
ization, on  the  theory  that  any  smaller  figure  would  result  in  the  disintegration 
of  the  property,  which,  in  the  eyes  of  the  commission,  would  be  a  public  calamity. 

Historical-Cost  Method  Also  Subject  to  Jugglery 

It  might  be  supposed  that  coming  down  out  of  the  clouds  of  theory  to  the 
hard  basis  of  accounting  facts  we  could  depend  upon  the  actual  or  historical-cost 
method  to  give  us  something  precise  and  definite  in  the  valuation  field.  Unfor- 
tunately, however,  miiform  and  scientific  systems  of  accounts  do  not  reach  back 
very  far  in  the  hi.siory  of  the  electric  railway  business,  and  in  the  case  of  a 
great,  composite  system  like  the  Public  Service  Railway,  with  a  street  car  history 
of  sixty  years  behind  it,  and  a  turnpike  history  almost  as  long  still  further  back, 
we  c.iniuit  hope  to  get  an  indisputable  figure  representing  original  cost  to  date  or 


Transportation  Issues  in  New  Jersey  707 

any  other  precise  investment  concept.  Historical  cost  can  be  juggled  with  almost 
as  freely  as  reproduction  cost,  if  the  experts  have  the  will  to  juggle.  As  we 
have  seen,  Accountant  Mark  Wolff  arrived  at  $93,662,873,  as  the  total  actual  cost 
of  the  Public  Service  Railway  property,  based  for  the  most  part  upon  the  con- 
struction accounts.  On  cross-examination,  in  view  of  minor  gaps  in  certain  of 
the  records,  and  in  order  to  be  liberal  to  the  company,  Mr.  Wolff  said  that  he 
would  be  willing  to  round  off  the  actual  cost  figure  to  an  even  $95,000,000.  As 
counsel  for  the  company,  Senator  Wakelee  brought  out  the  fact  that  certain  in- 
tangible items  which  the  company  claimed  as  elements  of  value  were  not  included 
in  Wolff's  actual  cost  figures,  but  for  the  most  part  these  were  hypothetical  and 
elusive  items  for  which  the  company  could  supply  no  specific  figures  from  its 
records.  On  the  other  hand,  it  was  pointed  out  on  behalf  of  the  municipalities 
that  Mr.  Wolff's  figures  represented  cost  new  of  all  the  physical  property  that  had 
ever  been  acquired  by  the  Public  Service  Railway  Company  or  its  predecessors, 
less  only  such  items  as  may  have  been  written  off  from  the  capital  account  by  the 
companies  themselves  during  the  past  sixty  years.  For  example,  the  figures  in- 
cluded many  millions  for  superseded  horse-car  and  cable  property  and  many  addi- 
tional millions  for  power  stations  subsequently  alienated  to  the  Public  Service 
Electric  Company.  The  figures  showed  no  deduction  whatever  from  the  cost 
new  of  the  existing  property. 

Barker  and  Almert,  Experts  in  Addition 

Nevertheless,  Mr.  W.  S.  Barker,  comptroller  of  the  Public  Service  Railway 
Company,  started  out  with  Wolff's  round  figure  of  $95,000,000,  and  built  up  an 
alleged  historical  cost  to  approximately  $147,000,000.  To  accomplish  this  he 
first  added  an  item  of  $420,515  paid  to  one  B.  M.  Shanley  back  in  electrification 
days,  and  charged  to  the  "franchise  and  property  account"  of  the  Consolidated 
Traction  Company.  Mr.  Wolff  had  rejected  this  item.  Then,  Mr.  Barker  added 
12%  per  cent  for  promoter's  remuneration,  cost  of  money,  and  organization  and 
development  of  the  project,  alleged  elements  of  preliminary  or  overhead  expense 
not  included  in  the  construction  costs  as  shown  on  the  books.  These  estimated 
items  amounted  to  nearly  $12,000,000.  He  then  added  two  and  a  half  million 
dollars  for  working  capital,  and  $6,000,000  for  the  unearned  increment  of  land 
value  which,  he  assumed,  had  been  taken  into  consideration  and  capitalized  at 
the  time  when  the  consolidations  of  the  underlying  companies  were  effected. 
This  gave  him  $115,848,079.  To  this  he  added  $7,795,750  of  development  costs 
for  the  period  prior  to  1903,  and  $23,841,764  for  development  costs  subsequent 
to  that  date.  These  estimates  of  development  costs  had  been  worked  out  from 
the  income  accounts  of  the  principal  companies,  and  represented  his  estimate  of 
the  aggregate  deficiencies  below  an  8  per  cent  return  upon  construction  cost. 
This  gave  him  a  final  figure  of  $147,485,593  as  the  approximate  historical  cost 
of  the  property. 

Mr.  Harold  Almert  also  took  a  fling  on  behalf  of  the  company  in  the  realm 
of  historical  cost.  He  started  with  the  $109,848,079  representing  Mr.  Barker's 
historical  cost  before  the  addition  of  development  costs,  but  instead  of  being 
satisfied  with  the  $31,637,514  of  development  costs  worked  out  on  the  8  per 


708  Appendix  A 

cent  theory,  he  concluded  that  it  would  be  proper  to  add  enough  for  development 
costs  to  bring  his  historical  cost  up  to  the  $165,000,000  which  he  had  already 
fixed  as  the  reproduction  cost  new  of  the  property  at  war  prices.  This  gave  him 
a  little  over  S55.OOO.0OO  for  development  costs,  although  he  stated  that  if  he 
were  of  a  mind  to  add  all  of  the  development  costs,  as  would  be  entirely  proper, 
he  would  have  to  put  them  in  at  between  90  and  100  million  dollars. 

Actual  Cost,  Less  Depreciation,  of  Existing  Property 

Starting  from  Mr.  Wolff's  actual  construction  cost  figure  of  $93,662,873 
and  going  in  the  opposite  direction  from  that  followed  by  Mr.  Barker  and  Mr. 
Almert  I  deducted  the  book  cost  of  power  plant  and  equipment  alienated  in  1910 
to  the  Public  Service  Electric  Company,  the  estimated  cost  of  superseded  prop- 
erty dating  back  to  the  days  of  horse  cars  and  cables,  the  cost  of  "rehabilitation"' 
charged  to  construction  in  the  early  years  of  Public  Service  Corporation  control 
(a  cost  which  appears  to  have  been  incurred  in  changing  the  gauges  of  various 
street  railway  lines  for  the  purpose  of  unified  operation),  the  miscellaneous 
properties  used  for  ferry  and  other  non-railway  puqioses,  and  accrued  deprecia- 
tion of  existing  property  figured  on  the  same  basis  that  I  used  in  estimating  re- 
production cost.  In  this  way  I  reached  $56,077,366,  as  the  final  figure  for  esti- 
mated actual  cost,  less  depreciation,  of  the  existing  physical  property  of  the 
Public  Service  Railway  Company  as  of  March  31,  1919. 

For  the  purpose  of  determining  whether  or  not  any  allowance  should  be 
made  for  development  cost  in  this  actual  cost  study,  I  assumed  that  the  physical 
property  superseded  at  or  before  electrification  could  or  should  have  been  written 
out  of  the  capital  account  before  the  several  dates,  beginning  May  31,  1903,  when 
the  control  of  the  various  portions  of  what  is  now  the  Public  Service  Railway 
system  came  into  the  hands  of  the  Public  Service  Corporation.  On  the  other 
hand  I  assumed  that  no  depreciation  had  been  written  of?  with  respect  to  the 
property  existing  on  those  dates.  Starting  on  this  basis  I  found  that  the  earn- 
ings of  the  Public  Service  Railway  system  were  sufficient  to  pay  6  per  cent  on 
the  actual  construction  cost  of  the  existing  property,  pay  the  $4,160,000  of 
rehabilitation  as  an  operating  expen.se.  and  pay  the  $14,510,000  of  accrued  depre- 
ciation which  I  attributed  to  the  existing  property  as  of  March  31.  1920,  and  still 
leave  a  handsome  surplus  for  contingencies.  1  could  not  see  that  it  would  be 
just  to  make  any  allowance  for  development  cost  to  be  capitalized  at  this  time 
against  the  public.  It  seemed  to  me,  particularly  in  view  of  the  scandalous  way 
in  which  the  five-cent  fare  franchises  were  capitalized  in  the  stock  and  bond  deals 
during  the  period  of  electrification,  that  it  would  be  preposterous  to  assume  the 
existence  of  develo])ment  costs  back  of  1903,  under  the  previous  regimes,  as  an 
element  of  "fair  value"  at  the  present  day.  However.  Mr.  Barker,  a  witness 
for  the  company,  came  along,  and  from  an  examination  of  the  incomplete  rec- 
ords of  the  predecessor  companies,  and,  upon  the  assumption  that  these  com- 
panies were  entitled  at  all  times  to  an  8  per  cent  return  with  deficiencies  cunni- 
latcd  at  8  per  cent  compound  interest,  figured  out  so-called  development  costs 
of  $7,795,750  for  the  period  prior  to  1903,  without  providing  for  the  superseded 


Transportation  Issues  in  New  Jersey  709 

property;  and  by  the  use  of  the  8  per  cent  return  and  certain  other  adjustments 
he  produced  a  cumulative  deficiency  of  $23,841,764  for  the  period  subsequent  to 
1903.  The  widely  divergent  results  reached  clearly  illustrate  the  possibility  of 
creating  the  appearance  of  a  loss  merely  by  starting  with  an  overloaded  capital 
account  and  by  figuring  the  fair  return  at  a  higher  rate  than  the  actual  cost  of 
money. 

It  will  be  remembered  that  1916  was  the  banner  year  in  the  history  of  the 
Public  Service  Railway  Company.  It  was  to  the  conditions  of  1916  that  the 
company  asked  to  be  restored  in  the  Emergency  case,  but  Mr.  Barker's  compu- 
tation of  development  cost  shows  a  deficit  of  $1,566,000  for  that  banner  year.  It 
is  out  of  the  deficits  so  computed  that  the  company  builds  up  development  costs 
by  compound  interest  and  pyramids  so-called  values  as  an  impassable  barrier  to 
rate  regulation  in  the  future. 

What  8  Per  Cent.  Compounded  Will  Do  for  Cheerful  Losers 

The  theory  that  a  street  railway  company  cannot  under  any  circumstances 
lose,  and  that  any  deficiencies,  assumed  or  real,  are  to  be  immediately  and  perma- 
nently capitalized  and  preserved  in  the  form  of  development  cost  or  going  value, 
is  reduced  to  an  absurdity  when  consideration  is  given  to  its  ultimate  effects.  For 
example,  a  single  dollar  of  loss  incurred  in  the  year  1916  and  cumulated,  accord- 
ing to  the  Public  Service  Railway  Company's  plan,  at  8  per  cent  compound  in- 
terest, would,  in  100  years,  add  the  sum  of  $2,199.98  to  the  value  of  the  plant 
for  rate  purposes,  and  if  the  railway  incurred  an  additional  loss  of  one  dollar 
during  each  of  the  100  years,  the  aggregate  additions  to  capital  at  the  end  of  that 
time  on  account  of  this  annual  one  dollar  loss  would  be  $27,484.79.  If  the  com- 
pany lost  $1,566,048  in  1916,  its  banner  year,  as  Mr.  Barker  figured  that  it  did,  lo, 
what  does  the  future  hold  for  the  people  of  New  Jersey!  This  loss,  even  if  not 
repeated,  would,  in  the  course  of  100  years  accumulate  the  tidy  sum  of  $3,400,- 
000,000;  and  if  the  banner  prosperity  of  1916.  when  the  company  lost  only 
$1,566,000.  were  to  be  the  lot  of  the  Public  Service  Railway  Company  year  after 
year  for  the  full  period  of  a  century,  the  accumulated  losses  would  by  that  time 
have  added  some  $43,000,000,000  of  wealth  to  the  company.  As  the  banished  Duke 
would  say,  "Sweet  are  the  uses  of  adversity."  Just  think  what  would  happen 
to  Mr.  McCarter's  half  million  dollars  of  common  stock  in  the  Public  Service 
Corporation  of  New  Jersey  if  he  could  manage  to  stick  it  out  for  another  100 
years.  But  as  a  century  seems  a  long  time  to  wait,  we  can  still  hold  out  a  better 
hope.  Even  the  accursed  zone  system,  jitney  competition,  the  strikes  and  the 
increased  wages  offer  their  balm  to  the  stockholders  of  the  Public  Service  Rail- 
way Company,  for,  according  to  Mr.  Barker's  figures,  the  company's  deficiency 
for  the  first  three  months  of  1919  was  accumulating  at  the  rate  of  nearly  $5,000,000 
a  year,  without  counting  the  unearned  return  upon  the  deficiencies  for  the  inter- 
vening years.  If  things  keep  up  at  this  rate  Mr.  McCarter  will  have  to  wait 
much  less  than  a  hundred  years  to  realize  his  billion  dollar  interest  in  the  intan- 
gible values  of  the  Public  Service  Railway  property.  This  analysis  suggests  an 
easy  way  to  provide  for  paying  the  cost  of  future  world  wars. 


710  Appendix  A 

What  Adjusted  Capitalization  Shows 

I  should  add  just  a  word  about  the  company's  capitalization.  Out  of  a  par 
value  of  $160,514,150,  including  real  estate  mortgages,  advances  from  the  Federal 
Government,  and  investment  by  the  Public  Service  Electric  Company  upon  which 
the  Public  Service  Railway  Company  pays  interest,  Mr.  Wolff  found  $72,934,221 
of  "water,"  or,  as  he  called  it  out  of  deference  to  the  sensibilities  of  Mr.  McCarter 
and  the  Utilities  Board,  "excess  capitalization."  This,  according  to  Senator 
Wakelee,  represents  the  franchise  values  of  the  property  as  of  the  dates  when 
the  water  was  injected  into  the  capitalization.  How  much  more  the  franchises 
may  now  be  worth  in  view  of  the  abrogation  of  the  five-cent  fare  limitation,  and 
the  accumulation  of  invaluable  deficits  during  the  past  17  years,  deponent,  the 
Public  Service  Railway,  sayeth  not. 

From  the  other  side  it  should  be  pointed  out  that  the  $87,000,000  of  "honest" 
capitalization,  conceded  by  Mr.  Wolff  in  a  spirit  of  liberality,  is  not  necessarily 
represented  to  the  full  100  per  cent  by  the  present  value  of  existing  property, 
for  the  company's  depreciation  reserve  is  a  mere  nominal  sum  and,  therefore,  a 
large  percentage  of  the  par  value  of  these  securities  now  represents  superseded 
property,  the  power  plant  disposed  of  to  the  Electric  Company  and  accrued  depre- 
ciation of  railway  property  still  in  use.  With  these  three  items  deducted  the  in- 
vestment, as  figured  on  the  basis  of  sound  capitalization,  would  be  brought  down 
well  below  $60,000,000.  So  again  we  get,  from  the  point  of  view  of  capitaliza- 
tion, a  range  of  nearly  one  to  three  in  the  final  results. 

The  Function  of  the  Utilities  Board 

With  these  [jreposterous  ditfcrcnccs  between  the  witnesses  representing  the 
opposing  interests,  whether  they  approach  the  problem  from  the  point  of  view 
of  reproduction  cost,  from  the  point  of  view  of  actual  cost,  or  from  the  point 
of  view  of  capitalization,  the  decision  of  the  Public  Service  Railway  Case  on  the 
basis  of  the  evidence  presented  would  seem  to  be  almost  hopeless.  With  so  much 
at  stake,  both  for  the  Public  Service  Railway  Company  and  for  the  people  of  New 
Jersey,  it  would  seem  that  the  Utilities  Board  might  better  have  adopted  a  pro- 
cedure designed  to  minimize  the  divergence  in  the  testimony  presented.  The 
inventory  should  have  been  made  under  public  supervision  or  by  cooperation 
between  the  opiiosinjj  parties  in  interest:  the  unit  prices  should  have  been  figured 
out  in  the  same  w.iy ;  the  conditions  and  methods  governing  the  reproduction- 
cost  appraisal  and  the  determination  of  depreciation  should  have  been  prescribed 
by  the  Utilities  Board;  the  canons  of  an  actual  or  historical-cost  study  should 
have  been  laid  down.  Under  the  ditVicult  circumstances  surrounding  a  valua- 
tion of  such  a  property,  the  Utilities  Board  should  have  gone  to  great  lengths 
to  prevent  the  presentation  of  loose  aiul  disputed  figures  by  either  side. 

But  with  all  i)recautions  taken  there  would  still  remain  for  the  Utilities 
Board  itself  a  high  and  dilVicult  governmental  function.  The  determination  of  the 
value  of  a  public  utility  property  for  rate  purj)oses  is  not  an  engineering  dis- 
covery.    Under  the  valuation   rules  that  are  coming  to  be  widely   accepted  by 


Transportation  Issues  in  New  Jersey  711 

courts  and  commissions,  the  responsible  authority  is  required  to  take  into  con- 
sideration every  pertinent  fact — the  original  cost  of  the  property  and  the  subse- 
quent additions  thereto,  its  present  condition,  the  estimated  cost  of  replacement, 
and  everything  else  that  may  help  in  reaching  a  just  decision.  It  is  clear  that 
for  the  proper  exercise  of  so  difficult  and  responsible  a  function  unusual  intel- 
ligence, wide  experience,  a  broad-gauge  attitude,  a  keen  realization  of  the  char- 
acter of  the  public  interest  involved,  and  a  virile  will,  are  essential. 

Under  the  terms  of  the  public  utility  law,  a  utilities  board,  with  the  right 
qualifications,  has  sufficient  authority  to  enable  it  to  reach  a  sound  conclusion 
in  even  so  difficult  a  matter  as  this,  but  it  cannot  hope  to  do  so  unless  it  provides 
itself  with  adequate  facilities,  independent  of  the  contending  parties,  for  the 
proper  testing  of  the  evidence  submitted  by  opposing  witnesses,  nor  unless  it 
brings  its  power  and  its  intelligence  to  bear  upon  the  problem  of  reducing  the 
points  of  difference  between  them,  so  far  as  this  can  be  done,  by  prescription  of 
rules  and  methods  of  procedure  to  give  some  reasonable  uniformity  to  the  results 
of  valuation  studies  which  are  based  on  the  same  general  theory.  In  the  con- 
fusion that  now  exists  in  the  Public  Service  Railway  Case,  the  Utilities  Board  is 
almost  helpless. 

Government  by  Contract — A  Nev^r  Way  of  Spending  Public  Money 

At  this  point  the  legislature  of  1920  steps  in  to  relieve  the  Board  of  all 
responsibility  for  the  valuation.  Proceeding  upon  the  naive,  but  exploded  theory 
that  a  valuation  is  a  mere  engineering  process.  Chapter  351  of  the  Laws  of  1920 
instructs  the  Governor,  the  State  Treasurer  and  the  State  Comptroller  to  act  as  a 
commission  to  procure  an  appraisement  of  street  railway  property.  The  first 
section  of  the  bill  constitutes  the  new  commission  "for  the  purpose  of  ascertain- 
ing and  determining  the  value  of  all  the  property,  including  every  proper  and 
lawful  element  thereof,  of  any  or  all  street  railway  and  traction  companies"  in 
the  State  of  New  Jersey.  This  sounds  like  discretion,  responsibility,  and  power ! 
But  the  act  goes  on  to  say  that  the  commission's  functions  are  to  be  performed 
"in  the  following  manner."  The  manner  prescribed  is  by  the  immediate  selection 
of  "a  competent  electrical  or  mechanical  engineering  concern,  either  firm  or  cor- 
porate, of  the  highest  established  reputation,  equipped  and  organized  for  and 
experienced  in  the  work  of  valuing  street  railway  property,"  and  of  entering 
into  a  contract  with  such  conern  "to  make  and  complete"  the  proposed  valuation. 
Then  the  act  proceeds  to  confer  powers  upon  and  give  directions  to  the  unknown 
engineering  concern  that  is  to  do  the  work.  The  sum  of  $100,000  is  appropri- 
ated for  the  purpose  of  carrying  out  the  provisions  of  the  act  and  the  commis- 
sion is  empowered  to  agree  with  the  engineering  concern  selected  upon  the  com- 
pensation to  be  paid  for  its  services  and  expenses.  Section  9  of  this  act  is  so 
unique  and  extraordinary  that  I  quote  it  in  full,  as  follows: 

"When  the  valuation  of  the  property  of  any  street  railway  or  traction  company  is  com- 
pleted as  herein  directed,  the  engineering  concern  so  selected  to  make  such  valuation  shall 
file  with  the  commission  herein  constituted  a  complete  and  detailed  report  of  such  valuation 
in  form  available  for  use  for  the  purpose  of  fixing  rates  under  e-xisting  laws,  which  report, 
together  with  all  documents  and  maps,  and  other  papers  accompanying  same  shall  be  imme- 
diately   transmitted   to   and   filed    with    the    Board   of    Public    Utility    Commissioners    of    this 


712  Appendix  A 

State,  and  shall  be  a  public  record,  open  to  the  inspection  of  the  public  at  all  reasonable 
times,  and  shall  be  admitted  as  evidence  in  the  courts  of  this  State  and  shall  be  evidence  of 
the  facts  therein  contained  to  the  same  extent  as  though  the  same  had  been  produced  and 
proved  and  the  value  of  the  property  as  set  forth  in  said  report  shall  be  accepted  by  the 
Board  of  Public  Utility  Commissioners  of  this  State  as  the  value  of  said  property  as  of  the 
date  specified  in  said  report  in  any  rate  proceeding  under  any  law  of  this  State  to  the  extent 
that  the  value  of  said  property  is  a  factor  in  the  fixing  of  a  rate."  * 

Thus  the  established  procedure  for  the  valuation  of  public  utility  propeiiy 
for  rate  purposes  is  swept  aside  and  this  all-important  function  of  government 
is  farmed  out  to  "an  engineering  conceni."  When,  before,  was  so  complete  an 
abdication  of  governmental  power  proposed?  Why  did  the  legislature  not  enact 
that  the  valuation  of  each  street  railway  company's  property  should  be  made 
by  the  company  itself?  Since  the  valuation  is  not  to  be  proven  by  oath;  is  not 
to  be  the  subject  of  public  hearings  and  cross-examination  of  witnesses ;  is  not 
even  to  repo,«;e  in  the  hands  of  the  valuation  comini.>5sioners  long  enough  for 
them  to  read  it,  but  is  to  be  immediately  transmitted,  with  all  the  accoinpanying 
maps  and  documents,  to  the  Utilities  Board  and  thereafter  to  be  accepted  by  the 
Board  as  fixing  the  value  of  the  property  for  rate  purposes,  and  is  to  be  accepted 
in  all  the  courts  of  New  Jersey  as  competent  evidence,  just  as  if  it  were  really 
so,  why  was  it  necessary  to  provide  for  the  expenditure  of  $100,000  of  the 
State's  money  for  doing  work  which  the  several  street  railway  companies  would 
have  been  glad  to  do  at  their  own  expense,  and  which  they  would  have  done 
with  as  great  a  degree  of  safety  to  the  public  interests?  For,  as  Dean  Cooley 
said  in  his  testimony  before  the  Federal  Electric  Railways  Commission,  the 
public  is  ignorant.  But  even  the  companies  themselves  are  also  ignorant.  It 
takes  the  acute  minds  of  engineers,  trained  in  the  process  of  valuation,  to  dis- 
cover elements  of  value  which  the  companies  themselves  could  not  find  if  they 
were  left  unprompted. 

The  valuation  issues  at  stake  in  the  Public  Service  Railway  Rate  Case  are 
of  supreme  importance.  Is  it  not  clear  that  the  people  of  New  Jersey  are  bung- 
ling the  problem,  with  possible  future  consequences  that  are  appalling  to  con- 
template? 

IV. 
A    DEFINITE    AND    CONSTRUCTIVE    STATE    POLICY    NEEDED 

Thus  far  in  this  review  1  have  dealt  witli  the  effects  of  jitney  competition, 
with  the  vital  importance  of  efTeclive  public  control  as  a  condition  precedent  to 
street  railway  monojn>ly,  with  the  failure  of  the  Public  Service  Company  in  the 
past  to  earn  by  adequate  service  the  right  to  public  i)rotection  as  the  exclusive 
agency  for  local  transportation,  and  with  the  extraordinary  complexity  and  vital 
importance  of  the  undetermined  issues  coiniected  with  the  valuation  of  the  rail- 
way projKTty  for  rate  purposes.  The  New  Jersey  situation  has  so  many  angles 
that  the  analysis  and  discussion  of  the  issues  involved  could  be  prolonged  indefin- 
itely. The  whole  nation-wide  jiroblem  of  street  railway  development  and  control 
is  here  exemplified.  I'verywhere  the  same  question  is  pressing  for  an  answer: 
Shall  the  public  arm  be  paralyzed  in  dealing  with  local  transportation  issues,  be- 


Transportation  Issues  in  New  Jersey  713 

cause,  forsooth,  the  companies  demand  unhmited  help  to  enable  them  to  support 
their  tottering  financial  structures?  Shall  the  urban  communities  of  the  state, 
and  even  the  state  itself,  for  lack  of  initiative  and  a  fixed  public  policy,  lapse 
into  the  pitiful  condition  where  they  recognize  their  absolute  dependence  upon 
the  street  railways  for  essential  transportation  service,  but  are  unable  to  help 
themselves,  and  see  no  way  but  to  "give  in"  and  take  whatever  terms  the  com- 
panies may  feel  like  prescribing?  Must  the  state  and  the  municipalities  accept 
as  inevitable  a  condition  where  every  consideration  of  public  policy  and  every 
urban  interest  affected  by  transportation  service  will  be  absolutely  subordinated 
to  the  one  compelling  demand  of  the  company  for  more  revenues  to  produce 
profits  that  will  be  sufficient  to  attract  new  capital  into  the  business? 

No  one  denies  that  capital  is  necessary  for  street  railways,  and  that  in  one 
way  or  another  the  full  cost  of  capital,  along  with  all  the  other  necessary  elements 
in  the  cost  of  necessary  service,  must  be  paid  by  those  who  receive  or  are  bene- 
fited by  the  service.  But  the  public  is  entitled  to  insist  that  the  cost  of  service 
shall  be  kept  down  to  the  lowest  practicable  minimum  and  that  the  service  shall 
be  adequate  without  being  wasteful.  It  is  absolutely  essential  that  the  cost  of 
capital,  the  fixed  charge,  shall  be  held  down.  This  involves  not  only  a  conserva- 
tive valuation  of  existing  property  and  reasonable  conservatism  in  the  invest- 
ment of  new  money,  but  also  a  conservative  rate  of  return.  The  Public  Service 
Railway  Company  claims  eight  per  cent  per  annum  reaching  all  the  way  back 
through  the  dim  and  distant  years  to  the  origin  of  street  railway  transportation 
in  New  Jersey.  We  have  already  seen  in  retrospect  and  in  prospect  the  colossal 
results  of  capitalizing  and  compounding  the  eight  per  cent  hopes  of  a  few  gener- 
ations of  sanguine  investors. 

We  have  to  ask  this  question :  What  is  it  that  makes  the  cost  of  capital 
high?  The  reply  is  clear:  Too  much  of  it  in  proportion  to  the  earning  power 
of  the  enterprise,  too  much  risk,  and  a  money  market  where  demand  outstrips 
supply. 

Too  Much  Capital:  Too  Much  Risk:  Too  High  a  Rate  of  Return 

With  the  seven-cent  fare,  the  Public  Service  Railway's  revenues  are  about 
525,000,000  per  annum.  On  the  basis  of  a  $60,000,000  investment,  this  would 
give  a  yearly  revenue  of  42  cents  for  each  dollar  of  capital,  a  figure  that  is  less 
than  the  earnings  of  the  Cleveland  Railway  in  1919  under  a  five-cent  fare.  On 
the  other  hand,  if  we  take  for  the  Public  Service  Railway  the  valuation  figure 
offered  by  Mr.  Blood,  namely,  $180,000,000,  the  company's  gross  revenue  is  re- 
duced to  14  cents  per  dollar  of  investment.  To  pay  an  eight  per  cent  return  upon 
a  $60,000,000  valuation  would  take  less  than  20  per  cent  of  the  gross  earnings, 
but  to  pay  8  per  cent  upon  a  valuation  of  $180,000,000  would  take  more  than  57 
per  cent  of  the  earnings.  The  very  claim  of  a  high  valuation  or  of  a  high  rate 
of  return  makes  the  investment  speculative.  The  power  to  earn  what  the  com- 
pany demands  as  a  right  becomes  more  precarious.  The  greater  risk  calls  for  a 
still  higher  rate  of  return,  and  the  still  higher  rate  of  return  further  increases  the 
risk.  Even  the  Cleveland  Railway  Company,  with  its  service-at-cost  franchise, 
has  recently  demanded  an  increase  in  the  rate  of  return  from  6  per  cent  to  7  per 


714  Appendix  A 

cent.  One  of  the  leading  witnesses  for  the  American  Electric  Railway  Associa- 
tion went  before  the  Federal  Electric  Railways  Commission  and  claimed  ten  per 
cent  as  a  fair  rate  of  return  even  with  a  service-at-cost  guaranty.  So  also  the 
New  York  Electric  Railways  Association  tried  to  put  through  the  1920  session 
of  the  legislature  a  service-at-cost  plan  with  a  ten  per  cent  return  prescribed. 
Thus  we  see  the  street  railways  being  drawn  by  the  lure  of  the  pleasant  circular 
motion  into  the  relentless  power  of  the  financial  whirlpool. 

Welfare  of  Capital  Requires  Safety  and  a  Low  Return 

The  high  rates  now  being  paid  to  induce  new  money  to  flow  into  public 
utilities,  particularly  street  railways,  are  the  result  of  insecurity  and  of  scarcity 
of  free  capital.  Many  people  seem  to  entertain  the  fallacy  that  the  nominal 
"wages  of  capital"  are  increased  on  account  of  the  general  increase  in  prices.  As 
a  matter  of  fact,  the  depreciation  in  the  currency  has  nothing  to  do  directly  with 
high  interest  charges,  since  interest  and  principal  are  both  figured  in  the  same 
kind  of  dollars.  Six  per  cent  applied  to  a  million  50-cent  dollars  is  obviously 
as  adequate  a  rate  of  return  as  six  per  cent  applied  to  a  million  100-cent  dollars. 
But  when  the  supply  of  free  capital  is  inadequate  to  meet  the  demand,  or  when 
the  risk  of  the  prospective  investment  is  increased,  the  rate  of  interest  goes  up. 
During  the  war  period  many  things  have  combined  to  accentuate  the  risk  attach- 
ing to  street  railway  investments,  but  the  most  potent  of  all  these  influences  is 
the  knowledge  that  the  promoters  who  built  up  the  pre-war  financial  structure 
overplayed  the  game  and  left  the  companies  topheavy  with  capital  obligations. 
There  is  no  hope  that  rates  of  fare  can  be  kept  low  enough  to  be  attractive  to 
potential  car  riders  unless  the  basic  financial  policies  of  the  street  railway  in- 
dustry are  reversed.  To  claim  a  doubled  valuation  by  reason  of  war  conditions 
increases  the  difficulty  of  earning  a  fair  return.  To  claim  a  doubled  rate  of 
return  on  account  of  the  scarcity  of  capital  and  the  increasing  dangers  of  the 
investment  takes  the  companies  a  stage  farther  on  the  road  to  ruin.  Safety  lies 
in  security  and  a  moderate  or  even  a  low  rate  of  return. 

A  Challenge  to  Efficient  Operation  Necessary 

Another  thing  that  the  public  has  a  right  to  look  out  for  is  the  operating 
expenses.  Protected  monopoly  has  a  tendency  to  deaden  enterprise,  particularly 
if  the  idea  gets  abroad  that  unrestricted  regulation  or  a  service-at-cost  contract 
is  nothing  more  than  a  cost-plus  scheme,  in  the  Public  Service  Railway  Kate 
Case,  the  municipalities  did  not  provide  the  funds  for  making  a  transportation 
survey  for  the  ])urpose  of  laying  bare  wastes  and  extravagances  in  operation, 
and  the  Utilities  Uoard  secTued  to  assume  that  it  was  unnecessary  to  ([uestion  or 
check  up  tiie  company's  expenses  to  any  great  extent.  It  is  surmised  that  a 
detailed  survey  of  the  Public  Service  Railway  from  the  point  of  view  of  opera- 
tion would  reveal  the  |)ossil)ility  of  important  economies,  particularly  in  the  speed- 
ing up  of  service,  in  the  adoption  of  one-man  safety  cars  on  many  lines,  and  in 
rerouting  and  in  the  improvement  of  schedules.  At  any  rate,  under  a  scheme  of 
state  regulatii'ii,  with  no  contractual  maximum  rate  of  fare,  public  control  will 


Transportation  Issues  in  New  Jersey  715 

surely  prove  a  failure  unless  it  provides  an  effective  challenge  to  economy  and 
efficiency  in  operation.  Without  such  a  challenge,  private  management  loses  its 
incentive  under  the  condition  of  protected  monopoly. 

The  Price  of  Public  Cooperation 

The  street  railways  have  come  to  a  pass  where  public  cooperation  is  more 
than  ever  necessary,  not  m,erely  for  their  prosperity  but  even  for  their  survival 
as  public  utilities.  In  his  testimony  before  the  Federal  Electric  Railways  Com- 
mission in  October,  1919,  Mr.  John  A.  Beeler,  the  transportation  engineer,  laid 
particular  emphasis  on  this  point. 

"The  electric  railways,"  said  he,  "were  for  so  many  years  unaccustomed  to  regulation 
that  they  came  to  respect  much  too  slowly  the  value  of  cooperation  with  state  and  municipal 
regulatory  bodies.  Today,  when  the  electric  railway  needs  all  the  cooperation  it  can  get, 
it  finds  that  it  has  been  a  demoralizer  of  public  confidence  in  these  very  commissions  and 
local  authorities  whose  help   would  now  be  so  valuable." 

If  the  companies  would  come  down  to  earth,  be  moderate  in  their  valuation 
claims,  be  satisfied  with  a  conservative  rate  of  return,  bestir  themselves  to  effect 
economies  in  operation,  and  subordinate  profits  to  service  as  their  controlling 
motive,  the  public  could  well  afford  to  extend  to  them  the  helping  hand  of  co- 
operation. When  street  railways  feel  themselves  to  be  public  servants  and  when 
they  are  so  regarded  by  the  communities  which  they  serve,  then  surely  there  is 
every  reason  to  give  them  protection  against  destructive  competition,  to  relieve 
them  from  excessive  and  discriminating  tax  burdens  and  other  public  charges,  to 
aid  them  in  every  way  possible  in  giving  convenient,  rapid  and  uninterrupted 
service,  and  to  assure  them  adequate  compensation  for  the  work  they  do.  But 
public  cooperation  cannot  properly  be  given  to  the  companies  in  these  or  any 
other  ways  unless  they  frankly  and  absolutely  accept  the  role,  not  merely  the 
name  of  public  servants. 

A  Fundamental  Change  in  Public  Relations  Essential 

The  degree  of  public  cooperation  necessary  to  make  street  railways  finan- 
cially successful  under  existing  conditions,  without  an  unwarrantable  curtail- 
ment of  the  public  service  they  render,  is  almost  if  not  quite  beyond  the  horizon 
of  hope  under  private  ownership  and  operation.  Without  doubt,  a  fundamental 
change  in  their  public  relations  is  essential,  and  also,  without  doubt,  the  com- 
munity at  large  cannot  escape  the  burden  of  a  greater  responsibility  for  self-help 
than  it  has  ever  been  willing,  hitherto,  to  assume.  The  effective  control  of  public 
utility  services,  and  more  especially  the  guaranty  that  adequate  local  transporta- 
tion service  shall  be  available  to  the  community  at  a  reasonable  cost,  stand  in  the 
very  front  rank  of  New  Jersey's  governmental  problems.  The  state  needs  a 
policy,  a  policy  that  goes  far  beyond  the  temporizing  expedients  of  mere  regu- 
lation, a  policy  that  looks  into  the  future  and  paves  the  way  for  effective  com- 
munity action  leading  to  the  full  acceptance  of  public  responsibility  for  the  per- 
formance of  public  functions  and  to  the  final  subordination  of  profits  to  service 
as  the  controlling  motive  in  the  public  utility  field.     Leading  up  to  the  fortuula- 


716  Appendix  A 

tion  of  such  a  policy,  a  searching  survey  of  existing  conditions  is  an  essential  first 
step.  Such  a  sur\ey  could  best  be  made  by  a  commission  acting  under  legisla- 
tive authority.  But  such  a  commission,  if  appointed,  ought  to  be  free  from  the 
curse  of  petty,  partisan  politics;  else  it  would  be  a  case  of  the  blind  leading  the 
blind,  and  both  falling  into  the  ditch.  Such  a  commission  would  need  intelli- 
gence and  courage,  for  the  subject  of  its  inquiry  would  be  not  only  supremely 
important  but  also  highly  controversial.  It  may  take  years  for  the  state  to  form- 
ulate and  adopt  an  efTective  public  utility  policy.  That  is  all  the  more  reason  for 
beginning  to  look  into  the  matter  now.  Perhaps  it  is  not  absolutely  essential 
that  at  the  start  the  inquiry  be  under  the  auspices  of  the  state.  The  municipal- 
ities might  act  together,  or  even  a  group  of  public-spirited  citizens'  organizations 
might  initiate  the  movement.  But  in  one  form  or  another  concerted  action  ought 
to  be  taken  to  lift  the  Public  Service  Railway  problem  out  of  chaos  and  get 
public  attention  focussed  on  it  under  circumstances  calculated  to  lead  to  the  adop- 
tion of  a  definite  plan  for  its  solution. 

New  Jersey  Needs  Light 

The  big  things  upon  which  definite  light  is  needed  at  the  present  juncture 
are: 

1.  The  extent  to  which  the  jitneys  are  rendering  a  necessary  public  service, 
the  extent  to  which  their  o])erations  need  to  be  brought  under  a  better  system 
of  regulation  for  the  protection  of  the  public,  and  the  etTect  of  their  competition 
upon  trolley  tratiic,  trolley  revenues  and  trolley  fares. 

2.  The  adequacy  of  the  local  transportation  service  now  being  rendered  by 
the  street  cars,  the  sufficiency  of  the  Public  Service  Railway  Company's  facili- 
ties to  handle  all  of  the  traffic,  the  street  railway  extensions  needed  in  the  near 
future,  and  the  extent  to  which  motor  buses  may  be  used  advantageously  as  part 
of  a  unified  transportation  system. 

3.  The  fair  value  of  the  Public  Service  Railway  Company's  property  de- 
voted to  public  use  and  the  relation  which  this  value  bears  to  the  company's 
capitalization  and  fixed  charges. 

4.  The  rate  of  return  which  the  Public  Service  Railway  Company  must  be 
allowed  to  earn  if  it  is  to  render  the  public  service  required  of  it ;  this  being 
largely  a  question  of  the  reasonableness  of  the  company's  present  commitments 
and  of  the  security  that  can  properly  be  given  to  its  investment  and  its  earning 
power  in  the  future. 

5.  The  extent  to  which  the  cost  of  necessary  street  railway  service  can 
properly  be  reduced  by  improved  methods  of  operation. 

6.  The  necessity  of  public  cooperation  and  the  extent  to  which  it  is  pos- 
sible in  the  production  of  adequate  transportation  service  upon  tenns  conducive 

-to  the  general  welfare,  including  a  consideration  of  policies  relating  to  taxation, 
paving  obligations,  the  readjustment  of  street  layouts,  help  in  keeping  the  tracks 
clear  for  the  street  cars,  the  status  of  the  investment  with  respect  to  its  fair 
earning  power  and  security,  and  the  ultimate  right  of  the  state  or  the  municipali- 
ties to  take  over  the  transportation  system  when  public  policy  makes  it  necessary. 


APPENDIX    B 


A    REPORT 


ON 


CERTAIN  ASPECTS  OF  THE 
TRACTION  PROBLEM  OF  THE 
CITY  OF  DENVER,  COLORADO 


BY 

DELOS  F.  WILCOX,  Ph.D. 


PREPARED  FOR 

THE  DENVER  COMMISSION  OF  RELIGIOUS  FORCES 
October,  1920 


Appendix  B 

A  REPORT  ON  CERTAIN  ASPECTS  OF  THE  TRACTION  PROBLEM 
OF  THE  CITY  OF  DENVER,  COLORADO 

Elmhurst,  N.  Y., 
Oct.  29,  1920. 
Dr.  John  A.  Lapp,  Director, 
22  East  Ontario  Street, 
Chicago,  Illinois. 

Dear  Doctor  Lapp: 

I  refer  to  our  conference  in  New  York  at  the  City  Club  on  September  18, 
1920,  when  you  explained  to  me  the  street  railway  situation  in  Denver  and  stated 
that  an  investigation  of  the  labor  relations  of  the  Denver  Tramway  Company 
was  being  undertaken  on  behalf  of  the  Catholic,  Protestant  and  Jewish  churches. 
At  that  time  you  said  that  you  and  your  associates  desired  me  to  take  part  in  the 
investigation  and  to  report  to  you  on  some  of  the  collateral  elements  of  the  prob- 
lem, particularly  with  respect  to  the  Tramway  Company's  financial  needs  as  a 
factor  in  the  determination  of  its  relations  with  its  employes.  At  a  subsequent 
conference  at  the  City  Club  on  October  10,  1920,  I  went  over  the  matter  again 
with  yourself  and  Rev.  Dr.  John  A.  Ryan  and  Dr.  Edward  T.  Devine,  your  asso- 
ciates in  the  conduct  of  the  investigation,  and  after  a  discussion  of  the  chief 
factors  in  the  general  electric  railway  problem  and  of  the  conditions  peculiar  to 
Denver,  you  requested  me  to  cover  four  principal  points  in  my  report,  as  follows : 

I.  Fair  play  in  the  attitude  of  the  public  toward  the  public  utilities,  and  the  position 
which  the  moral  forces  of  the  community  should  take  with  respect  to  the  utilities'  financial 
needs. 

II.  The  significance  of  valuation  in  the  settlement  of  street  railway  problems,  with  a 
brief  analysis  of  the  methods  followed  and  the  results  reached  in  the  valuation  of  the  Denver 
Tramway  property  by  the  Colorado  Public  Utilities  Commission  and  by  the  experts  retained 
by  the  Tramway  Adjustment  Committee  of  Fifty-Five. 

III.  A  brief  analysis  and  evaluation  of  the  "Service-at-Cost"  ordinance  drafted  by  the 
Tramway  Adjustment  Committee  and  of  the  "Elastic  6c  Fare''  ordinance,  both  of  which 
were  submitted  to  popular  vote  at  a  special  election  October  22,  1919. 

IV.  \  discussion  of  the  methods  pursued  by  the  Denver  Tramway  Company  with 
respect  to  maintenance,   replacements  and  depreciation  as  revealed  by  the  company's  reports. 

You  advised  ine  that  the  primary  purpose  of  the  investigation  undertaken 
by  you  and  your  associates  was  to  enable  you  to  render  an  impartial  report  to  the 
people  of  Denver  with  respect  to  the  Trainway  Company's  labor  policy.  You 
explained  that  your  interest  in  the  financial  problems  of  the  company  was  inci- 
dental to  the  efifect  which  the  company's  financial  condition  necessarily  or  actu- 
ally has  upon  its  labor  relations.  Therefore,  for  the  purposes  of  this  investiga- 
tion, you  did  not  deem  it  necessary  that  I  should  go  to  Denver  and  make  a  de- 

719 


720  Appendix  B 

tailed  study  of  the  street  railway  problem  on  the  ground.  In  lieu  of  that,  you 
asked  me  to  examine  a  considerable  mass  of  data  submitted  by  you  which  in- 
cluded : 

(a)  The  two  decisions  of  the  Colorado  Public  Utilities  Commission  with  respect  to  the 
Tramway    vahiation   and    fares;  ,  r-r      c 

(b)  The  report  and  findings  of  the  Tramway  Adjustment  Committee  of   bitty-hve; 

(c)  The  two  ordinances  rejected  by  the  voters  at  the  October.   1919,  election; 

(d)  A  series  of  statements   furnished  by  the  Denver  Tramway  Company  to  the  Tram- 
way Adjustment  Committee  at  various  dates  in  the  early  months  of  1919; 

(e)  The  last  three  annual  reports  of  the  Denver  Tramway  Company,  and 

(f)  The  special  edition  of  "Tram-O-Grams"  published  May  25,  1920. 

While  the  time  available  for  my  part  of  the  investigation  has  been  limited, 
and  while  the  documents  submitted  to  me  do  not  cover  all  of  the  details  which  I 
should  need  to  look  into  if  I  were  asked  to  render  a  complete  and  final  report  on 
the  company's  financial  needs,  nevertheless,  on  the  basis  of  the  information  at 
hand  and  the  time  available  for  its  examination,  I  am  now  prepared  to  discuss 
in  general  terms  the  several  points  upon  which  you  requested  my  advice. 


Fair  play  in  the  attitude  of  the  public  toward  the  public  utilities,  and 
the  position  which  the  moral  forces  of  the  community  should  take  with 
respect  to  the  utilities'  financial  needs. 

In  the  grave  crisis  through  which  the  street  railways  of  the  country  are  now 
passing,  the  problem  of  their  public  relations  is  absolutely  fundamental.  The 
street  railway  problem  at  the  present  time  involves  a  conflict  between  public  and 
private  interests.  The  drift  of  population  to  the  urban  centres  is  still  going 
steadily  on,  and  no  community  fuiictiuii  that  arises  out  of  the  conditions  of  city 
life  is  more  vital  to  the  public  welfare  than  the  provision  of  local  transportation 
facilities.  The  magnitude  of  the  interests  in  street  railways,  and  their  importance 
in  the  social  economy  of  cities  may  be  seen  from  the  fact  that  these  local  trans- 
portation lines  carry  more  than  10  times  as  many  passengers  as  are  carried  by 
the  steam  railroads  of  the  country,  and  the  investment  in  street  railway  facilities 
is  about  twice  as  great,  in  the  aggregate,  as  the  entire  funded  debt  of  all  the 
municipalities  in  the  country.  The  policy  of  American  cities  thus  far,  with  few 
exceptions,  has  been  to  depend  upon  private  agencies  to  supply,  under  various 
degrees  of  public  control,  the  local  transportation  service  that  is  essential  to  every 
community. 

At  the  present  time  every  big  city  in  the  United  States  is  faced  with  the 
problem  of  detennining  what  its  duty  toward  the  street  railway  is.  The  last 
thing  that  a  community  can  atlord  to  be  is  unfair.  The  greatest  need  of  every 
modern  urban  community  is  the  power  of  public  initiative  and  civic  cooperation 
and  nothing  can  be  so  destructive  to  this  power  as  a  spirit  of  injustice  donjinating 
community  policy.  Yet  under  many  circumstances  it  is  very  hard  to  know  what 
justice  is. 

Beyond  a  doubt,  the  street  railway  companies  as  a  class  have,  in  the  past, 


Denver  Tramway  Report  721 

committed  grave  wrongs  against  the  public  conscience  and  the  public  welfare. 
They  have  often  been  instrumental  in  the  corruption  of  public  servants;  they 
have  seldom  accepted  intelligently  and  in  good  faith  the  full  obligations  resting 
upon  them  as  agencies  for  public  service;  they  have  too  often  looked  upon  their 
business  as  a  private  business  with  the  desire  for  profit  as  ks  mainspring,  and 
have  made  the  manipulation  of  stocks  and  bonds  rather  than  the  operation  of 
street  railways  their  primary  business.  At  the  present  time,  when  the  street 
railway  companies  are  in  financial  straits,  and  the  transportation  service  of  urban 
communities  is  being  curtailed  and  is  thought  to  be  in  danger  of  breaking  down 
completely,  it  is  time  to  look  the  facts  squarely  in  the  face  for  the  purpose  of 
determining  what  good  morals  and  the  public  interest  demand  in  the  readjust- 
ment of  the  relations  between  the  communities  and  the  companies. 

It  is  the  theory  of  the  Federal  Constitution  and  of  American  law  in  general 
that  contracts  representing  the  voluntary  engagements  of  the  parties  are  sacred 
and  must  be  enforced  unless  both  parties  consent  to  have  them  changed.  In  the 
past,  when  the  cost  of  street  railway  service  was  low  and  the  amount  of  street 
railway  traffic  rapidly  increasing,  the  companies  have  stoutly  resisted  the  exercise 
of  the  police  power  to  reduce  the  fares  below  the  rates  stipulated  in  their  fran- 
chise contracts.  But  now  the  tables  are  turned !  The  companies  that  once 
looked  upon  the  fixed  5-cent  fare  as  the  talisman  of  speculation  and  profit — as 
the  key  that  would  unlock  the  vaults  of  private  capital  for  the  unlimited  expan- 
sion of  a  prosperous  and  powerful  industry — have  fallen  upon  evil  times.  They 
miscalculated  the  cost  of  transportation  service ;  they  did  not  foresee  the  poten- 
tial competition  of  the  trackless  and  trolleyless  motor  vehicle ;  they  neglected 
depreciation  and  lived  in  a  fool's  paradise  and,  in  common  with  the  rest  of  us, 
failed  to  take  into  account  the  possibility  of  such  an  economic  revolution  as  was 
brought  on  by  the  World  War ;  they  pursued  a  reckless  financial  policy ;  and  they 
cultivated  the  enmity  of  the  people,  who,  they  supposed,  were  dependent  upon 
them   for  transportation  service. 

They  have  had  a  rude  awakening  and  now  they  come,  hat  in  hand,  pleading 
that  they  be  released  from  the  obligations  of  the  contracts  which  are  no  longer 
profitable  to  them.  Under  the  new  conditions  that  have  arisen  a  franchise  con- 
tract is  regarded  as  a  mere  scrap  of  paper^the  last  thing  in  the  world  that  should 
be  enforced. 

In  the  midst  of  this  confusion  it  is  important  to  lay  bare  the  essential  factors 
in  the  problem  of  urban  transportation. 

First.  It  has  come  to  be  recogiiized  that  public  transportation  facilities  are 
absolutely  essential  to  the  welfare  of  every  large  urban  community  and  that  for 
the  present,  and  perhaps  for  an  indefinite  time  in  the  future,  electric  railways  will 
be  the  principal  agency  through  which  this  service  is  rendered.  Just  now  a 
great  deal  is  being  thought  and  hoped  and  said  about  the  possibilities  of  the 
motor  bus  as  a  means  of  public  transportation,  but  the  one  thing  that  has  be- 
come certain  in  this  connection  is  that  the  unrestricted  development  of  motor 
bus  transportation  in  competition  with  the  street  railways  will  certainly  result  in 
the  crippling,  if  not  the  complete  destruction,  of  one  or  the  other  of  these  agencies, 
and  that  thus  far  the  electric  street  railway,  conservatively  financed  and  effi- 


722  Appendix  B 

ciently  operated,  has  very  great  advantages  over  the  motor  bus  as  the  sole  or 
principal  means  of  transportation  in  a  large  city. 

Second.  Local  transportation  service  is  recognized  to  be  so  essential  to  the 
general  welfare  of  every  urban  community,  and  the  conditions  under  which  the 
sen'ice  must  be  rendered  are  so  intimately  related  to  community  affairs,  that  the 
community  itself  is  bound  to  assume  the  final  responsibility  for  the  provision 
of  such  service.  It  is  too  late  in  the  day  for  American  cities  to  shirk  this  respon- 
sibility and  allow  the  burden  to  fall  upon  private  initiative  and  private  enterprise 
unassisted  and  uncontrolled.  No  community  can  afford  to  permit  the  motive  of 
private  profit  to  be  controlling  in  the  determination  of  the  extent  and  character 
of  the  transportation  facilities  furnished. 

Third.  It  follows  that  the  community,  in  its  organized  capacity,  either  must 
take  the  initiative  and  perform  for  itself  the  service  which  it  recognizes  to  be  in- 
dispensable, or  else  it  must  permit  the  service  to  be  performed  by  private  agen- 
cies on  terms  and  conditions  that  will  be  persuasive  to  private  enterprise  to 
undertake  or  to  continue  the  performance  of  the  function.  What  the  community 
does  for  itself  need  not  be  self-sustaining;  what  the  community  depends  upon 
private  enterprise  to  do  must  be  remunerative,  or  else  private  enterprise  will 
balk  and  refuse  to  do  the  work. 

Fourth.  Where  a  private  company  has  entered  into  a  franchise  contract 
by  which  it  undertakes  to  render  transportation  service  indefinitely  or  for  a 
given  period  of  years  at  a  fixed  price,  the  community,  undoubtedly,  has  the  legal 
right  to  enforce  the  terms  of  the  contract  and  to  require  that  the  stipulated 
service  shall  be  rendered  at  the  stipulated  price.  However,  if  the  city  is  growing, 
as  most  American  cities  are,  it  is  necessary  that  street  railway  facilities  be  con- 
tinually extended  and  improved.  This  requires  the  investment  of  new  capital, 
and  as  a  practical  matter  a  city  has  to  consider  the  effect  of  the  enforcement 
of  the  franchise  rates  prescribed  by  the  franchise  upon  the  ability  of  the  operat- 
ing company  to  furnish  or  procure  the  additional  capital  required  for  the  full 
performance  of  its  function  as  a  public  servant.  Under  some  circumstances  the 
city's  legal  right  to  force  the  company  to  fulfill  its  contract  as  to  rates  of  fare  is 
a  barren  one.  Whether  or  not  it  should  be  exercised  depends  largely  upon  the 
question  whether  at  the  particular  time  and  under  the  particular  circumstances 
it  is  essential  to  the  public  welfare  that  additional  street  railway  facilities  be 
provided  to  take  care  of  increasing  public  needs.  In  an  era  of  rising  prices, 
when  new  rails  and  new  cars  and  all  the  other  items  entering  into  the  construc- 
tion and  equipment  of  a  street  railway  cost  more  than  they  did  when  the  railway 
was  originally  constructed  and  equipped,  the  capital  account  has  to  be  gradually 
readjusted  to  the  higher  price  level  through  the  process  of  replacement.  This 
process  of  replacement  is  going  on  continually  and  cannot  be  halted  for  any 
length  of  time  under  any  circumstances  without  resulting  in  the  deterioration  and 
ultimate  breakdown  of  the  transportation  agency.  This  means  that  when  prices 
are  going  up  and  for  a  number  of  years  after  they  have  reached  a  high  level, 
new  capital  will  be  rcijuircd  from  time  to  time  even  though  the  street  railway 
is  not  extended  a  single  foot  and  even  though  its  facilities  for  carrying  passen- 
gers are  not  increased  in  the  slightest  degree.     If  the  revenues  are  limited  by  a 


Denver  Tramway  Report  723 

fixed  rate  of  fare,  and  if  wages  and  the  cost  of  materials  used  in  maintenance 
have  greatly  increased,  it  may  be  that  the  company's  revenues  will  not  be  suffi- 
cient to  take  care  of  replacements  even  though  it  foregoes  entirely  the  return 
upon  the  investment.  So  here  again  it  becomes  a  question  of  sound  public  policy 
based  upon  necessity.  If  transportation  service  is  recognized  as  essential  to  the 
community;  if  it  is  seen  that  the  continuous  expansion  of  transportation  facilities 
is  also  essential,  and  if  the  revenues  provided  under  the  rates  of  fare  fixed  by 
the  franchise  contract  are  insufficient  to  provide  an  income  by  which  additional 
capital  can  be  attracted  into  the  service,  the  enforcement  of  the  letter  of  the  con- 
tract may  result  in  defeating  the  very  purpose  for  which  the  franchise  was 
granted.  Here  again  we  see  that  the  community  must  either  be  prepared  to  serve 
itself  in  the  matter  of  transportation  or  else  to  permit  private  agencies  to  serve 
it  on  terms  and  conditions  that  will  enable  them  to  render  the  service,  and  particu- 
larly that  will  be  persuasive  to  additional  capital  to  come  into  the  service  as 
needed. 

Fifth.  In  certain  cases  the  revenues  of  the  enterprise  may  be  so  limited  as 
compared  with  the  increasing  cost  of  the  service  as  to  make  it  impossible  for  the 
company  to  continue  the  operation  of  the  cars  irrespective  of  any  provision  for 
new  capital  already  invested.  If  the  fair  and  necessary  cost  of  labor  and  ma- 
terials necessarily  entering  into  the  essential  service,  with  all  practicable  econ- 
omies efifected,  is  still  greater  than  the  revenues  derived  from  the  traffic  at  the 
rates  prescribed  by  the  franchise,  it  is  obvious  that  the  service  will  have  to  stop. 
If  the  service  is  to  be  continued  upon  terms  advantageous  to  the  public  and 
just  to  the  employes,  the  revenues  derived  from  the  rates  must  be  at  the  very 
least  sufficient  to  pay  all  of  the  costs  of  operation,  including  the  depreciation  that 
is  accruing  as  time  goes  by;  for  unless  depreciation  is  taken  care  of  out  of 
revenues  the  street  railway  will  ultimately  break  down  through  lack  of  provision 
for  essential  replacements. 

Sixth.  Every  community,  therefore,  in  times  like  these,  is  confronted  with 
the  question  as  to  what  it  can  do,  consistent  with  preserving  street  railway^  service. 
Cities  are  confronted  with  a  condition,  not  a  theory.  "You  cannot  get  blood  out 
of  a  turnip."  The  enforcement  of  a  contract  with  a  street  railway  company, 
though  legally  possible,  may,  under  certain  circumstances,  be  impracticable  for 
the  reason  that  the  enforcement  of  the  contract  under  those  circumstances  would 
destroy  entirely  the  company's  ability  to  serve.  Unless  the  city  is  prepared  to 
undertake  the  service  itself  or  can  find  somebody  else  willing  and  able  to  render 
the  service  on  better  terms,  it  can  have  no  object  in  driving  the  existing  agency 
entirely  out  of  the  field.  In  every  proceeding  for  the  fixing  of  rates,  and  in  every 
negotiation  for  a  resettlement  of  the  relations  between  a  city  and  the  owners  of 
a  public  utility,  it  is  essential  at  the  outset  to  look  the  facts  in  the  face.  The 
street  railway  interests  are  prone  to  confuse  the  preservation  of  the  present  man- 
agements with  the  preservation  of  the  industry  itself,  but  the  public  ought  not  to 
confound  the  two.  In  many  cases  where  the  financial  foundation  of  the  exist- 
ing street  railway  system  is  rotten  there  may  be  no  remedy  for  the  poverty  and 
impotence  of  the  present  time  except  through  a  radical  reorganization  of  the 
company  and  a  scaling  down  of  its  excessive  obligations.     If  such  action  is  neces- 


724  Appendix  B 

sary  to  the  devclopiueiit  of  a  sound  future  policy,  the  community  ought  not  to 
flinch  from  enforcing  it.  Bankruptcy,  receiverships  and  reorganization  do  not 
necessarily  mean  the  crippling  of  street  railway  service.  Under  certain  circum- 
stances they  may  be  absolutely  essential  conditions  precedent  to  stable  and  effi- 
cient performance  in  the  future. 

Seventh.  This  brings  us  to  the  crux  of  the  ethical  problem  involved.  At 
the  present  time,  when  prices  have  reached  an  abnormally  high  level  through  the 
exigencies  of  the  World  War.  the  companies  are  seeking  to  take  advantage  of 
the  rules  of  rate  regulation  to  get  the  public  to  recognize  and  guarantee  a  valua- 
tion based  on  present  prices  that  will  absolutely  cover  the  improvident  expendi- 
tures, the  neglected  depreciation  and  the  inflated  capitalization  of  the  past,  and 
not  only  leave  the  present  managements  in  control  but  so  increase  their  equities 
in  the  property  as  to  make  them  safe  for  all  time  to  come  from  the  fear  of  the 
bondholder.  1  have  no  hesitation  in  taking  the  position  that  the  sense  of  justice 
and  equity  does  not  require  the  public  to  agree  to  an  adjustment  that  would  bring 
such  a  result.  It  follows  that  an  increase  of  fares,  if  it  is  to  be  granted,  should 
be  based  upon  a  valuation  at  normal  prices  and  not  at  the  swollen  reproduction 
cost  prices  of  the  present  day.  In  this  era  of  abnormally  high  prices  the  cost 
of  street  railway  service  in  terms  of  dollars  and  cents  has  greatly  increased. 
On  the  other  hand,  the  development  of  the  automobile  and  the  motor  bus  has 
tended  to  place  an  automatic  limit  upon  the  value  of  the  service.  Every  con- 
sideration of  public  welfare  demands  that  street  railway  rates  shall  be  kept  as 
low  as  possible  without  an  essential  impairment  of  the  service  rendered.  It  may 
even  be  that  in  certain  communities,  under  certain  conditions,  good  public  policy 
will  require  that  a  substantial  portion  of  the  cost  of  transportation  ser\'ice  be 
paid  out  of  taxes,  but  there  can  be  no  dispute  of  the  statement  that  high  street 
railway  rates  are  inimical  to  the  ])ublic  welfare  and  to  the  proper  development  of 
urban  communities.  Therefore,  it  is  essential  that  the  representatives  of  the 
public  in  making  adjustments  with  street  railway  com])anies  shall  insist  upon  a 
conservative  valuation  and  a  conservative  rate  of  return,  as  well  as  upon  economy 
and  ctVicicncy  in  management .  in  order  that  rates  may  be  ke])t  down.  It  is  infin- 
itely better  to  have  a  low  valuation  of  well-maintained  property  and  a  low  rate 
of  return  with  security  that  the  return  will  be  earned  and  paid,  than  to  yield  to 
the  policies  for  which  the  street  railway  industry  is  now  contending  which  lead 
to  intlaled  valuations,  to  increased  risk,  to  higher  rates  of  return,  to  higher  fares. 
to  increased  competition,  to  decreased  traffic  and  lo  the  ultimate  breakdown  and 
possible  elimination  of  the  street  railway  as  a  public  utility. 

Eiilhth.  A  sense  of  justice  does  not  require,  and  a  soft  spot  in  the  heart 
for  the  "widows  and  orphans"  docs  not  warrant,  the  adoption  of  a  jmlicy  based 
on  the  theory  that  no  matter  how  the  street  railway  magnates  mav  have  gambled 
and  lost  in  the  i)ast  their  losses  are  now  to  be  made  good  and  given  a  public 
guaranty  for  all  time  to  come,  i^quity  is  not  forever  yielding  the  rights  of  the 
general  public  for  the  sake  of  preserving  the  gains  or  making  good  the  losses  of 
particular  individual>  who  happen  to  have  been  engaged  in  the  street  railway 
business  at  the  time  when  it  was  looked  upon  as  a  speculative  industry. 

Xiiitli.     in  my  view,  therefore,  the  policy  which  the  moral  forces  of  America 


Denver  Tramway  Report  725 

should  adopt  with  respect  to  the  street  railway  companies  includes  a  refusal  to 
make  good  the  ancient  losses  that  have  been  sustained  under  the  terms  of  fran- 
chise contracts,  unless  it  be  in  those  exceptional  cases  where  the  losses  resulted 
directly  or  indirectly  from  public  action  taken  subsequent  to  the  negotiation  of 
the  contracts,  and  action  which  could  not  reasonably  have  been  anticipated  by 
the  grantees  of  the  franchise.  If,  upon  a  conservative  valuation  with  a  conserva- 
tive but  secured  rate  of  return,  and  with  the  adoption  of  all  economies  in  opera- 
tion consistent  with  the  payment  of  just  wages  to  the  employes  and  with  the 
rendering  of  adequate  and  efficient  service  to  the  public,  the  revenues  derived 
from  the  contract  rates  are  insufficient  to  pay  the  full  cost  of  service,  and  if  the 
companies  have  not  earned  excessive  returns  under  their  franchises  in  the  past, 
then,  notwithstanding  the  requirements  of  the  franchise  contracts,  the  community, 
in  justice,  ought  to  do  one  of  three  things — (1)  permit  an  increase  in  rates  suf- 
ficient to  cover  the  full  cost  of  the  service;  or  (2)  relieve  the  companies  from 
taxes  and  public  burdens,  and  if  necessary  make  contributions  out  of  the  public 
treasury  to  decrease  their  expenses  or  to  increase  their  revenues,  one  or  both,  to 
the  point  where  they  can  make  the  two  ends  meet;  or  (3)  take  over  the  properties 
for  public  ownership  and  operation.  Whether  fares  shall  be  increased  should 
be  determined  primarily  upon  the  basis  of  the  public  welfare.  Fares  should 
never  be  increased  to  a  point  where  they  result  in  a  substantial  curtailment  of  the 
usefulness  of  the  transportation  service. 

My  answer  to  the  question  of  ethics  is  that  as  a  matter  of  practical  neces- 
sity the  community  must  either  be  ready  to  serve  itself  in  the  performance  of  this 
essential  public  function,  or  else  must  be  prepared  to  concede  the  terms  and  con- 
ditions which,  under  all  the  circumstances,  will  induce  private  enterprise  to  per- 
form the  function.  Beyond  this,  the  community  is  not  required  to  go  unless  the 
company  comes  with  clean  hands  and  a  humble  spirit. 


II. 

The  significance  of  valuation  in  the  settlement  of  street  railway  prob- 
lems, with  a  brief  analysis  of  the  methods  followed  and  the  results  reached 
in  the  valuation  of  the  Denver  Tramway  property  by  the  Colorado  Public 
Utilities  Commission  and  by  the  experts  retained  by  the  Tramway  Adjust- 
ment Committee  of  Fifty-Five. 

The  initial  step  in  the  preparation  for  rendering  street  railway  service  is  the 
investment  of  capital.  So  long  as  the  community  has  been  or  is  unable  or  un- 
willing to  make  use  of  public  funds  or  public  credit  for  this  purpose  the  burden 
of  supplying  the  necessary  capital  falls  upon  private  enterprise.  It  has  long 
been  recognized  in  American  jurisprudence  that  public  utility  property,  though 
privately  owned  and  operated,  is  property  affected  with  a  public  interest  and 
subject  to  various  limitations  and  disabilities  that  do  not  attach  to  private  prop- 
erty devoted  to  private  use.  As  a  necessary  result  of  these  conditions,  the  amount 
of  the  investment  to  be  recognized,  used  and  protected  must  be  determined  at 


726  Appendix  B 

the  very  threshold  of  any  intelligent  policy  of  public  control  or  public  ownership 
of  a  street  railway  or  other  public  utility.  The  hostility  that  has  grown  up 
against  public  utilities,  the  failures  of  public  regulation,  and  the  slowness  and 
painfulness  of  the  development  of  public  ownership  as  a  policy  are  all  due  pri- 
marily to  uncertainty  upon  this  one  point :  What  is  the  amount  of  the  capital 
necessarily  invested  in  the  production  of  the  service,  and  upon  which  those  who 
render  the  service  are  entitled  to  a  fair  return? 

It  is  of  primary  importance  that  a  figure  be  fixed  as  the  definite  capital 
value  upon  which  as  a  basis  the  whole  structure  of  the  public  relations  of  the 
utility  can  be  erected.  Within  certain  limits,  it  might  even  be  urged  that  it  is 
more  important  both  to  the  public  and  to  the  utility  to  get  the  capital  value  fi.ved, 
than  it  is  to  have  it  fixed  at  the  right  amount.  Nevertheless,  fair  play  to  the 
investors,  justice  to  the  public,  and  the  practical  requirements  of  a  conservative 
financial  program  make  it  exceedingly  important  that  the  capital  value  as  fixed 
should  be  somewhere  near  right.  One  not  familiar  with  the  conditions  under 
which  street  railways  have  been  constructed  and  operated  would  naturally  assume 
that  the  determination  of  the  amount  of  investment  properly  to  be  recognized  as 
an  essential  factor  in  the  cost  of  service  would  be  a  comparatively  simple  and 
easy  matter.  A  great  many  intelligent  people  assume  that  the  "value"  of  a 
street  railway  property  is  a  fact  which  can  be  readily  ascertained  by  any  com- 
petent valuation  engineer.  But  this  is  far  from  being  so.  .K  street  railway  is 
not  a  commodity  that  has  a  freely  determined  market  value,  and  what  its  "fair 
value"  may  be  for  the  purposes  of  public  control  is  determined  by  the  application 
of  a  great  number  of  assumptions  and  theories  with  respect  to  which  engineers, 
lawyers,  economists,  business  men  and  plain  citizens  have  entertained  wide  dif- 
ferences of  opinion.  Valuation  theorj-  and  valuation  practice  are  now  in  a 
chaotic  condition  in  this  country.  Premature  or  imprudent  investments,  the 
manipulation  of  securities,  the  neglect  of  depreciation,  the  coming  of  the  auto- 
mobile as  a  competitor,  the  appreciation  of  land  values,  the  violent  economic 
changes  that  have  grown  out  of  the  war,  and  the  tightening  reins  of  public  regu- 
lation all  combine  to  make  "actual  value."  "fair  value,"  or  any  other  measure 
of  the  amount  of  the  investment  entitled  to  recognition  an  elusive  concept. 

In  the  midst  of  this  confusion  it  is  hard  to  get  away  from  the  inherent  justice 
of  the  rule  adopted  by  the  regulatory  authorities  of  the  State  of  Massachusetts 
to  the  effect  that  the  capital  value  upon  which  the  owners  of  a  public  utility 
property  are  entitled  to  earn  a  fair  return,  so  long  as  as  the  jiropertv  is  devoted  to 
public  service,  is  the  amount  of  capital  honestly  and  prudently  invested  in  the 
enterprise.  Even  in  the  application  of  this  apparently  simple  rule  we  encounter 
many  difficulties.  The  records  of  investment  m.\v  be  incomplete  or  inaccurate. 
In  the  matter  of  imprudence,  hindsight  is  better  than  foresight.  Even  with  re- 
spect to  honesty,  something  depends  upon  the  ethical  standards  of  the  time. 
No  formula  can  be  devised  that  will  invariably  bring  a  just  result  unless  it  be 
applied  by  an  iiUelligent,  informed  and  fair-minded  tribunal.  Just  now,  how- 
ever, we  arc  not  so  much  concerned  with  the  niceties  of  even-handed  justice  in 
valuation  matters  as  we  are  in  avoiding  the  enormities  that  arc  being  proposed  by 
interested  parties  in  tin-  n.inu-  nf  valuation.     If  free  rein  is  given  to  the  imagina- 


Denver  Tramway  Report  727 

tion  of  the  appraisers,  it  makes  little  ditTerence  whether  the  rule  adopted  is  "his- 
torical cost"  or  "reproduction  cost";  with  a  given  amount  of  securities  outstand- 
ing to  be  protected,  they  can  be  safely  covered  by  either  method  of  appraisal. 

The  Colorado  Public  Utilities  Commission  in  its  Decision  No.  223,  found 
that  "the  present  fair  value"  of  the  company's  property  "devoted  to  public  use" 
as  of  December  31,  1917,  "including  a  reasonable  allowance  for  working  capital," 
was  the  sum  of  $23,674,100,  of  which  $20,867,750  was  the  value  of  the  "city 
lines."  The  length  of  track  included  in  the  city  lines  on  December  31,  1917,  as 
shown  by  the  company's  annual  report  for  that  year,  was  203.83  miles,  which 
gives  a  valuation  of  $102,378  per  mile  of  single  track.  The  figure  given  by  the 
company  in  the  special  edition  of  "Tram-O-Grams"  for  May  25,  1920,  is  $102,796 
per  mile,  but  the  difference  is  immaterial.  The  Public  Utilities  Commission, 
dealing  with  the  property  as  a  whole — including  the  47.97  miles  of  interurban 
lines — found  the  value  to  be  a  little  less  than  $94,000  per  mile  of  single  track. 
As  tending  to  show  that  its  valuation  was  conservative,  the  Commission  said  in 
its  decision  of  December  17,  1918  (page  34) : 

"From  the  testimony  in  this  case  it  appears  that  in  similar  proceedings,  involving  street 
railroad  properties  of  the  same  general  character,  the  following  valuations  for  rate-making 
purposes   have   been  determined   and   have   been   sustained : 

Total  appraised  value 
Year  Location  per  mile  of  single  track 

1913  Toronto   $167,000.00 

1913  Kansas   City,   Mo 134,600.00 

1915  Detroit   134,300.00 

1917  Portland,   Ore 117.000,00 

1917  Chicago   surface    lines    143,400.00" 

While  it  is  impossible  to  establish  with  any  degree  of  finality  the  fairness  of 
a  street  railway  valuation  by  a  comparison  of  the  result — reduced  to  a  track 
mileage  basis — with  the  results  reached  in  other  jurisdictions  with  respect  to 
other  street  railway  properties,  track  mileage  figures,  if  carefully  used,  may  throw 
light  upon  the  subject.  However,  it  is  a  matter  of  great  surprise  to  me  that  the 
Colorado  Public  Utilities  Commission  should  have  been  led — no  doubt  by  the 
imperfect  evidence  before  it — to  make  such  an  astonishingly  incorrect  statement 
as  that  which  I  have  just  quoted.  Of  the  five  appraisals  referred  to  only  one — 
namely,  that  of  the  Portland,  Oregon  lines — was  determined  "in  similar  pro- 
ceedings," and  my  figures  show  that  the  valuation  placed  by  the  Oregon  Public 
Service  Commission  upon  the  city  lines  of  the  Portland  street  railway  was  $98,879 
per  mile  of  single  track,  and  upon  the  entire  Portland  system — including  the 
interurban  lines — $87,328  per  mile  of  single  track.  The  same  figure  quoted  by 
the  Commission— namely,  $117,000  per  mile  of  track — is  cited  again  by  the 
Denver  Tramway  Company  in  "Tram-O-Grams"  of  May  25,  1920.  I  cannot 
identify  this  figure  at  all. 

The  Toronto  1913  valuation  was  an  appraisal  made  for  the  purpose  of  fixing 
a  price  at  which  the  city  could  take  over  the  property  eight  years  in  advance  of 
the  expiration  of  the  franchise,  which  was  then  supposed  to  be  a  very  advan- 
tageous one  for  the  company.  The  physical  property  of  the  Toronto  railway, 
consisting  of  120  miles  of  single  track,  was  valued  at  $9,894,483  and  the  fran- 


728  Appendix  B 

chise  at  $10,713,553.  The  mileage  figure  cited  by  llie  Colorado  coniniissioii  in- 
cludes this  franchise  value. 

The  Kansas  City  appraisal  of  1913  was  made  as  a  basis  for  the  negotiation 
of  a  new  franchise  between  the  two  Kansas  Cities  and  the  company.  The 
"value"  attributed  to  the  unexpired  life  of  the  old  franchise  represented  about 
25  per  cent  of  the  total  valuation  agreed  upon,  and  even  at  that  the  value  of  the 
property  per  mile  of  single  track  was  only  $110,000  instead  of  the  $134,000  quoted 
by  the  Colorado  commission. 

The  1915  Detroit  appraisal  was  not  made  in  a  rate  proceeding  and  was  not 
"sustained"'  so  far  as  I  know  by  any  public  authority.  In  fact,  the  Detroit 
United  Railway  in  1919  offered  to  sell  its  city  lines  consisting  of  302  miles  of 
track  to  the  City  of  Detroit  for  the  sum  of  $31,500,000,  and  the  offer  was  re- 
jected by  the  people  on  the  theory  that  the  price  was  too  high. 

The  valuation  of  the  Chicago  surface  lines  referred  to  in  the  table  was  the 
result  of  an  agreed-upon  valuation  in  1907.  plus  additions  to  capital  account 
under  the  terms  of  the  Chicago  Settlement  Ordinances,  which  have  notoriously 
resulted  in  the  inflation  of  the  capital  value.  When  the  Chicago  Surface  Lines 
went  before  the  Illinois  Public  Utilities  Commission  early  in  1919  for  emergency 
relief,  the  Commission  looked  over  their  capital  account  and  struck  out  of  the 
$157,000,000  total  items  aggregating  $44,000,000,  on  the  ground  that  these  items 
were  of  such  a  character  that  they  could  not  be  accepted  as  part  of  a  valuation 
for  rate  fixing.* 

It  thus  appears  that  the  valuation-per-track-mile  comparison  drawn  bv  the 
Colorado  commission  in  its  decision  of  December  17,  1918.  is  based  upon  mis- 
information and  is  wholly  unreliable  and  misleading.  If  the  conclusions  of  the 
commission  are  correct,  they  certainly  are  not  proven  by  the  com])arison  upon 
which  the  commission  relied  to  prove  them. 

It  is  a  well-known  fact  that  variations  in  the  character  and  extent  of  street 
railway  properties  in  different  communities  are  so  great  that  comparisons  of 
cost  or  value  per  mile  of  single  track  are  apt  to  be  misleading  unless  all  the  con- 
ditions are  carefully  scrutinized ;  yet.  if  comparisons  on  this  basis  were  desired, 
we  might  turn  to  the  valuation  of  the  local  lines  of  the  Los  Angeles  Railway  Cor- 
poration made  for  the  Board  of  Public  Utilities  of  the  City  of  Los  Angeles  in 
1913.  In  that  case  a  local  car  system  of  351  miles,  principallv  narrow  gauge  like 
the  car  lines  of  Denver,  was  appraised  at  approximately  $i9.S00,000  exclusive 
of  working  capital,  and  later  on,  when  the  California  Railroad  Commission  re- 
viewed this  appraisal  in  a  case  where  the  company  was  seeking  to  issue  addi- 
tional securities  the  commission  did  not  establish  a  final  value  but  dismissed  the 
ai)plication,  as  it  was  unable  to  see  how  the  value  of  the  property  could  be 
brought  up  to  the  face  value  of  tiic  bonds  outstanding  against  it.  which  at  that  ■ 
time  amounted  to  $23,544,000.  or  approximately  $(>7.000  per  mile  of  track.  I 

In  1016  the  Massacluisctis  Public  Ser\ice  Commission  made  a  valuation  of      I 
the  liay  Slate  lines  serving  Fall  River.  Lowell,  Lynn,  Lawrence.  Brockton  and      " 

\ovcn,hrl%  l«"n*^S,l','lJ'i''  '';"";""?"  P<  '••"  rn'orl  Ihc  Illinois  Public  Utilili«  fommission.  on 
fonncr«.r:i  f/.r;  irihi.iTl,  ^"••'  ""'V  '"  ""•  "'?'.'"  "f  '»><■  appKcalion  of  thr  ChicaRo  Surface  Lines 
«^  "irr,..."  .  V.)  Ill  iT.!  Ia     thr    vnlnation    for    ratc-makmR   |.„r,.o.rs.    as   of    .\|,ril    Jn.    VUO     w.is   cst.,l.lishr<l 

relerrrd   m  in    the   I  olotado  (  onmnssion  »   decision   of    nccetnlier    17,    191S.~I).    F.    W. 


Denver  Tramway  Report  729 

other  industrial  cities  and  towns  in  eastern  Massachusetts.  This  system  as 
valued  comprised  870  miles  of  single  track,  and  the  value  for  rate  purposes  was 
fixed  at  $39,104,370,  or  $45,000  per  mile. 

The  City  of  Seattle  on  April  1,  1919,  acquired  by  purchase  the  city  lines  of 
the  Puget  Sound  Traction,  Light  &  Power  Company,  comprising  approximately 
206  miles  of  single  track,  for  the  sum  of  $15,000,000,  or  a  little  less  than  $73,000 
per  mile.  It  should  be  said,  however,  that  no  power  plant  was  included  in  the 
Seattle  purchase,  but  it  should  also  be  said  that  the  consummation  of  the  pur- 
chase at  the  time  was  strongly  opposed  by  some  of  the  most  intelligent  friends 
of  municipal  ownership  on  the  ground  that  the  price  was  grossly  excessive,  and 
this  opinion  is  strongly  held  in  Seattle  at  the  present  time. 

It  is  well  known  to  all  those  who  have  made  a  study  of  street  railway  traffic 
that  the  number  of  rides  per  capita  tends  to  increase  with  the  size  of  the  com- 
munity, and  so  distinguished  a  transportation  engineer  as  Mr.  Bion  J.  Arnold 
of  Chicago  has  figured  out  that  the  necessary  investment  in  local  transportation 
facilities  increases  somewhat  as  the  square  of  the  population  of  the  urban  com- 
munity concerned.  A  comparison  of  street  railway  valuations  on  the  basis  of 
the  amount  of  the  recognized  investment  per  capita  would  be  likely  to  show, 
under  conditions  otherwise  comparable,  a  larger  per  capita  investment  for  a  big 
city  than  for  a  small  one.  Such  a  comparison  is  of  course  subject  to  many  quali- 
fications just  as  in  the  case  of  track  mileage  comparison.  The  topography  of 
cities  is  diiTerent ;  the  cost  of  materials  and  labor  is  dilTerent ;  the  amount  of 
paving  is  different ;  the  density  of  population  is  different,  and  many  other  factors 
require  that  the  results  of  any  comparison  be  carefully  checked  before  they  are 
accepted  as  having  definite  and  conclusive  significance.  However,  for  the  pur- 
pose of  showing  how  Denver  would  stand  in  the  matter  of  street  railway  valua- 
tion per  capita,  I  have  assembled  the  figures  showing  the  population  in  1920, 
the  total  valuation  of  the  city  lines  of  the  street  railway  system  at  certain  given 
dates,  the  valuation  per  capita  of  population  in  1920,  and  the  mileage  of  single 
track,  in  10  different  communities  ranging  in  population  from  Toledo,  which  is 
slightly  smaller  than  Denver,  to  Detroit,  which  is  four  times  as  large.  These 
figures  show  Denver  with  a  street  railway  investment  of  $81  per  capita  based  on 
the  valuation  of  the  city  lines  made  by  the  Public  Utilities  Commission  and  ac- 
cepted by  the  Tramway  Adjustment  Committee  of  Fifty-Five  for  incorporation 
in  the  "Service-at-Cost"  ordinance  last  year.  Toledo  is  now  voting  on  a  service- 
at-cost  franchise  in  which  the  capital  value  of  the  property  is  fixed  at  $8,000,000, 
or  the  equivalent  of  $33  per  capita.  This  does  not  include  power  plant,  which 
usually  amounts  to  10  or  15  per  cent  in  value  of  the  total  street  railway  property. 
It  is  noteworthy  that  Cleveland,  which  has  been  operating  for  the  past  10  years 
under  the  original  service-at-cost  plan,  and  which  is  known  to  have  one  of  the 
best  street  railway  systems  in  the  country,  has  a  recognized  investment  of  only 
$40  per  capita,  and  Detroit,  on  the  basis  of  the  purchase  price  rejected  in  1919 
because  it  was  too  high,  has  an  investment  of  only  $29  per  capita.  The  case  of 
Milwaukee  is  one  of  the  most  significant  among  those  shown  in  the  table  below; 
for  it  was  in  Milwaukee  that  the  policy  of  valuation  of  street  railway  properties 
by  state  authority  for  rate-making  purposes  first  became  effective.     It   will   be 


730  Appendix  B 

seen  that  in  1920  the  amount  of  the  recognized  investment  per  capita  in  the  city 
lines  of  Milwaukee  is  only  $35,  which  does  not  include  any  power  plant. 
The  table  is  as  follows: 

STREET  RAILWAY   \ALUATION— CITY  LINES 

Per  Capita  Miles  of 

Population  of  iQio  Single 

Cit\                                                            19^0  Year  Total  Population  Track 

Toledo    243.109  1920  S8.000.000  $33  118.00 

Denver     2.S6.369  1918  20.867.750  81  203.83 

Portland,   Ore 258.288  1917  18.233.371  71  184.36 

Indianapolis    314.194  1918  15.0(W.000  48  161.12 

Seattle                315.652  1919  16.154.950  51  228.13 

The  Kansas  Cities  425.587  1920  36.763.954  87  315.73 

Washington    437.571  1919  30,376.863  69  192.47 

Milwaukee    457,147  1920  16,020.057  35  180.4 

Cleveland    (including  East   Cleveland 

and    Lakcwood)     865.860  1919  34.218.000  40  364.56 

Detroit    (including    Hamtramck   and 

Highland    Park)     1,088.853  1919  31,500,000  29  302.04 

There  is  practically  no  limit  to  the  values  claimed  by  the  street  railway 
companies  under  the  chaotic  conditions  of  the  present  time.  With  their  secur- 
ities greatly  depreciated  in  value,  with  operating  expenses  so  high  as  to  make  it 
doubtful  in  many  cases  whether  their  enterprises  can  be  made  fully  self-sustaining 
even  with  all  fare  restrictions  removed,  with  the  confession  upon  their  lips  that 
the  fulfillment  of  their  contracts  spells  inevitable  bankruptcy,  the  companies  still 
greedily  display  their  ancient  losses  and  disappointments,  transmuted  by  the 
alchemy  of  appraisal  into  "going  value,"  and  appeal  to  the  very  prices  that  make 
profitable  operation  impossible  to  prove  an  enormous  increase  in  the  amount  of 
their  investment.  I  am  satisfied  that  the  financial  structure  of  the  street  rail- 
way companies  in  this  country  has  been  largely  built  upon  the  hope  of  profiteer- 
ing, and  that  the  disappointment  of  this  hope  during  the  war  period,  when  so 
many  other  lines  of  business  were  in  fact  reaping  rich  rewards,  has  made  many 
traction  men  feel  that  the  electric  railways  have  been  the  victims  of  unjust  dis- 
crimination at  the  hands  of  fortune.  There  can  be  no  doubt  whatever  that  the 
valuation  claims  generally  put  forward  by  the  companies  at  the  present  time,  if 
allowed  and  made  good  through  public  guaranties,  would  put  the  stockholders  in 
the  way  of  profiteering  on  an  even  larger  scale  than  was  indulged  in  by  street 
railway  promoters  in  the  early  days  of  electric  traction. 

Under  these  conditions  what  shall  we  adopt  as  the  correct  method  of  reach- 
ing a  fair  result  in  the  appraisal  of  street  railway  property  as  a  basis  for  public 
control  or  public  purchase?  I  believe  that  the  basic  figure  to  be  used  is  the 
actual  capital  cost  of  the  property  now  in  existence  devoted  to  public  use,  with 
such  deduction  for  depreciation  as  will  measure  the  extent  to  which  the  original 
investment  has  been  impaired  by  wear  and  tear  or  by  the  passage  of  time.  If 
complete  records  are  not  available,  then  the  so-called  "normal"  reproduction  cost, 
based  u[)on  a  careful  estimate  of  what  the  existing  items  of  property  should  have 
cost  at  the  time  when  they  were  installed,  supplies,  in  my  opinion,  the  foundation 
for  a  just  appraisal.  It  is  neither  financially  provident  nor  ethically  necessary 
for  the  community  to  perpetuate  the  false  hopes,  the  blunders,  or  the  negligence 


Denver  Tramway  Report  731 

of  a  past  generation  of  street  railway  owners  and  operators.  A  property  that 
is  subject  to  increasing  competition,  that  never  in  the  world  would  be  reproduced 
in  its  present  form  and  extent,  and  that  can  hardly  see  its  way  out  of  the  woods 
under  any  possible  scale  of  rates,  cannot  properly  be  said  to  have  an  immense 
"going  value"  over  and  above  the  depreciated  cost  of  its  physical  plant.  If  the 
street  railways  are  to  be  put  upon  their  feet  financially  and  if  their  credit  is  to  be 
restored  without  the  destruction  of  their  primary  function  as  a  means  of  render- 
ing cheap  transportation  service  to  the  multitudes  who  dwell  in  cities,  the  valua- 
tion of  their  property,  established  as  a  basis  for  rate  making,  with  public  guaran- 
ties, must  be  conservative.  Losses  that  have  been  liquidated  years  ago  cannot 
now  be  revived  and  capitalized,  and  losses  that  have  occurred  in  more  recent 
years  must  in  the  main  be  finally  liquidated  before  the  street  railways  can  be  put 
upon  a  sound  financial  footing. 

In  this  era  of  war  prices  the  companies  beg  us  to  forget  all  about  capitaliza- 
tion, knowing  full  well  that  a  physical  appraisal  based  upon  present  prices,  with- 
out any  deduction  for  depreciation,  will  in  most  cases  make  good  all  of  the 
securities  outstanding,  no  matter  how  much  they  have  been  inflated,  and  further 
knowing  that  if  under  pressure  of  the  demand  that  the  investment  shall  be  made 
attractive  to  new  capital  the  rate  of  return  upon  the  appraised  value  is  forced  up 
several  points  beyond  the  normal  rate  of  interest  on  borrowed  money,  the  stock- 
holders can  profiteer  in  the  margin  between  what  they  receive  as  a  fair  rate  of 
return  and  the  actual  rate  of  interest  paid  on  the  bonds.  For  illustration,  let  us 
take  the  case  of  the  Denver  Tramway  Company,  whose  outstanding  securities, 
on  December  31,  1917,  amounted  to  $24,872,100,  of  which  $18,715,800  was  bonds 
and  $6,156,300  stock,  as  compared  with  the  valuation  of  $23,674,100  fixed  by  the 
Colorado  Public  Utilities  Commission  as  of  that  date.  The  interest  actually 
paid  at  the  present  time  on  the  company's  funded  debt  appears  to  be  $1,005,790 
per  annum,  or  an  average  of  approximately  5.4  per  cent.  The  commission  re- 
commended that  the  company  be  allowed  a  return  of  8  per  cent  upon  its  entire 
capital  value  as  fixed.  This  would  mean  an  annual  return  of  $1,893,928,  or 
$888,138  in  excess  of  the  bond  interest.  Assuming  that  all  of  this  excess  return 
were  paid  out  to  the  stockholders,  the  company  could  pay  an  annual  dividend  of 
14.4  per  cent  upon  the  capital  stock.  Even  if  the  rate  of  return  is  figured  at  7 
per  cent,  as  recommended  by  the  Tramway  Adjustment  Committee,  the  excess  of 
the  return  over  and  above  the  bond  interest  is  sufficient  to  yield  a  dividend  of  10.5 
per  cent  upon  the  capital  stock.  My  point  is  that  even  if  the  value  of  the  prop- 
erty were  no  greater  than  the  par  value  of  the  bonds  outstanding,  a  rate  of  return 
two  points  higher  than  the  average  rate  of  interest  paid  on  the  bonds  would 
yield  in  this  case  a  dividend  of  6  per  cent  on  the  stock,  and  the  value  of  the  stock 
in  the  market  might  be  established  at  par,  even  though  it  did  not  represent  a 
dollar  of  investment. 

Thus  the  companies  by  their  present  claims,  and  in  the  face  of  the  most  un- 
toward conditions,  are  striving  in  two  ways  to  put  themselves  beyond  the  pale  of 
regulation  so  far  as  rates  are  concerned.  If  they  can  get  war  prices  adopted  as 
the  basis  of  valuation,  they  can  snap  their  fingers  at  the  public  so  far  as  over- 
capitalization is  concerned.     Then,  again,  if  they  can  get  the  rate  of  return  on 


732  Appendix  B 

the  entire  investment  high  enough  to  make  street  railway  securities  under  present 
conditions  attractive  to  the  possessors  of  free  capital,  that  in  itself  will  cover  the 
existing  capitalization,  even  with  a  conservative  valuation,  and  will  make  the 
capitalization  itself  conservative  if  the  valuation  is  based  upon  present  prices  or 
is  brought  up  to  the  level  of  present  reproduction  cost  by  the  capitalization  of 
imagined  intangibles. 

In  the  light  of  these  conditions,  and  tested  by  the  standards  of  sound  public 
policy,  what  can  we  say  as  to  the  valuation  of  the  Denver  Tramway  property 
fixed  by  the  Public  Utilities  Commission  of  Colorado  and  accepted  by  the  Tram- 
way Adjustment  Committee  of  Fifty-Five?  The  first  thing  that  strikes  one 
in  an  analysis  of  the  methods  followed  by  the  commission  is  its  brave  words 
used  in  denouncing  reproduction  cost  at  war  prices,  where  it  says:  "The  Com- 
mission is  of  the  opinion  that  the  cost  of  reproduction  of  this  property,  as  sub- 
mitted by  the  Tramway  Company,  based  on  market  prices  and  conditions  pre- 
vailing as  of  January  1,  191S,  *  *  *  *  should  not  be  given  any  considera- 
tion in  arriving  at  the  value  of  the  property  in  a  procedure  of  this  nature." 
The  valuation  of  the  property  by  the  commission's  engineers  is  labeled  "Normal 
Reproduction  Cost,"  and  so  far  as  the  commission's  decision  reveals  the  de- 
tailed methods  used  by  the  engineers  it  appears  that  the  unit  prices  were  estab- 
lished partly  on  the  basis  of  actual  cost,  and  partly  on  the  basis  of  average  market 
prices  prevailing  in  1915  or  during  a  ten-year  period  preceding  1915.  Evidently 
the  engineers  applied  no  specific  fornnila  strictly  but  assembled  such  data  as  they 
could  for  the  establishment  of  unit  prices  on  a  pre-war  basis.  While,  of  course, 
I  have  been  unable  to  check  from  the  data  submitted  either  the  inventory  itself 
or  the  unit  prices  applied  to  it.  I  assume  that  the  inventory  is  approximately  cor- 
rect and  that  the  unit  prices  were  fairly  established  on  the  bases  outlined.  The 
value  found  by  the  commission  illustrates  very  well  the  relative  unimportance 
of  the  base  cost  of  the  physical  property  as  arrived  at  in  engineering  appraisals. 
The  final  result  may  be  so  different  as  to  make  the  basic  figure  unrecognizable. 
That  depends  primarily  upon  what  is  done  with  the  three  factors  of  overhead 
expenses,  accrued  depreciation  and  intangible  values. 

It  is  noteworthy  that  in  this  particular  case  the  normal  reproduction  cost  new 
of  the  entire  physical  pro])erty.  exclusive  of  general  overheads  and  working  cap- 
ital, was  found  to  be  $15,257,944,  while  the  final  figure  reached  by  the  commis- 
sion as  the  fair  value  of  the  property  for  rate-making  purposes  was  $23,674,100, 
an  increase  of  55  per  cent.  This  increase,  without  any  offset  for  accrued  depre- 
ciation, is  apparently  made  up  of  the  following  items: 

1.  General  overhead  cxik-ii>cs  allowed  In-  tlic  engineers $.i.()87.430 

2.  "WorkinR   Capital"   allows!    In-   the   enRiiieers .^i.^O.OOO 

3.  "Going    \alue"   or  other    intaiiKihlcs.   allnwed    In-    the    Commissinii 4.178.726 

$«.416,156 

nic  general  overheads  allowed  by  the  engineers  are,  in  my  opinion,  exces- 
sive. They  amount  to  24  per  cent  on  the  base  cost  of  the  property.  While  this 
is  a  iinich  lower  percentage  than  is  sometimes  claimed  by  engineering  experts 
cniplovfd  l)v  the  coinp.Miii-s.  ii  is  noteworthy  that  it  is  high  in  comparison  with 


Denver  Tramway  Report  733 

the  allowances  made  by  tlie  Wisconsin  Railroad  Commission,  the  Massachusetts 
Public  Service  Commission,  and  the  Interstate  Commerce  Commission  in  valua- 
tion work.  As  is  well  known,  the  Wisconsin  commission  was  a  pioneer  in  the 
valuation  of  street  railways  and  other  utilities.  In  its  first  appraisals  it  allowed 
10  per  cent  for  overheads,  but  as  its  work  proceeded  it  found  that  this  percent- 
age was  too  low,  and  increased  it  first  to  12  per  cent,  and  finally,  after  verv  care- 
ful checking,  to  15  per  cent.  The  latter  is  the  percentage  used  in  the  valuation 
of  the  ^Milwaukee  Street  Railway  property.  The  Massachusetts  Public  Service 
Commission,  in  the  now  celebrated  Bay  State  Street  Railway  Case,  where  the 
basis  used  was  the  estimated  amount  of  capital  honestly  and  prudently  invested 
in  the  property,  allowed  8  per  cent  for  general  overheads. 

In  1919,  at  the  solicitation  of  the  electric  railway  interests,  the  Federal  Elec- 
tric Railways  Commission  was  appointed  by  the  President  for  the  purpose  of  in- 
vestigating the  condition  of  the  industry  and  making  recommendations  for  the 
solution  of  the  electric  railway  problem,  which  was  recognized  to  be  acute.  This 
Commission  did  not  attempt  to  make  specific  findings  as  to  the  proper  basis  for 
the  valuation  of  street  railway  properties,  but  said : 

"No  permanent  solution  of  the  electric  railway  question  can  be  found  in  the  absence 
of  a  finding  of  value  for  rate-making  purposes.  This  applies  to  commission  form  of  regu- 
lation, cost  of  service  contracts,  or  public  ownership  and  operation.  The  public  should  know 
what  it  is  paying  for,  and  this  question  cannot  be  settled  without  knowing  what  the  property 
is  worth." 

At  its  hearings  the  Commission  had  discouraged  the  introduction  of  testimony 
on  the  subject  of  valuation,  but  in  its  report  it  referred  to  the  work  of  valuation 
of  the  steam  railroads  of  the  United  States,  and  said  that  in  its  opinion  "the 
decisions  of  the  Interstate  Commerce  Commission,  based  upon  long  experience 
and  investigation,  will  in  large  measure  settle  the  standard  of  valuation."  For 
this  reason  it  suggested  that  municipalities  and  states  when  engaged  in  fixing  the 
values  of  electric  railways  should  familiarize  themselves  with  the  practice,  experi- 
ence and  decisions  of  the  I.  C.  C.  in  these  valuation  cases.  The  fact  must  not 
be  lost  sight  of  that  the  Federal  Electric  Railways  Commission  report  was  signed 
by  a  representative  of  the  electric  railways  and  by  a  representative  of  the  invest- 
ment bankers.  Particular  reference  was  made  to  the  Interstate  Commerce  Com- 
missions's  report  in  the  Texas  Midland  Railroad  valuation,  and  it  is  a  matter  of 
great  significance  that  in  the  Texas  Midland  Case  the  overheads  allowed  aggre- 
gated less  than  8  per  cent  on  the  base  cost  of  the  property.  Furthermore,  it 
is  significant  that  in  the  Des  Moines  Gas  Case,  where  the  United  States  Supreme 
Court  said  that  the  master  had  given  sufficient  consideration  to  going  value  with- 
out the  allowance  of  a  separate  amount  for  that  item,  the  court's  conclusion  was 
based  in  part  upon  the  fact  that  the  master  had  allowed  overheads  aggregating 
15  per  cent  and  covering  the  usual  items  which,  in  the  court's  opinion,  were  in 
large  part  identical  with  the  elements  ordinarily  considered  in  the  determination 
of  going  value.  Moreover,  in  the  appraisal  of  the  property  of  the  Denver  Union 
Water  Company,  May  1,  1914,  by  Special  Master  William  J.  Chinn,  appointed 
by  the  United  States  District  Court,  the  amount  allowed  for  overhead  expenses 
was  only  15.21  per  cent  of  the  base  cost  new.  Mr.  Cliinn's  appraisal  was  sub- 
sequently approved  by  the  United  States  Supreme  Court. 


734  Appendix  B 

In  view  of  the  foregoing,  I  think  that  the  overhead  allowances  made  by  the 
commission's  engineers  in  the  Denver  Tramway  appraisal  are  about  $1,500,000 
too  high.  It  will  be  observed  that  the  allowance  for  interest  during  construction 
alone  is  $1,783,499,  or  more  than  10  per  cent  on  the  total  reproduction  cost  of 
the  property,  exclusive  of  interest  during  construction  and  working  capital. 
The  amount  to  be  allowed  for  this  item,  as  for  other  items  of  overhead  expenses, 
is  largely  hypothetical,  and  depends  upon  the  assumptions  made  by  the  appraisers 
with  respect  to  the  length  of  the  construction  period,  the  financial  arrangements 
entered  into  and  the  rate  of  interest  paid  upon  money  used  for  construction  pur- 
poses, but  in  my  opinion  the  allowance  made  is  nearly  double  what  it  should  be. 

With  respect  to  the  item  of  $550,000  for  working  capital,  I  assume  that  this 
includes  both  "material  and  supplies"  on  hand  and  "cash  working  capital." 
Indeed  I  find  from  the  Denver  Tramway  Company's  annual  report  for  the  fiscal 
year  ended  December  31,  1917,  that  the  company  on  that  date  had  among  its 
assets  material  and  supplies  with  a  book  value  of  $219,051.  It  would  appear, 
therefore,  that  about  $330,000  of  the  amount  allowed  by  the  commission's  en- 
gineers was  for  "cash  working  capital."  The  matter  of  working  capital  in  a 
street  railway  valuation  has  been  the  subject  of  a  good  deal  of  controversy  in 
rate  cases.  A  street  railway  collects  its  revenues  at  the  time  when  the  service 
is  rendered,  or  even  in  advance  of  that  time  to  the  extent  that  tickets  are  sold. 
A  street  railway  company  gets  from  day  to  day  substantially  all  of  the  revenues 
that  it  will  ever  get  to  cover  the  full  cost  of  the  service  as  it  is  rendered.  If 
working  capital  is  to  be  allowed  in  a  public  utility  valuation,  it  can  only  be  on 
account  of  moneys  necessarily  supplied  by  the  investors  to  cover  the  company's 
cash  expenditures  on  account  of  the  cost  of  service  in  advance  of  the  time  when 
the  revenues  applicable  to  the  cost  of  service  are  collected.  It  is  hardly  necessary 
to  examine  the  actual  financial  transactions  of  a  street  railway  company  to  see 
that  expenditures  on  account  of  the  cost  of  service  are  for  the  most  part  paid 
after  the  revenues  have  been  collected.  On  this  point  the  Federal  Electric  Rail- 
ways Commission  in  its  report  to  tiie  President  makes  the  following  statement : 

"They  (the  electric  railways)  liavc  a  continnons  and  immediate  market  for  tlieir  'juxls  ' 
They  sell  transportation  as  it  is  produced.  While  electric  railway  traffic  fluctuates  somewhat 
from  year  to  year,  accordinR  to  the  numlwr  of  passengers  and  the  prosperity  that  prevails, 
and  fluctuates  somewhat  from  season  to  season,  from  week  to  week,  and  from  day  to  day, 
these  fluctuations  arc  relatively  unimportant.  The  husiness  of  transportation  goes  on  every 
day  in  the  year.  I'ndcr  n<irmal  conditions  the  credit  of  the  electric  railway  husine'^s  is  it- 
relatively  small  need  for  'fluid'  or  workiuR  capital.  In  this  respect  it  occupies  a  position 
more  independent  than  that  of  any  other  utility  or  any  other  pri\-ate  industry.  It  docs  a  cash 
husiness.  .Mmost  UK)  per  ceiit  of  its  revenues  are  collected  in  advance,  through  the  sale  of 
tickets  or  at  the  time  the  service  is  rendcreil.  from  the  collection  of  fares  in  the  cars.  Money 
flows  into  its  coffers  day  liy  day  in  a  relatively  even  stream.  Before  it  pays  the  wages  of 
its  employes,  the  salaries  of  its  officers,  the  claims  resulting  from  injuries  and  damages,  the 
rentals  for  the  use  of  property,  the  interest  and  dividends  on  its  investment,  or  its  taxes, 
it  has  already  collected  from  its  patrons  in  cash  full  compensation  for  the  .service  rendered. 
It  does  not  send  out  hills." 

The  Wisconsin  Kailroad  Commission,  as  a  result  of  its  many  years  of  ex- 
perience in  dealing  with  street  railway  valuations  in  rate  proceedings,  no  longe. 
makes  any  allowance  whatever  for  cash  working  capital.  My  own  analyses  of 
the  cash  receipts  and  expenditures  of  the  Public  Service  Railway  Company  of 
New  Jersey  and  of  the  detailed  balance  sheets  of  the  Cleveland  Railway  Com- 


r 


Denver  Tramway  Report  735 

pany  have  thoroughly  convinced  me  that  even  as  to  the  item  of  material  and 
supplies  the  cash  required  to  pay  for  them  in  advance  of  the  time  when  they  are 
used  is  much  more  than  offset  by  a  company's  deferred  payments  for  salaries, 
wages,  taxes,  interest,  etc.  In  my  opinion,  therefore,  neither  the  book  item 
"material  and  supplies"  nor  "cash  working  capital"  has  any  place  in  the  per- 
manent valuation  of  a  street  railway  property  for  rate  purposes. 

The  Colorado  commission  discusses  going  value  at  considerable  length,  but 
does  not  clearly  indicate  the  amount  actually  allowed  for  this  item.  Prof.  Milo 
S.  Ketchum,  in  his  report  to  the  Tramway  .\djustment  Committee,  reached  the 
conclusion  that  the  commission  had  allowed  about  $2,500,000  for  the  going  value 
of  the  city  lines.  The  exact  amount  cannot  be  deduced  from  the  commission's 
decision,  for  the  commission  does  not  give  details  in  support  of  its  final  figure, 
but  says :  "The  amount  arrived  at  represents,  in  other  words,  the  present  fair 
value  of  the  property  based  upon  its  cost  of  reproduction  under  average  or  nor- 
mal conditions,  its  present  service  condition  and  efficiency,  and  all  other  relevant 
facts."  As  we  have  seen,  the  diiTerence  between  the  reproduction  cost  new  plus 
working  capital  and  the  final  valuation  figure  for  the  entire  property  is  $4,178,726. 
If  the  commission,  in  fact,  in  arriving  at  its  final  figure,  made  any  allowances  for 
accrued  depreciation,  then  its  allowance  for  going  value  or  other  intangible  ele- 
ments must  have  been  even  greater  than  $4,178,726.  For  this  reason  I  shall 
assume  that  no  deduction  was  made  for  depreciation,  and  that  the  figure  just 
given  represents  the  commission's  estimate  of  going  value  of  the  property.  If 
that  be  so,  it  will  be  seen  that  going  value  amounts  to  22  per  cent  of  the  repro- 
duction cost  new  of  the  physical  property,  including  the  overheads,  but  excluding 
working  capital,  or  27  per  cent  of  the  base  cost  of  the  physical  property. 

There  is  still  great  uncertainty  as  to  what  going  value  in  the  street  railway 
business  is.  The  United  States  Supreme  Court  has  discussed  this  element  of 
value  with  respect  to  other  utilities,  such  as  gas  and  water  supply,  where  a, 
going  concern  is  enabled  to  do  business  and  to  earn  a  revenue  by  reason  of  the 
fact  of  its  having  established  physical  connections  between  its  distribution  system 
and  the  buildings  in  which  its  consumers  live  or  do  business.  In  street  railway 
operation  I  know  of  nothing  closely  analogous  to  the  value  of  these  connections. 
Even  at  that  the  United  States  Supreme  Court,  as  I  have  already  indicated,  ap- 
proved the  valuation  of  the  Des  Moines  Gas  property  without  any  separate  allow- 
ance for  going  value.  In  the  Denver  Union  Water  Case  it  approved  the  master's 
finding  with  a  separate  allowance  of  $800,000,  or  the  equivalent  of  6.35  per  cent 
of  the  total  value  of  the  property  with  this  element  excluded.  In  the  water 
case,  however,  the  master  expressly  stated  that  in  arriving  at  the  value  of  the 
physical  property  he  had  made  "no  addition  whatsoever  because  such  property 
constitutes  part  of  a  long  established  plant  doing  a  business  which  yields  an 
income."  Personally  I  have  no  doubt  at  all  that  the  valuation  of  the  physical 
property  made  by  the  master  in  the  Denver  Water  Case  and  the  valuation  of  the 
physical  property  made  by  the  master  in  the  Des  Moines  Gas  Case  were  as  nearly 
alike  with  respect  to  the  consideration  of  the  value  of  the  property  as  a  going 
concern  as  two  appraisals  could  well  be.  but  in  one  case  the  master  said  that  he 
had  valued  the  company's  property  on  the  basis  that  it  was  in  successful  opera- 


736  Appendix  B 

tion,  while  in  the  other  case  the  master  expressly  stated  that  nothing  was  included 
in  the  physical  appraisal  on  this  account,  and  so  made  a  separate  allowance. 
The  Supreme  Court  approved  the  results  in  both  cases.  It  is  perfectly  clear  that 
a  value  reached  by  a  reproduction  cost  appraisal  of  the  physical  property  is  based 
upon  the  assumption  tliat  the  property  is  alive  and  not  dead,  for  if  it  were  not 
"going"  or  at  least  if  it  did  not  have  the  right  to  go.  and  the  opportunity  to  earn 
money  by  going,  it  would  be  worth  less  than  its  reproduction  cost.  Indeed,  it 
might  have  very  little  value  e.xcept  as  junk. 

The  Wisconsin  Railroad  Commission  in  its  decision  of  June  24,  1920.  with 
respect  to  the  fares  to  be  charged  by  the  Milwaukee  Electric  Railway  and  Light 
Company,  complying  with  the  mandate  of  the  Dane  County  Circuit  Court,  de- 
ducted accrued  depreciation  from  the  cost  new  of  the  physical  property,  and  set 
up  a  separate  allowance  for  going  value.  It  fixed  the  sum  of  $500,000  as  the 
going  value  of  a  property  otherwise  appraised  at  $15,500,000.  This  makes  the 
going  value  allowance  between  3  per  cent  and  4  per  cent  of  the  value  of  the 
physical  property. 

Taking  all  these  things  intu  consideration.  1  cannot  escape  the  conclusion 
that  the  allowance  for  going  value  made  by  the  Colorado  commission  in  the 
case  of  the  Denver  Tramway  Company,  and  approved  by  Prof.  Ketchum.  was 
grossly  excessive.  I  doubt  if  any  separate  allowance  whatever  for  going  value, 
under  the  circumstances  of  the  Denver  Tramway  Company,  is  required  under  the 
rulings  of  the  United  States  Supreme  Court,  but  in  any  case  I  am  sure  that  it 
would  be  difficult  to  justify  an  allowance  of  more  than  5  per  cent  of  the  cost 
new  of  the  physical  property. 

We  now  come  to  the  question  of  depreciation.  The  figures  thus  far  dis- 
cussed assume  that  the  property  is  brand  new.  The  treatment  of  depreciation 
is  a  subject  of  violent  controversy  in  valuation  circles.  The  United  States 
Supreme  Court  has  repeatedly  held  that  accnied  depreciation  must  be  deducted 
from  cost  new  when  the  re])ro(luction  method  is  used  as  a  basis  for  arriving  at 
fair  value  for  rate  purposes.  Whether  accrued  depreciation  should  be  deducted 
where  the  "actual  cost"  or  the  "capital  honestly  and  prudently  invested"  is  the 
basis  used  has  not  been  made  quite  so  clear.  It  is  now  fully  recognized  that 
depreciation  is  an  operating  expense.  From  this  it  follows  that  if  depreciation 
has  been  neglected  a  portion  of  the  operating  expenses  has  been  deferred,  and  if 
the  property  is  retained  in  the  capital  account  at  its  cost  new,  the  result  in  effect 
is  the  capitalization  of  unpaid  operating  expenses.  Such  a  policy,  if  permanently 
followed,  cannot  he  justified  on  any  theory  of  sound  finance.  If  a  street  railway 
company  operating  under  a  franchise  contract  containing  specific  limitations  upon 
the  rates  of  fare  has  failed  to  make  i>rovision  for  depreciation  as  it  accrued, 
whether  the  failure  was  due  to  insutVicient  earnings  or  to  a  propensity  lor  paying 
dividends  on  stock  not  representing  cash  investment,  it  cannot  be  justly  claimed 
that  the  public  when  it  makes  a  new  deal  with  the  company  at  the  latter's  solicita- 
tion should  make  goo<l  all  of  the  comjiany's  past  losses,  as  well  as  guarantee  it 
against  losses  in  the  future. 

Ill  its  decision  of  December  17,  lOl.S.  the  Colorado  commission  fixed 
$500,000  as  the  amount  of  antnial  depreciation  .tccruing  on  the  entire  property  in 


Denver  Tramway  Report  7},7 

excess  of  current  maintenance.  It  found  that  during  the  year  1917  the  company 
had  in  fact  included  in  its  maintenance  accounts  the  sum  of  $150,000  for  replace- 
ments properly  chargeable  to  a  depreciation  reserve.  It  appears,  therefore,  that 
in  the  commission's  opinion  the  value  of  the  physical  property  at  the  end  of  1917 
must  have  been  $350,000  less  than  it  was  at  the  beginning  of  the  year  as  a  result 
of  the  uncared  for  accruing  depreciation.  The  commission  did  not  state  the 
amounts  of  money  included  in  the  maintenance  accounts  for  years  prior  to  1917 
which  were  properly  attributable  to  replacements,  but  if  we  assume  that  on  the 
average  during  the  preceding  period  of  ten  years  the  dififefence  between  the 
amount  actually  spent  for  replacements  and  the  amount  of  the  accruing  depre- 
ciation as  fixea  by  the  commission  was  the  same  as  it  was  in  the  year  1917,  we 
should  have  to  conclude  that,  disregarding  additions,  extensions  and  betterments, 
the  physical  property  on  December  31,  1917,  must  have  been  worth  $3,500,000 
less  than  it  was  ten  years  before.  I  make  this  computation  merely  to  show  how 
the  Colorado  commission,  by  its  treatment  of  annual  depreciation,  proves  that 
the  physical  property  in  its  present  condition  must  be  worth  very  much  less  than 
cost  new.  It  is  said  that  the  Denver  Tramway  property  has  been  well  managed 
and  maintained,  and  is  in  good  operating  condition ;  but  it  has  been  well  estab- 
lished in  the  case  of  the  Cleveland  Railway  Company  that  a  standard  of  70  per 
cent  condition  of  cost  new  is  a  very  high  standard  and  one  that  cannot  easily  be 
maintained.  True,  many  engineers  who  ignore  the  depreciation  that  cannot  be 
seen  and  measured  appraise  street  railway  properties  and  report  them  to  be  in 
a  condition  as  high  as  85  or  90  per  cent  of  cost  new.  Here  again  the  conclusion 
reached  depends  upon  the  assumptions  made  and  the  methods  used,  but  I  have 
very  little  doubt  that  a  consistent  application  of  the  commission's  findings  with 
respect  to  annual  depreciation  would  reveal  an  accrued  depreciation  of  at  least 
$5,000,000  in  the  Denver  Tramway  property  on  the  basis  of  the  reproduction  cost 
estimate  submitted  by  the  commission's  engineers. 

Taking  into  consideration  the  several  matters  to  which  I  have  called  atten- 
tion, I  think  that  a  fair  valuation  of  the  entire  Tramway  property,  with  deduc- 
tion for  accrued  depreciation,  would  be  not  more  than  $14,000,000  or  $15,000,000. 
It  all  depends  upon  the  assumptions  made,  the  valuation  rules  followed,  and  the 
practical  interpretation  of  the  word  "fair"  in  a  readjustment  of  the  public  rela- 
tions between  the  city  and  the  company,  but  so  far  as  I  have  been  able  to  deter- 
mine from  the  data  submitted  to  me,  I  should  expect  that  the  result  indicated 
would  be  reached  by  the  application  of  correct  rules  of  valuation  and  a  proper 
consideration  of  the  relative  claims  of  the  company  and  the  public. 

So  far  as  I  can  see,  the  only  escape  from  this  conclusion  would  lie  in  the 
acceptance  of  the  claim  that  war  prices  should  be  used  as  the  basis  for  a  present- 
day  valuation  on  the  theory-  that  the  purchasing  power  of  money  has  been  cut  in 
two  through  economic  changes  over  which  neither  the  City  of  Denver  nor  the 
Tramway  Company  had  any  control,  and  that,  therefore,  a  valuation  of  $30,000,000 
in  the  money  of  today  represents  no  greater  purchasing  power  than  a  valuation 
of  $15,000,000  in  the  money  of  1914.  In  certain  respects  this  theory  is  plausible, 
but  as  applied  to  a  public  utility  property  mortgaged  to  the  full  extent  of  its 
original  cost  the  application  of  the  theory  works  out  a  monstrous  injustice.     No 


738  Appendix  B 

street  railway  company  considers  for  a  moment  the  necessity  of  voluntarily  going 
to  its  bondholders  and  doubling  the  rate  of  interest  on  the  bonds  outstanding  in 
order  that  the  owners  of  these  securities  may  receive  the  same  amount  of  income, 
measured  by  purchasing  power,  that  they  received  when  the  bonds  were  first 
issued.  The  result  is  that  if  street  railway  valuations  are  now  fixed  on  the  basis 
of  war  prices  for  the  purpose  of  making  good  to  the  owners  the  decrease  in  the 
purchasing  power  of  money,  the  losses  which  the  bondholders  have  already  in- 
curred through  the  depreciation  of  the  dollar  will  not  be  made  up  to  them,  but 
these  losses  will  be  transformed  into  profits  conferred  upon  the  stockholders, 
whose  real  financial  interest  in  the  property  may  be  little  or  nothing.  From  the 
practical  point  of  view,  it  would  mean  that  every  tribunal  charged  with  the  regu- 
lation of  the  rates  of  public  utilities  would  be  setting  up  in  the  business  of  guar- 
anteeing the  purchasing  power  of  the  dollar  so  far  as  the  utilities  under  its  control 
were  concerned,  and  thus  we  should  have  a  motley  group  of  regulatory  author- 
ities assuming  jurisdiction  over  the  money  of  the  country  and  conferring  special 
favors  upon  the  particular  groups  of  property  owners  who  happened  to  have  in- 
vested in  public  utilities.  It  is  not  yet  certain  how  the  highest  courts  will  finally 
decide  with  respect  to  the  use  of  war  prices  in  the  valuation  of  public  utility 
property  for  rate  purposes,  but  thus  far  the  weight  of  judicial  opinion  and 
sound  reason  is.  I  believe,  in  support  of  the  position  taken  by  the  Colorado  com- 
mission, when  it  flatly  refused,  in  this  case,  to  consider  war  prices  as  a  basis  for 
fair  valuation. 

III. 

A  brief  analysis  and  evaluation  of  the  "Service-at-Cost"  ordinance  drafted 
by  the  Tramway  Adjustment  Committee  and  of  the  "Elastic  6c  Fare"  ordi- 
nance, both  of  which  were  submitted  to  popular  vote  at  a  special  election 
October  22,   1919. 

The  service-at-cost  plan  is  now  being  advocated  by  the  electric  railway  com- 
panies throughout  the  country,  and  this  plan  has  recently  been  recommended  by 
the  Federal  Electric  Railways  Commission  in  its  report.  The  plan  was  origin- 
ated in  Cleveland  ten  years  ago  as  a  means  of  bringing  to  a  conclusion  a  long  and 
bitter  controversy  between  the  city  and  the  street  railway  company.  It  has  since 
been  adopted  in  a  number  nf  other  American  cities,  but  in  no  other  instance  that 
I  know  of  have  its  fundamental  conditions  been  so  favorable  to  the  public  as  in 
the  case  of  Cleveland.  The  testimony  given  before  the  Federal  Electric  Rail- 
ways Commission  at  its  hearings  in  Washington  last  year  and  the  general  con- 
sensus of  opinion  of  those  familiar  with  street  railway  conditions  in  different 
cities  of  the  country  indicate  that  service  at  cost,  as  worked  out  in  Cleveland,  has 
proved  to  be  the  most  satisfactory  plan  of  street  railw.iy  operation  yet  devised 
under  private  management.  But  even  in  Cleveland,  where  the  spirit  of  coopera- 
tion between  the  city  and  the  company  in  the  administration  of  the  plan  has  been 
quite  remarkable,  certain  weaknesses  have  developed  which  show  that  it  is  far 
from  perfect  and  that  it  can  hardly  be  regarded  as  a  permanent  and  final  solution 


Denver  Tramway  Report  739 

of  the  public  relations  of  the  street  railways.  As  worked  out  in  other  cities, 
service  at  cost  has  been  modified  so  as  to  be  in  many  respects  more  favorable  to 
the  companies,  although  even  in  Cleveland  the  company  went  through  the  war 
with  flying  colors  and  maintained  its  credit  during  the  period  when  most  other 
street  railways  of  the  country  were  bankrupt  or  on  the  verge  of  bankruptcy. 

A  flexible  fare  is  one  of  the  most  characteristic  features  of  a  service-at-cost 
plan,  but  in  the  Cleveland  franchise  an  upper  limit  is  established  beyond  which 
the  fares  may  not  go ;  while  in  the  plan  as  advocated  by  the  electric  railway  com- 
panies and  as  recommended  by  the  Federal  Commission,  no  such  upper  limit 
is  established.  In  the  light  of  recent  fare  tendencies  it  requires  very  little  con- 
sideration to  show  that  the  dift'erence  between  an  upper  limit  and  no  upper  limit 
in  a  service-at-cost  plan  is  a  radical  and  fundamental  difference.  Under  the 
theory  of  regulation  by  state  commissions  or  by  other  public  avithorities  exercis- 
ing the  police  power,  it  is  well  established  that  the  rates  charged  by  a  public  utility 
may  not  be  higher  than  the  service  is  reasonably  worth.  In  the  past  the  neces- 
sary cost  of  the  service  has  been  regarded  as  the  low  limit  and  the  reasonable 
value  of  the  service  as  the  high  limit  of  rates,  and  so  long  as  the  cost  under 
normal  conditions  was  uniformly  less  than  the  value  there  was  no  conflict  in  the 
practical  application  of  the  two  rules.  But  since  the  advent  of  automobile  com- 
petition, and  particularly  since  the  vast  increase  in  the  cost  of  service  under  the 
influence  of  the  war,  it  is  becoming  apparent  that  in  many  cases  the  full  cost  of 
local  transportation  service,  with  a  liberal  return  on  past  investments  figured  in, 
is  likely  to  be  greater  than  the  true  value  of  the  service  rendered  to  the  car  riders. 
The  adoption  of  the  service-at-cost  plan  without  any  upper  limit  on  street  rail- 
way fares  exempts  the  companies  from  the  effect  of  the  old  limitation  inherent 
in  the  police  power  and  permits  them  to  charge  under  public  guaranties  any  rates 
— no  matter  how  high — up  to  the  point  where  they  yield  sufificient  revenue  to 
cover  the  entire  cost  of  service,  including  the  established  rate  of  return  upon  the 
capital  value.  In  theory,  this  change  is  one  of  vast  moment.  It  means  that  here- 
after— if  the  service-at-cost  plan  as  outlined  is  adopted — the  rates  of  fare  on 
urban  street  railways  will  be  fixed  wholly  on  the  basis  of  the  financial  needs  of 
the  enterprise,  and  to  no  extent  whatever  will  be  controlled  or  limited  by  social 
requirements.  In  other  words,  street  railway  fares,  for  all  practical  purposes, 
will  be  removed  from  public  control  and  the  character  of  the  street  railway  as  a 
public  utility  will  be  impaired  and,  perhaps,  in  some  cases  destroyed. 

In  addition  to  the  flexible  fare,  the  establishment  of  a  fixed  capital  value 
is  an  important  characteristic  of  the  service-at-cost  plan.  Here  again,  the  pub- 
lic interest  was  better  protected  in  the  original  Cleveland  ordinance  than  in  most, 
if  not  all,  of  the  service-at-cost  plans  subsequently  adopted.  The  fixed  capital 
value  serves  not  only  as  the  open  door  to  public  ownership  in  case  the  experiment 
of  service  at  cost  under  private  management  should  fail,  but  also  as  one  of  the 
chief  determining  factors  in  the  cost  of  service  and,  therefore,  in  the  control  of 
the  rates  to  be  charged.  It  is  not  too  much  to  say  that  a  service-at-cost  plan 
might  be  excellent  in  every  other  respect,  and  yet  have  its  efTectiveness  entirely 
destroyed  by  too  high  a  valuation. 

A  third  element  of  great  importance  is  the  rate  of  return  to  be  paid  on  the 


740  Appendix  B 

capital.  From  the  point  of  view  of  its  effect  upon  fares,  this  may  be  quite  as 
important  as  the  valuation  itself.  In  this  respect,  also,  the  original  Cleveland  plan 
was  reasonably  conservative,  as  the  return  to  capital  represented  by  stock  issued 
at  par  was  fixed  at  6  per  cent,  and  the  return  to  capital  represented  by  bonds  was 
fixed  at  the  actual  interest  paid  on  the  money,  not  exceeding  6  per  cent. 

It  can  readily  be  seen  that  a  service-at-cost  plan  with  no  upper  limit  as  to 
fares,  with  an  excessive  valuation,  and  with  a  "liberal"  rate  of  return  will  be  so 
different  from  the  Cleveland  plan  in  its  relative  effects  upon  the  public  and  the 
private  interests  concerned  as  to  fall  into  an  entirely  different  category. 

The  points  I  have  mentioned  affect  the  price  that  is  to  be  paid  for  the 
service  rendered,  but  under  service  at  cost  it  is  also  necessary  that  some  provision 
be  made  by  which  the  public  will  be  enabled  to  see  that  it  gets  the  worth  of  its 
money.  In  other  words,  it  is  recognized  as  an  essential  characteristic  of  service 
at  cost  that  the  control  of  the  service  shall  be  wholly  or  predominantly  in  the 
hands  of  officials  representing  the  community. 

Turning  to  the  Denver  service-at-cost  ordinance  prepared  by  the  Tramway 
Adjustment  Committee  of  Fifty-F'ive,  and  submitted  to  the  electors  last  year,  it 
will  be  noticed  that  it  contained  no  upper  limit  whatever  upon  the  fares  to  be 
charged  except  the  cost  of  the  service.  On  the  other  hand,  it  did  prescribe  a 
definite  though  low  minimum  below  which  the  fares  could  not  go,  no  matter  how 
little  the  cost  of  service  under  future  conditions  might  become.  This  ordinance, 
therefore,  is  subject  to  the  general  objection  that  it  would  relieve  the  company 
of  the  obligation  to  charge  rates  not  in  excess  of  the  reasonable  value  of  the 
service  rendered  except  as  that  value  is  measured  by  cost,  including  a  full  return 
upon  capital.  In  this  respect  the  ordinance  was  theoretically  nuich  more  advan- 
tageous to  the  company  and  much  less  advantageous  to  the  city  than  the  Cleve- 
land service-at-cost  model. 

In  the  second  place,  the  recognized  capital  value  in  the  Denver  ordinance 
was  $20,867,750.  or  $81  per  capita  on  the  basis  of  the  1920  population  as  com- 
pared with  a  capital  value  of  $34,218,000  on  December  31,  1919  in  Cleveland,  or 
the  equivalent  of  $40  per  capita  of  the  1920  population.  If  my  analysis  of  the 
valuation  fixed  by  the  Colorado  Public  Utilities  Commission  is  anywhere  nearly 
correct,  then  it  shows  that  the  capital  value  recognized  in  the  Tramway  Adjust- 
ment Committee's  ordinance  was  excessive.  Indeed,  the  importance  of  conserva- 
tism in  laying  the  foundation  for  the  financial  rehabilitation  of  a  street  railway 
system  at  the  present  time  is  so  great  that  the  valuation  accepted  in  the  Denver 
ordinance  might  have  proven  fatal  to  its  success,  regardless  of  anv  consideration 
of  the  public  rights  in  the  matter. 

It  will  be  noted,  also,  that  the  rate  of  return  fixed  in  the  Denver  plan  was  7 
per  cent  upon  the  entire  capital  value  of  the  city  lines.  This  would  amount 
to  $1,4'''0,742.  If  the  s.ime  rates  of  return  est.ablishcd  by  the  Cleveland  plan 
had  been  fixed  in  the  Denver  ordinance,  the  total  annual  return  paid  to  capital 
on  the  basis  of  the  initial  investment  and  the  amount  of  bonds  now  outstanding 
would  have  been  approximately  $350,000  less. 

It  will  be  seen,  therefore,  that  from  the  point  of  view  of  what  the  car  riders' 
would  have  to  pay  for  the  service  rendered,  the  Tramway  Adjustment  Commit- 


Denver  Tramway  Report  741 

tee's  plan  was  much  less  favorable  to  the  public  and  much  more  favorable  to  the 
company  than  the  Cleveland  plan. 

If  we  turn  to  the  matter  of  the  extent  and  quality  of  the  service  rendered, 
we  find  that  in  the  Tramway  Adjustment  Committee's  plan  the  city  reserved  no 
affirmative  control  whatever  over  extensions,  additions  and  improvements ;  while 
its  supervision  over  schedules,  routes  and  transfer  regulations  was  to  be  exercised 
through  the  Board  of  Tramway  Control  consisting  of  three  members — one  to 
be  appointed  by  the  Mayor,  one  by  the  City  Council,  and  one  by  the  Denver 
Tramway  Company.  At  first  blush  it  would  appear  that  the  city,  with  a  two- 
thirds  representation  on  the  board,  could  have  everything  its  own  way.  Upon 
further  examination,  however,  we  see  that  the  company's  representative  is  to  be 
removable  at  any  time  at  the  pleasure  of  the  company.  There  would  be  no  ques- 
tion whatever  about  his  being  continuously  and  completely  responsible  to  the 
company's  point  of  view  as  to  its  own  interests.  On  the  other  hand,  the  Mayor's 
representative  was  to  hold  office  during  the  term  of  the  Mayor  that  appointed 
him.  and  was  not  subject  to  removal  by  the  appointing  power  or  by  anybody  else. 
Similarly,  the  member  appointed  by  resolution  by  the  majority  of  the  City  Council 
was  to  hold  office  for  five  years  with  no  provision  whatever  for  his  removal  prior 
to  the  expiration  of  his  fixed  term.  It  can  readily  be  seen  that  with  complete 
responsibility  on  the  part  of  the  company's  representative  to  the  interests  which 
he  was  appointed  to  serve,  and  with  the  two  city  representatives  appointed  by 
different  political  authorities,  and  in  neither  case  responsible  to  the  appointing 
power  or  to  the  jieople  of  the  City  of  Denver  for  the  way  they  protected  the  public 
interests,  the  control  of  service  reserved  to  the  city  would  in  all  likelihood  prove 
to  be  nominal  rather  than  real.  The  Tramway  Company  would  have  a  supreme 
interest  in  controlling  either  the  Mayor  or  the  Council  when  the  original  appoint- 
ments were  made,  or  else  in  getting  control  of  one  or  the  other  of  the  city  repre- 
sentatives after  they  had  been  appointed.  I  cannot  think  that  such  a  plan  of 
control  could  possibly  work  out  for  the  public  interest. 

One  of  the  most  obvious  and  fundamental  theoretical  defects  of  the  Cleve- 
land plan  is  the  fact  that  the  return  to  the  investors  is  a  fixed,  inflexible  amount 
which  under  all  ordinary  circumstances,  within  the  limitations  of  the  earning 
power  of  the  enterprise  under  the  maximum  rate  of  fare,  will  be  paid;  whereas, 
no  amount  of  effort  on  the  part  of  the  management — no  matter  how  commendable 
— will  result  in  yielding  any  additional  reward  to  the  investors  who  are  supposed 
to  appoint  and  control  the  management.  This  is  recognized  to  be  one  of  the 
fundamental  weaknesses  of  the  whole  service-at-cost  scheme.  It  inheres  even 
in  the  scheme  of  continuous  state  regulation  whenever  the  rules  restricting  the 
:ompanies  to  a  fair  return  are  consistently  applied.  An  effort  to  get  away  from 
:his  difficulty  by  providing  some  incentive  for  economical  and  efficient  manage- 
Tient  through  the  use  of  a  sliding  scale  schedule  applicable  to  the  return  upon 
:apital  and  dependent  upon  the  rate  of  fare  charged  was  made  in  the  Dallas  and 
Cincinnati  service-at-cost  ordinances,  but  in  neither  case  thus  far  has  the  sliding 
scale  come  into  play,  and  for  that  reason  no  positive  experience  with  the  effect 
jf  the  sliding-scale  plan  in  the  control  of  street  railway  fares  is  yet  available. 
The  scheme  is  adapted  from  the  so-called  Boston  sliding  scale  which  was  applied 


742  Appendix  B 

some  years  ago  in  the  case  of  the  Boston  Consolidated  Gas  Company.  In  fact, 
the  plan  was  originally  imported  froni  England  where  also  it  has  been  applied 
to  gas  companies.  The  Denver  "Service-at-Cost"  ordinance,  as  drafted  by  the 
Tramway  Adjustment  Committee,  incorporated  the  sliding  scale  feature.  This 
was  based  upon  the  assumption  that  the  service-at-cost  experiment  would  be 
started  off  at  a  6-cent  fare.  The  company  would  be  entitled  to  an  additional 
Yi  of  1  per  cent  on  the  capital  value  so  long  as  it  was  able  to  maintain  this  initial 
rate  of  fare,  and  if  it  succeeded  in  reducing  the  adult  fare  to  5'/^  cents  by  ticket, 
it  would  be  entitled  to  take  as  a  part  of  the  return  upon  capital  another  Vi  of 
1  per  cent,  thus  raising  the  ultimate  return  to  7'/^  per  cent.  In  like  manner,  if 
the  company  succeeded  in  reducing  the  fare  to  5  cents  its  ultimate  rate  of  return 
would  be  7%  per  cent,  and  if  it  reduced  the  fare  below  5  cents,  the  ultimate 
return  upon  the  investment  would  be  a  full  8  per  cent. 

While  I  recognize  the  need  for  some  sort  of  an  incentive  to  induce  the 
management  to  provide  efficient  and  economical  operation  under  a  service-at-cost 
plan,  I  have  not  had  any  confidence  that  the  sliding-scale  schenie,  with  its  auto- 
matic adjustment  of  the  rate  of  return  to  the  rate  of  fare,  can  work  out  bene- 
ficially to  the  public  in  the  case  of  a  street  railway.  Any  automatic  plan  that 
furnishes  a  direct  incentive  to  economy  is  likely  to  result  in  a  scamping  of  service, 
greatly  to  the  detriment  of  the  traveling  public.  It  may  be  that  in  the  case  of 
gas  companies,  where  the  standards  of  service  are  relatively  simple,  this  diffi- 
culty can  be  overcome  by  diligent  public  control,  but  in  the  case  of  local  transpor- 
tation the  elements  entering  into  good  service  are  numerous  and  complex,  and  it 
seems  to  me  that  any  scheme  of  public  control  of  serv-ice  is  likely  to  be  thwarted 
if  at  the  same  time  a  definite  reward  is  offered  to  the  management  for  making 
the  service  poor.  If  low  fares  mean  high  dividends,  the  management  of  a  street 
railway  resi)onsible  to  the  stockholders  will  be  pretty  sure  to  sec  that  the  number 
of  straphangers  is  not  unduly  diminished,  and  that  all  of  the  elements  of  service 
which  cost  money  are  restricted  as  far  as  practicable. 

It  is  one  of  the  merits  of  the  service-at-cost  idea  that  the  control  of  the 
service  to  be  rendered  is  to  be  vested  in  the  hands  of  the  public,  and  that  the 
public  can  have  any  kind  of  service  it  wants  if  only  it  is  willing  to  pay  for  it. 
This  idea  negatives  any  scheme  of  control  throusjh  an  automatic  device  for  the 
manipulation  of  financial  inotives.  I  am  satisfied  that  under  any  service-at-cost 
plan  the  control  of  the  cost  of  service,  as  well  as  the  control  of  the  quality  of 
service,  must  be  effected  through  the  exercise  of  continuous  detailed  attention 
and  pressure  on  the  part  of  those  representing  the  public  interest.  For  this 
reason  I  do  not  believe  in  the  automatic  slitling  scale  method  as  a  substitute  for 
vigilant  regulation  and  the  frequently  repealed  exercise  of  responsible  and  intel- 
ligent judgment. 

From  what  I  have  already  said  it  will  be  clear  that  in  my  judgment  the 
Tramway  .\djuslmcnt  Committee's  service-at-cost  plan  was  seriously  defective. 
The  limits  of  this  re|>ort  do  not  permit  nie  to  go  into  a  complete  analysis  of  all 
the  features  of  the  ordinance,  but  without  going  any  further  in  details  I  may  say 
that  in  my  opinion  the  purchase  clause,  the  arbitration  clause,  and  the  provisions 
for  the  fare  control  fund  and  for  the  renewals  and  depreciation  reserve  fund  are 


Denver  Tramway  Report  743 

all  open  to  criticism.  On  the  whole,  I  should  say  that  the  ordinance  was  by  no 
means  as  carefully  worked  out  or  as  well  calculated  to  protect  the  public  interests 
as  the  Cleveland  plan.  Moreover,  it  strikes  me  that  if  the  service-at-cost  idea  is 
to  be  weakened  the  farther  it  gets  away  from  its  point  of  origin  and  the  more 
light  we  have  upon  its  merits  and  defects,  then  instead  of  being  a  panacea  for 
the  ills  of  the  street  railway  business,  as  many  enthusiasts  would  now  regard  it,  it 
will  prove  to  be  a  scheme  fraught  with  danger,  and  may  even  have  the  efi'ect  of 
making  the  ultimate  solution  of  the  transit  problem  more  difficult  instead  of 
easier.  Surely,  no  city  can  afford  to  adopt  the  service-at-cost  plan  except  after 
the  most  careful  deliberation,  and  with  the  most  complete  safeguarding  of  the 
public  interest. 

With  respect  to  the  "Elastic  6c  Fare"  ordinance,  not  much  need  be  said. 
Its  sole  purpose  was  to  provide  machinery  for  moving  fares  up  and  down  to 
meet  changes  in  wage  schedules  of  the  Tramway  employes.  It  appears  that  the 
efifect  of  this  ordinance  would  have  been  to  establish  a  tendency  toward  the 
stabilization  of  wages  at  the  point  where  they  were  at  the  time  when  it  was  voted 
upon.  While  the  increase  of  fares  to  cover  an  increase  in  wages,  or  the  decrease 
of  fares  to  take  up  the  slack  brought  about  by  a  decrease  in  wages,  was  not  to  be 
mandatory  upon  the  board  of  control  but  merely  permissive,  the  action  of  the 
board  in  case  it  decided  to  change  the  fares  was  closely  circumscribed.  Where 
wages  had  been  increased  the  fares  could  not  be  increased  more  than  sufficient 
to  take  care  of  the  wage  increase :  and  where  wages  had  been  decreased  the  fares, 
if  lowered,  could  not  be  decreased  less  than  sufficient  to  cover  the  amount  of  the 
decrease  in  wages.  The  best  that  can  be  said  for  such  a  plan  is  that  nobody  can 
tell  for  certain  how  it  would  work  out.  Its  apparent  purpose  was  to  make  the 
rate  of  fare  flexible  only  with  respect  to  changes  in  the  rates  of  wages.  It  did 
not  contemplate  a  fluctuation  in  rates  of  fare  as  a  result  of  general  causes,  such, 
for  example,  as  the  introduction  of  one-man  car  operation,  or  changes  in  the  cost 
of  power  or  materials  entering  into  street  railway  service.  Apparently,  it  did 
not  contemplate  the  possibility  that  the  increase  in  traffic  might  under  certain  con- 
ditions absorb  wage  increases,  though  it  is  quite  possible  that  under  the  terms  of 
the  ordinance  this  could  have  been  taken  into  consideration  by  the  board  of  con- 
trol. One  provision  of  the  ordinance  which  1  never  like  to  see  in  such  a  measure 
was  to  the  effect  that  fares  could  not  be  increased  to  take  care  of  a  wage  increase 
based  upon  an  hourly  schedule  above  the  average  paid  to  street  railway  employes 
at  the  time  in  five  other  cities.  The  ordinance  did  not  even  define  this  standard 
as  being  applicable  to  motormen  and  conductors,  and  under  its  terms  the  board 
of  control  would  have  been  compelled  to  figure  out  in  the  best  way  it  could  the 
average  wage  schedule  paid  to  the  "employes"  in  the  five  cities  mentioned.  In 
any  case,  the  adoption  of  such  a  standard  is  a  mere  lazy  man's  way  of  avoiding 
responsibility.  Such  a  plan  would  throw  upon  the  employes  of  the  other  cities 
the  primary  burden  of  securing  wage  increases  which  the  Denver  employes  would 
then — with  little  effort  of  their  own — proceed  to  enjoy.  However,  if  the  em- 
ployes of  the  other  cities  or  some  of  them  were  unsuccessful  in  their  efforts  to 
secure  higher  wages,  the  Denver  employes  would  have  to  "tag  along."     For  these 


744  Appendix  B 

reasons  I  do  not  think  that  the  "Elastic  6c  Fare"  ordinance  was  a  measure 
designed  with  sufficient  care  and  skill  to  be  used  as  a  means  of  settling  either  the 
financial  or  the  labor  problems  of  the  Denver  Tramway  Company. 


IV. 

A  discussion  of  the  methods  pursued  by  the  Denver  Tramway  Company 
with  respect  to  maintenance,  replacements  and  depreciation,  as  revealed  by 
the  company's  reports. 

It  appears  from  the  annual  reports  of  the  Denver  Tramway  Company  to  its 
stockholders,  and  from  the  statements  submitted  by  the  company  to  the  Tramway 
Adjustment  Committee,  that  prior  to  the  company's  appeal  to  the  Colorado  Public 
Utilities  Commission  for  permission  to  charge  an  increased  fare  little  or  no  pro- 
vision had  been  made  for  accruing  depreciation  other  than  the  current  expendi- 
tures for  mantenance.  In  its  appeal  to  the  Utilities  Commission  the  company 
submitted  an  estimate  intended  to  show  that  for  the  year  1917  "the  annual 
accrual  for  depreciation,  renewals  and  obsolescence"  was  approximately  $892,140. 
In  Tramway  Letter  No.  6,  submitted  to  the  Tramway  Adjustment  Committee 
under  date  of  February  8,  1919,  the  company  explained  the  basis  for  this  estimate. 
The  amount  charged  to  maintenance  and  renewals  in  1916  and  1917  by  the  San 
Francisco  Municipal  Railway  was  figured  out  at  $7,434  per  mile;  the  amount 
charged  in  Cleveland,  at  $5,7SO  per  mile,  and  the  amount  charged  by  the  Chicago 
.'Surface  Lines  at  $5,310  per  mile,  showing  an  average  of  $6,174  per  mile  for  these 
three  systems.  The  Tramway  Company  then  assumed  that  $5,000  per  mile  on 
the  city  lines  and  $4,000  per  mile  on  the  interurban  lines  would  be  a  proper  figure 
for  Denver,  and  from  the  $1,215,000  i)cr  annum  thus  arrived  at,  it  deducted  the 
$320,860  actually  s])ent  in  current  maintenance  in  1917,  and  thus  reached  the 
figure  $892,140  claimed  by  it  as  the  necessary  allowance  to  cover  depreciation 
accnied  during  that  year  and  not  cared  for  by  maintenance. 

The  Colorado  commission  found  that  during  1917  $150,000  of  the  amount 
expended  for  maintenance  was  for  replacements  properly  chargeable  to  deprecia- 
tion reserve.  Its  engineers  estimated  the  annual  depreciation  requirements  of 
the  entire  system  of  the  Denver  Tramway  Company  at  $()77,644  on  the  straight 
line  basis,  and  at  $435,275  on  a  4  jkt  cent  sinking  fund  basis.  Without  stating 
the  basis  for  its  final  decision  and  without  prescribing  the  method  to  be  used  by 
the  company  in  handling  the  de])reciation  reserve,  the  commission  fixed  the 
annual  depreciation  requirements  at  $500,000,  of  which  90  per  cent  was  attributed 
to  the  city  lines. 

Sul)se(iuent  to  the  commission's  decision,  the  Board  of  Directors  of  the 
Denver  Tramway  Company,  in  July,  1918,  decided  that  $300,000  per  annum 
should  be  "the  minimum  annual  accrual  to  cover  depreciation  and  renewals." 
an<l  this  decision  was  made  retroactive  to  cover  the  year  1917.  The  company's 
annual  report  for  the  year  1918  shows  that  the  .sum  of  $218,448.21  was  charged 
to  profit  and  loss  on  account  of  "additional  depreciation  accrual"  over  and  above 


Denver  Tramway  Report  745 

the  amount  actually  expended  for  renewals  in  1917.  In  an  exhibit  attached  to 
Tramway  Letter  No.  5,  addressed  to  the  Tramway  Adjustment  Committee  under 
date  of  February  8,  1919,  it  is  shown  that  the  amount  actually  expended  for  re- 
placements and  charged  to  maintenance  during  the  year  1918  was  $350,000  as 
compared  with  the  sum  of  $150,000  so  spent  and  charged  during  the  preceding 
year,  and  $150,000  estimated  to  be  so  spent  and  charged  during  the  year  1919. 
The  real  questions  to  be  determined  are  (1)  the  amount  of  depreciation  actually 
accruing  from  year  to  year,  and  (2)  the  extent  to  which  this  depreciation  is  being 
offset  by  expenditures  charged  to  maintenance. 

This  involves  a  discussion  of  the  fundamental  theory  of  depreciation  and 
the  relation  between  annual  depreciation  allowances,  the  depreciation  reserve  and 
the  accrued  depreciation  to  be  taken  into  account  in  the  determination  of  the 
present  fair  value  of  the  property  for  rate  purposes.  It  is  generally  recognized 
by  regulatory  authorities  and  students  of  public  utility  finance  that  one  of  the 
primary  causes  of  the  financial  breakdown  of  the  electric  railways  has  been  their 
neglect  of  accruing  depreciation.  The  present  managements  of  the  companies 
say  that  not  only  did  their  predecessors,  in  their  optimism  with  respect  to  the 
future  earning  power  of  the  electric  railways,  fail  to  see  the  need  of  a  deprecia- 
tion reserve,  but  that  their  earnings  were  in  fact  too  small  to  permit  of  their 
setting  such  a  reserve  aside  if  they  had  recognized  the  need  of  it.  The  situa- 
tion seems  to  be  this :  when  a  street  railway  is  new,  the  necessary  expendi- 
tures for  maintenance  are  very  small,  but  as  the  system  grows  older  the  cost  of 
maintenance  and  replacements  gradually  increases  until,  as  the  experts  say,  the 
system  has  gone  through  a  complete  cycle  of  renewals  and  has  settled  down  to  the 
normal  condition  of  an  old  property.  While  there  may  be  considerable  difference 
of  opinion  as  to  what  that  normal  condition  is,  measured  in  a  percentage  of  cost 
new,  it  is  admitted  that  this  difference  represents  capita!  that  has  been  used  up 
in  the  rendering  of  service.  It  is  what  might  be  termed  an  invisible  operating 
expense.  However,  it  is  further  admitted  that  in  the  ordinary  course  of  develop- 
ment of  a  going  street  railway  property  it  will  never  be  possible  by  a  wise  expen- 
diture of  money  to  restore  the  capital  so  used  up.  It  is  not  correct  to  assume  that 
the  entire  property  is  going  to  depreciate  down  to  zero  and  then  have  to  be  re- 
placed all  at  once.  On  the  contrary,  the  particular  items  of  property  have  dif- 
ferent useful  lives,  and  are  renewed  from  time  to  time  as  occasion  requires. 
After  the  property  has  once  settled  down  to  a  normally  depreciated  condition, 
the  renewals  come  along  from  year  to  year  in  a  comparatively  steady  stream, 
and  a  sum  equivalent  to  the  full  amount  of  accruing  depreciation,  on  the  average, 
will  have  to  be  spent  each  year  for  replacements.  If  during  the  early  life  of  the 
plant  the  full  amount  of  accruing  depreciation  has  been  set  aside  out  of  earnings 
and  not  paid  back  to  the  investors,  a  reserve  will  have  been  accumulated  far  in 
excess  of  any  actual  need  for  replacements.  Theoretically  this  reserve  represents 
the  permanent  depreciation  of  the  property.  As  it  cannot  be  used  in  the  main- 
tenance of  the  property,  it  should  have  been  returned  to  the  investors,  and  a 
corresponding  reduction  in  the  capital  account  made,  or  else  it  should  have  been 
invested  in  additions  and  betterments  without  any  increase  in  the  capital  accoimt. 
In  the  one  case  the  capital  account  upon  which  the  investors  are  entitled  to  earn 


746  Appendix  B 

a  fair  return  under  the  established  rules  of  rate  regulation  will  have  been  reduced 
from  the  original  cost  of  the  property  to  the  original  cost  less  permanent  accrued 
depreciation.  In  the  other  case,  the  property  will  have  been  enlarged  from  time 
to  time  so  that  the  original  cost  of  the  property,  including  the  cost  of  additions 
and  betterments,  less  the  amount  of  the  accrued  depreciation,  will  at  all  times 
be  equal  to  the  construction  cost  of  the  initial  plant,  and  thus  the  integrity  of 
the  company's  investment  will  be  protected. 

It  may  be  said  that  the  whole  issue  in  the  matter  of  depreciation  is  bound 
up  with  the  confusion  in  regard  to  what  the  present  treatment  of  past  history 
should  be.  In  the  Kno.xville  Water  Case  the  United  States  Supreme  Court  clearly 
held  that  in  a  rate  proceeding  accrued  depreciation  should  be  deducted  from  the 
cost  new  of  the  property,  and  that,  if  the  company  had  failed  in  the  past  to  charge 
rates  sufficient  to  take  care  of  depreciation  as  it  accrued,  or  having  collected  suf- 
ficient revenues  for  the  purpose  had  dissipated  them  in  the  payment  of  dividends 
or  otherwise,  the  public  could  not  now  be  made,  through  a  higher  schedule  of 
rates,  to  make  good  the  company's  past  negligence.  Under  this  rule  it  seems  to 
be  clear  that  when  the  rates  of  a  street  railway  are  first  fixed  on  the  service-at- 
cost  principle,  whether  through  the  exercise  of  the  police  power  or  by  means  of  a 
negotiated  contract,  the  full  amount  of  the  accrued  depreciation  of  the  property 
up  to  that  time  should  be  deducted  from  cost  new  in  arriving  at  the  rate  base. 
Therefore,  assuming  that  the  property  has  reached  a  normally  depreciated  con- 
dition, the  entire  amount  of  accruing  depreciation  will  be  oflFset  on  the  average 
from  year  to  year  by  expenditures  for  replacements,  and  under  these  circum- 
stances there  is  sound  reason  for  the  practice  of  combining  maintenance,  depre- 
ciation and  renewals  in  a  blanket  allowance  which,  in  general,  will  correspond 
with  the  amount  of  money  actually  put  into  the  property  from  year  to  year  as  a 
part  of  the  cost  of  operation.  True,  prudence  and  the  fact  that  even  in  an  old 
property  replacements  do  not  come  in  an  ab.solutely  even  stream,  dictate  that  the 
amount  set  aside  out  of  earnings  should  be  sufficient  to  accumulate  a  moderate 
reserve  to  cover  the  unevenness  in  the  actual  requirements  for  replacement  ex- 
penditures. 

The  San  Francisco  Municipal  Railway,  starting  out  as  a  new  enterprise, 
adopted  the  policy  of  setting  aside  a  fixed  percentage  of  the  gross  revenues  for 
depreciation,  and  this  reserve,  during  the  first  seven  years  of  operation,  accumu- 
lated to  the  extent  of  $15,000  per  mile  of  track  in  service  at  the  end  of  the  period. 
I  do  not  know  just  how  this  San  Francisco  depreciation  reserve  is  being  used, 
but  to  the  extent  that  the  bonds  issued  against  the  jiroperty  are  being  paid  off 
and  to  the  extent  tiiat  additions  and  betterments  are  being  made,  this  fund  could 
properly  be  used  for  one  or  both  of  those  purposes.  In  either  case  the  result 
would  be  in  effect  the  decapitalization  of  the  property  to  the  extent  of  the  per- 
manent accrued  depreciation  provided  for. 

In  Cleveland,  under  the  service-at-cost  plan,  no  separate  depreciation  reserve 
has  been  established,  but  a  certain  amount  per  car  mile  is  taken  out  of  current 
revenues  and  expended  for  maintenance  and  renewals,  which  arc  treated  as  a 
part  of  operating  expenses.  Moreover,  one  of  the  chief  reasons  why  the  current 
expenditures   for  maintenance  and   renewals   on   the   Cleveland   Railway   system 


Denver  Tramway  Report  747 

are  so  liberal  is  that,  under  the  terms  of  the  service-at-cost  ordinance,  the  entire 
cost  of  replacements  is  charged  to  operating  expenses,  even  though  the  new  item 
of  property  may  cost  twice  as  much  as  the  original  cost  of  the  identical  item 
replaced.  In  other  words,  under  the  Cleveland  plan  the  replacement  of  identical 
jtenis  of  property  is  treated  as  an  operating  expense,  regardless  of  fluctuation  in 
costs,  whereas  under  the  ordinary  accounting  rules  prescribed  by  the  Interstate 
Commerce  Commission  and  by  the  state  utility  commissions  generally,  it  is  not 
the  property  itself  but  the  original  cost  of  it  that  is  replaced  and  charged  to  oper- 
ating expenses.  In  a  period  of  rising  prices  and  for  quite  a  number  of  years 
after  prices  have  reached  a  high  level,  the  Cleveland  policy  results  in  a  much 
swollen  maintenance  account,  for  the  reason  that  the  street  railway  system  is 
being  rebuilt  on  the  basis  of  a  higher  price  level,  without  any  corresponding  ad- 
justment and  increase  in  the  capital  account. 

Attention  should  be  called  in  this  connection  to  the  confusion  resulting  from 
the  unwarranted  claims  advanced  by  the  Denver  Tramway  Company  in  its  state- 
ments to  the  Tramway  Adjustment  Committee,  and  in  fact  frequently  advanced 
by  street  railway  companies  in  rate  proceedings  during  the  present  abnormal 
times,  to  the  effect  that  on  account  of  the  great  increase  in  the  cost  of  labor  and 
materials  allowance  for  accruing  depreciation  to  cover  the  cost  of  replacements 
ought  to  be  greatly  increased,  when  the  fact  is  that  under  the  systems  of  account- 
ing prescribed  by  the  commissions  the  portion  of  the  cost  of  replacements  repre- 
senting an  increase  over  the  original  cost  of  the  articles  replaced  is  not  to  be 
charged  to  operating  expenses  at  all,  but  to  new  capital. 

An  allowance  for  depreciation,  in  addition  to  the  expenditures  for  current 
maintenance  as  reflected  in  the  companies'  statements  of  operating  expenses,  is 
frequently  made  by  commissions  in  establishing  rates,  but  it  is  impossible  to  say 
in  any  given  case  whether  or  not  the  allowance  is  correct  or  excessive,  except 
upon  the  basis  of  an  actual  detailed  examination  of  the  company's  operating 
expenses  and  of  the  condition  in  which  the  property,  as  a  matter  of  fact,  is  being 
maintained.  True,  the  lesson  of  neglected  depreciation  ought  to  be  well  enough 
learned  so  that  in  the  future  the  regulating  authorities  will  lean  toward  liberality 
in  the  amounts  allowed  for  depreciation,  but  will  accompany  this  liberality  with 
the  enforcement  of  strict  rules  respecting  the  use  of  the  moneys  so  allowed. 
Financial  conservatism  requires  that  depreciation  shall  be  taken  care  of  as  it 
accrues,  but  this  does  not  mean  that  the  public  shall  give  up  its  rights  under  the 
Knoxville  Water  Case  rule,  and.  in  the  guise  of  an  allowance  for  accruing  depre- 
ciation, enable  the  company  in  the  future  to  build  up  a  reserve  to  make  good  all 
of  the  depreciation  that  has  already  accrued.  The  Denver  Tramway  Company 
states  that  in  1918  it  spent  $350,000  for  renewals.  If,  as  a  matter  of  fact,  the 
property  was  in  as  good  a  condition  at  the  end  of  the  year  as  it  was  at  the  begin- 
ning of  the  year,  this  would  indicate  that  the  entire  amount  of  accruing  depre- 
ciation had  been  taken  care  of  through  maintenance,  and  if,  in  point  of  fact,  the 
condition  of  the  property  was  improved  during  the  year,  this  would  indicate  that 
not  only  all  of  the  accruing  depreciation  had  been  taken  care  of.  but  that  some  of 
the  depreciation  accrued  in  previous  years  had  been  made  up. 

Upon  the  data  submitted  I  cannot  determine  closely  the  amount  which  the 


748  Appendix  B 

Denver  Tramway  Company  ought  to  spend  from  year  to  year  in  maintenance 
and  renewals  in  order  to  keep  its  physical  property  up  to  its  present  condition. 
However,  it  is  clear  that  track  mileage  is  a  very  imperfect  basis  for  the  determin- 
ation of  what  such  an  allowance  should  be.  Under  the  Cleveland  plan  the 
allowance  is  based  on  the  number  of  car  miles  run,  which,  in  my  opinion,  is  a 
better,  though  by  no  means  a  perfect  basis,  for  the  determination  of  reasonable 
requirements.  The  Denver  Tramway  Company's  annual  report  shows  that  in 
the  year  1917  the  number  of  passenger  car  miles  run  on  its  entire  system  was 
12,077,487.  At  the  average  rate  allowed  under  the  Cleveland  ordinance  during 
the  year  1917,  namely  4.9  cents  per  car  mile,  the  total  expenditures  of  the  Denver 
Tramway  Company  for  that  year  should  have  been  approximately  $600,000,  as 
compared  with  the  $322,860  reported  by  the  company  as  its  actual  expenditures 
for  current  maintenance.  The  Cleveland  allowance  has  since  been  practically 
doubled,  but  the  necessity  for  the  increase  was  in  large  part  due  to  the  fact  which 
I  have  already  explained,  namely,  that  the  full  cost  of  replacements  is  charged  to 
oi)crating  expenses  under  the  Cleveland  contract,  even  though  at  prices  now 
prevailing  this  cost  is  very  much  greater  than  the  original  cost  of  the  articles 
replaced. 

Whatever  policy  is  followed  with  respect  to  accruing  depreciation,  it  should 
be  made  to  "tie  in"  with  the  treatment  of  accrued  depreciation  in  the  valuation. 
The  company  cannot  be  permitted  in  one  breath  to  assert  that  its  property  for  ■ 
valuation  purposes  has  not  depreciated  a  dollar,  while  in  the  next  it  stoutly  main- 
tains that  for  revenue  purposes  the  property  is  going  to  the  scrap  heap  on  the 
straight  line  basis  to  the  tune  of  several  hundred  thousand  dollars  a  year. 

Respectfully  submitted, 

Delos  F.  Wilcox 


I 


NOTES  AND   REFERENCES 


TO 


ANALYSIS   OF  THE   ELECTRIC   RAILWAY   PROBLEM 


Chapter  I 

Note  i  (Page  3).  The  New  York  City  traffic  figures  for  the  year  ended  June  30, 
1920,  are  as  follows :  Total  Revenue  Passengers,  2,364,775,067.  Revenue  Rides  Per 
Capita,  421. 

Chapter  II 

Note  i  (Page  6).  On  May  i,  1920,  the  wages  of  motormen  and  conductors  in 
Cleveland  were  advanced  to  the  following  scale:  70  cents  per  hour  for  the  first  three 
months,  7^  cents  for  the  next  nine  months  and  75  cents  thereafter.  The  same  scale  was 
put  into  efifect  in  Detroit  on  May  16,  1920.  In  Chicago  a  still  higher  scale  was  adopted 
as  of  June  I,  1920,  the  rate  on  the  surface  lines  being  75  cents  for  the  first  three  months, 
78  cents  for  the  next  nine  months  and  80  cents  after  the  first  year,  with  82  cents  for 
night  operation.  In  Philadelphia  the  trainmen  are  not  members  of  the  Amalgamated 
Association  of  Street  and  Electric  Railway  Employes,  but  their  wages  are  adjusted  from 
time  to  time  to  the  average  wages  paid  to  trainmen  in  the  four  cities,  Chicago,  Cleve- 
land, Detroit  and  Bufifalo.  On  this  basis  the  Philadelphia  wage  rate  should  have  been 
increased  to  72^/2  cents  on  June  i,  1920.  The  increase  could  not  be  paid  at  the  time 
because  of  insufficient  revenues  under  the  five-cent  fare.  Subsequently,  when  the  seven- 
cent  fare  became  effective  in  Philadelphia,  November  i,  1920,  the  72^-2  cent  wage  scale 
was  put  into  effect. 

The  peak  of  motormen's  and  conductors'  wages  was  reached  in  the  increases  in 
Chicago,  Cleveland,  Detroit  and  Philadelphia  in  1920.  The  cost  of  living  reached  its 
maximum  in  the  summer  of  1920.  By  May  l,  1921,  as  measured  by  the  index  compiled 
by  the  National  Industrial  Conference  Board,  it  had  fallen  19  per  cent  from  the  maxi- 
mum and  stood  at  166,  as  compared  with  100  representing  the  cost  of  living  in  1914. 
Under  the  influence  of  the  general  downward  trend  of  prices  and  the  decrease  in 
revenues  resulting  from  the  business  depression  coupled  with  high  rates,  street  railway 
trainmen's  wages  have  been  coming  down  in  connection  with  the  readjustment  of  con- 
tracts in  1921.  On  April  15,  1921,  the  Cleveland  trainmen's  union  voted  2,158  to  348 
to  accept  a  20  per  cent  reduction  in  wages  beginning  May  I.  The  new  Cleveland  scale 
is  55  cents  for  the  first  three  months  of  service,  58  cents  for  the  next  nine  months  and 
60  cents  after  the  first  year.  The  men  voted  in  favor  of  the  wage  cut.  rather  than  go 
to  arbitration  with  the  issue  of  the  "open  shop"  to  be  included  as  a  question  to  be  passed 
upon  by  the  arbitrators,  as  proposed  by  the  company.  Later  on,  the  same  scale  was  also 
accepted  by  the  employes  of  the  Dietroit  United  Railway  effective  as  of  May  I,  1921. 

749 


750  Electric  Railway  Problem 

Another  illustration  of  the  recent  wage  changes  is  that  of  the  motormen  and  con- 
ductors on  the  city  lines  of  the  Michigan  United  Railways  Company,  operating  in 
Jackson,  Kalamazoo,  Lansing  and  Battle  Creek.  As  a  result  of  arbitration  the  wage 
scale  was  increased  June  I,  1920,  from  40  cents  for  the  first  year  and  42  cents  there- 
after to  60  cents  and  62  cents.  When  the  year's  contract  expired  in  1921  the  men 
accepted  a  cut  to  44  cents  and  46  cents,  with  5  cents  additional  for  operators  of  one-man 
safety  cars. 

On  May  I,  1921,  the  Philadelphia  scale  was  reduced  7V2  cents  per  hour  as  a  result 
of  decreases  in  Detroit  and  Cleveland.  The  Philadelphia  scale  for  surface  motormen 
and  conductors  is  now  60  cents  for  the  first  three  months.  63  cents  for  the  next  nine 
months  and  65  cents  thereafter.  Beginning  August  i.  1921,  the  wages  of  trainmen  on 
the  Public  Service  Railway  lines  in  New  Jersey  will  be  46  cents  for  the  first  three 
months,  48  cents  for  the  next  nine  months,  and  60  cents  after  the  first  year,  with  5 
cents  per  hour  extra  for  operators  of  one-man  cars. 

Note  2  (Page  6).  The  "Proceedings"  referred  to  here  and  elsewhere  in  the  "Analy- 
sis" are  the  "Proceedings  of  the  Federal  Electric  Railways  Commission,  held  in  Wash- 
ington, D.  C,  during  the  months  of  July,  August,  September  and  October,  1919.  together 
with  Final  Report  of  the  Commission  to  the  President,"  published  in  three  volumes.  The 
distribution  of  the  "Proceedings"  was  undertaken  by  the  American  Electric  Railway 
Association,  8  West  40lh  Street.  New  York  City.  The  following  announcement  appeared 
in  the  Electric  Railway  Journal  of  April  23,  1921  : 

"Acting  Secretary  J.  W.  WVlsli  of  the  .■\merican  .Association  has  notified  nicmlwr  com- 
panies that  a  limited  supply  of  the  complete  proceedings  of  the  Federal  Electric  Railways 
Coinmission  report,  bound  in  buckram,  arc  available.  As  far  as  the  supply  will  permit,  the 
association  will  furnish  without  charge  a  complete  set  of  the  volumes  to  any  city  or  college 
librar>'.  or  to  any  city  official  designated  by  a  member  company.  .As  the  requests  must  come 
through  the  member  companies  and  as  the  librarians  may  not  know  about  the  report,  it 
devolves  upon  electric  railway  officials  to  take  the  initiative  in  seeing  that  their  local  college 
and  public  libraries  are  given  an  opportunity  to  secure  these  volumes." 

In  addition  to  the  copies  of  the  Proceedings  purchased  and  distributed  by  the  American 
Electric  Railway  Association,  500  copies  were  run  off  for  the  Government  Printer  and 
copies  may  be  purchased  from  him. 

Chapter  III 

Note  I  (Page  u).  This  is  the  printed  "Argument  and  Brief,"  submitted  on  behalf 
of  the  Amalgamated  A.ssociation  of  Street  and  Electric  RaiUvay  Employes  of  America 
by  W.  Jctt  Lauck.  For  copies  address  Mr.  Lauck,  712  Southern  Building,  Washington, 
D.  C,  or  W.  D.  Mahon.  International  President  of  the  Amalgamated  Association,  Detroit, 
Mich. 

Chapter  VI 

Note  i  (Page  2q).  This  report  of  the  Committee  on  Public  Service  Securities  was 
published  in  the  I.  B.  A.  of  A.  Bulletin  of  December  3.  1919.  issued  from  the  office  of 
the  Secretary  of  the  Investment  Bankers  Association  of  America.  11  West  Monroe 
Street,  Chicago.  111.  On  May  i,  1921,  the  Association  had  a  membership  of  541  main 
offices  and  250  branch  offices. 

Chapter  VII 

Note  I  (/'(j(7f  .?-').  Public  Utilities  Reports.  1918E.  page  910;  Reports  of  the 
Board  of  Public  Utility  Commissioners  of  the  State  of  New  Jersey,  Vol.  VI,  page  269. 


Notes  and  References  751 

Chapter  IX 

Note  i  (Page  42)-  After  being  still  further  revised,  this  exhibit  was  filed  a  third 
time  with  the  Commission  under  date  of  December  3,  191 9. 

Chapter  X 

Note  i  {Page  45).  See  "Award  and  Findings  of  A.  A.  Stearns,  J.  R.  Nutt,  and 
W.  E.  Davis,  Arbitrators,  between  the  City  of  Cleveland  and  the  Cleveland  Railway 
Company  on  the  question  of  increase  in  interest  rate  upon  the  capital  stock  of  the 
company;  together  with  brief  in  behalf  of  the  company  and  ordinance  of  the  city  amend- 
ing Ordinance  No.  48845-A,  as  directed  by  award."    December,  1919. 

Chapter  XI 

Note  i  {Page  55).  The  report  of  Committee  on  Valuation  of  the  American  Elec- 
tric Railway  Association  was  approved  by  the  Executive  Committee  of  the  Association, 
June,  1919,  and  ordered  published.  A  full  abstract  of  this  report  appeared  in  the  Elec- 
tric Railway  Journal  of  August  2,  1919,  Vol.  54,  page  222.  The  report  was  presented 
at  the  Atlantic  City  convention  of  the  Association,  October  8,  1919.  It  was  issued  in 
pamphlet  form  from  the  office  of  the  Secretary  of  the  Association,  8  West  40th  Street, 
New  York  City. 

Note  2  {Page  ^4).  In  an  article  published  in  the  Electric  Railway  Journal  of 
May  7.  1921  (page  873),  entitled  "Depreciation  in  San  Francisco,"  a  table  is  given 
showing  that  the  total  amount  of  funds  voted  by  the  City  of  San  Francisco  for  its 
municipal  railways  up  to  December  31,  1920,  amounted  to  $5,826,552.47.  During  the 
eight  years  of  operation  the  municipal  railway  had  received  a  total  revenue  (with  the 
fare  at  5  cents)  of  $15,078,490.49.  The  operating  expenditures  during  the  same  period 
had  been  $9,561,758.63,  and  net  earnings  before  deduction  of  taxes  and  depreciation. 
$5,516,731.86.    The  net  earnings  had  been  distributed  as  follows: 

Interest  on  outstanding  bonds    $1,642,322.03 

Redemption   of   maturing   bonds    899,300.00 

Extensions    and    betterments     1,188,150.20 

Depreciation 1,266,832,01 

Compensation    insurance     156,628.69 

Materials    and    supplies    150,57872 

Advanced  to  Twin  Peaks  Tunnel   82.152.52 

Accidents,  damages,  etc 130,767.68 

$5,516,731.86 

Another  indication  of  what  the  electric  railways  could  have  done  under  the  five- 
cent  fare  in  pre-war  times  by  w-ay  of  accumulating  depreciation  and  amortization 
funds,  if  the  interests  in  control  had  been  bent  upon  pursuing  a  conservative  finan- 
cial policy,  is  found  in  the  experience  of  Cleveland  under  the  Tayler  service-at-cost 
ordinance  during  the  eight  years  from  1910  to  1918.  As  a  result  of  the  adoption 
of  the  Tayler  plan,  street  railway  fares  in  Cleveland  were  reduced  from  5  cents  to 
3  cents.  The  3-cent  fare,  with  some  variations  in  transfer  charges,  continued  in  effect 
until  December  26,  1917,  and  it  was  not  until  August  4,  191 8,  under  war  conditions,  that 
the  fare  got  back  to  5  cents.  In  an  address  before  the  National  Municipal  League  at  its 
Indianapolis  Convention  in  November,  1920,  Judge  Fielder  Sanders,  City  Street  Rail- 
road Commissioner  of  Cleveland,  said :  "'One  tremendous  result  of  this  low  fare  in 
Cleveland  not  to  be  forgotten  is  the  fact  that  its  car  riders  in  eight  years  between  1910 


752  Electric  Railway  Problem 

and  1918  have  saved  more  than  thirty  million  dollars,  over  and  above  what  they  would 
have  paid  if  the  fare  had  continued  at  5  cents  under  the  pre-existing  private  manage- 
ment as  in  other  cities ;  or,  in  other  words,  they  have  saved  for  their  own  use  an  amount 
which,  if  it  had  been  put  in  a  sinking  fund,  would  have  purchased  all  of  the  railway 
company's  property  in  September,  1918."  (See  National  Municipal  Review  for  Febru- 
ary, 1921,  special  supplement  on  "Service  at  Cost.") 

Chapter  XII 
Note  i   (Page  59).    See  Note  i.  Chapter  V'll. 

Chapter  XIII 

Note  i  (Page  62).  On  November  14,  1920 — two  years  after  the  signing  of  the 
Armistice  and  more  than  one  year  after  the  close  of  the  hearings  of  the  Federal  Electric 
Railways  Commission — the  Cleveland  fare  at  last  was  forced  up  to  the  maximum  per- 
mitted under  the  amended  Tayler  service-at-cost  ordinance,  viz. :  6  cents  cash  fare,  9 
tickets  for  50  cents,  and  i  cent  for  transfer,  with  no  rebate.  See  also  Note  3.  Chapter 
XXVII. 

Note  2  (Page  64).  Published  as  a  document  of  the  Commonwealth  of  Massachu- 
setts. For  copies  address  Commission  of  the  Department  of  Public  Utilities,  15  Ash- 
burton  Place,  Boston,  Mass. 

Note  3  (Page  66).  The  members  of  the  Committee  on  One-Man  Car  Operation 
were :  C.  W.  Kellogg,  of  Stone  &  Webster,  chairman ;  S.  W.  Greenland,  of  Fort  Wayne 
and  Northern  Indiana  Traction  Company ;  J.  K.  Punderford,  of  the  Connecticut  Com- 
pany; J.  C.  Thirlwall,  of  the  General  Electric  Company;  C.  H.  Beck,  of  the  Westing- 
house  Traction  Brake  Company,  and  Clarence  Renshaw,  of  the  Westinghouse  Electric 
and  Manufacturing  Company.  The  Committee's  report  was  published  in  pamphlet  form 
by  the  American  Electric  Railway  Association,  8  West  40th  Street,  New  York  City. 

Note  4  (Page  66).  Henry  Ford's  promised  gasoline  street  car  has  not  yet  material- 
ized (June,  1921).  The  City  of  Detroit  in  constructing  its  municipal  railway  lines  for 
electrical  operation,  however,  has  adopted  a  new  type  of  track  construction  which  is 
said  to  be  much  less  expensive  than  the  old  type.  It  has  had  25  safety  cars  in  operation 
since  February  i,  1921,  and  according  to  a  statement  issued  by  the  Street  Railway  Com- 
mission, May  7,  1921,  it  has  ordered  125  additional  safety  cars,  to  be  delivered  from 
June  20  to  September  15  of  the  current  year.  It  was  also  announced  that  cars  of  the 
Peter  Witt  type  would  be  ordered  for  use  on  the  heavy  traffic  lines. 

Chapter  XIV 

Note  i  (Page  6q).  The  members  of  this  committee  were  P.  H.  Gadsden,  E.  K. 
Hall,  and  H.  H.  Crowcll,  representing  the  American  Electric  Railway  Association,  the 
National  I\lectric  Light  Association,  and  the  National  Commercial  Gas  Association. 

Note  2  (Page  jo).    Published  by  the  author,  Morris  L.  Cooke,  401  West  Walnu 
Lane,  Gcrmantown.  Philadelphia,  Pa. 

Chapter  XV 

Note  i  (Page  Jj).  For  changes  in  the  Cleveland  situation,  see  Note  I,  Chapter 
XIII.  At  the  present  writing  (June,  1921),  the  Intcrborough  Rapid  Transit  Company 
is  still  on  a  5-cent  fare  basis,  and  has  thus  far  escaped  a  receivership.  The  Philadelphia 
Rapid  Transit  Company  has  been  forced  by  the  Pennsylvania  Public  Service  Commis- 


Notes  and  References  753 

sion  to  abandon  the  5-cent  fare  and  charge  7  cents  cash,  with  four  tickets  for  25  cents, 
in  lieu  of  the  abolition  of  transfers,  which  the  company  proposed.  The  Chicago  Surface 
Lines  have  raised  their  fare  to  8  cents  upon  authority  of  the  Illinois  Public  Utilities 
Commission.  The  Capital  Traction  Company  has  also  been  put  up  to  8  cents  cash  fare, 
with  four  tickets  for  30  cents,  because  the  Public  Utilities  Commission  of  the  District 
of  Columbia  decided  that  the  less-profitable  competing  car  line  (the  Washington  Railway 
and  Electric  Company)  needed  this  rate.  The  Union  Street  Railway  Company  of  New 
Bedford  has  retained  the  5-cent  basic  fare,  and  earned  nearly  12  per  cent  on  its  capital 
stock  in  1920.  See  Electric  Railway  Journal,  June  11,  1921,  page  1098.  The  fare  on 
the  Detroit  United  Railway  city  lines  went  up  to  6  cents  in  1920,  but  was  reduced  on 
June  19,  1921,  to  5  cents  cash,  with  a  i-cent  transfer  charge.  Even  in  Indianapolis  the 
6-cent  cash  fare,  with  20  tickets  for  $1  and  a  i-cent  transfer  charge,  was  put  into  effect 
beginning  April  18,  1921.  A  few  weeks  later,  in  June,  1921,  the  5-cent  cash  fare  was 
restored,  with  a  2-cent  transfer  charge.  In  San  Francisco  both  the  private  and  the 
municipal  lines  have  kept  the  5-cent  fare,  but  in  Seattle  under  municipal  operation  the 
cash  fare  has  gone  up  to  10  cents  and  the  ticket  fare  to  &,i  cents.  The  result  in  Seattle 
is  partly  due  to  the  fact  that  the  city  bought  the  Stone  &  Webster  properties  at  a  high 
valuation,  and  undertook  to  pay  for  them  out  of  the  earnings  within  20  years,  besides 
meeting  all  the  costs  of  operation,  maintenance  and  depreciation.  (See  also  Note  4, 
Chapter  XLII).  With  the  falling  off  of  traffic,  and  a  substantial  drop  in  wages  and 
material  prices,  the  increase  in  street  railway  fares  at  the  present  time  (June,  1921) 
seems  to  have  been  checked,  and  a  tendency  downward  is  now-  apparent. 

Chapter  XVI 

XoTE  I  (Page  ^q).  The  entire  series  of  tables  and  charts  prepared  by  Mr.  Welsh, 
including  Chart  C-122,  leferred  to  at  this  point  in  the  text,  have  been  reproduced  in  the 
Proceedings,  Volume  III,  pages  2221  to  2252. 

XoTE  2  (Page  85).  The  number  of  operating  street  railways  in  New  York  City 
listed  by  the  Public  Service  Commission  in  its  statistical  reports  for  the  fiscal  year  ended 
June  30,  1920,  was  36.  This  included  several  lines  operate;d  by  receivers  and  several 
lines  which  had  only  recently  resumed  independent  operation  as  a  result  of  cancellation 
of  leases.  The  operation  of  one  company's  lines  has  since  been  undertaken  by  the  city. 
The  aggregate  operating  revenue  of  all  the  companies  for  the  year  was  $127,880,166.06. 
Taxes  amounted  to  $7,353,877.53,  or  5.75  per  cent  of  revenue. 

Chapter  XVII 

XoTE  I  (Page  gi).  "Studies  in  the  Cost  of  Urban  Transportation  Service,"  by 
F.  \\'.  Doolittle,  Director,  Bureau  of  Fare  Research,  American  Electric  Railway  Asso- 
ciation.   Published  by  the  Association,  8  West  40th  Street,  New  York  City. 

Chapter  XX 

Note  i  (Page  100).  The  Special  Street  Railway  Investigation  Commission's  work 
and  report  form  one  of  the  several  interesting  contributions  of  Massachusetts  to  the 
study  of  the  street  railway  problem.  The  commission,  created  by  the  Massachusetts 
legislature,  was  composed  of  the  following  members :  State  Senators  Joseph  W.  Martin, 
Jr.,  Charles  W.  Eldridge,  and  James  L.  Harrop;  Representatives  John  M.  Gibbs,  George 
M.  Worrall,  George  Bunting,  Martin  Hays,  John  L.  Donovan,  Michael  J.  Fitzgerald; 
and,  as  appointees  of  the  Governor,  W.  Cameron  Forbes  and  Gurdon  W.  Gordon. 
Among  other  things,  the  commission  recommended  the  adoption  of  a  service-at-cost  plan 


754  Electric  Railway  Problem 

applicable  to  the  street  railways  of  the  state.  Two  members  of  the  commission — Messrs. 
Worrall  and  Bunting — presented  dissenting  reports  in  favor  of  jnililic  ownership,  while 
Mr.  Donovan  in  another  dissenting  report  expressed  himself  in  favor  of  the  resumption 
by  the  legislature  of  the  powers  of  control  which  had  been  delegated  to  the  Public  Service 
Commission.  A  general  act  carrying  out  the  commission's  recommendations  with  respect 
to  service  at  cost  was  subsequently  passed  by  the  legislature  in  1918:  also  special  acts 
under  which  the  Boston  Elevated  Railway  and  the  Eastern  Massachusetts  Street  Rail- 
way (the  Bay  State  System)  were  taken  over  by  the  state  for  operation  by  boards  of 
public  trustees,  on  a  service-at-cost  basis.  The  Street  Railway  Investigating  Commis- 
sion's report  was  published  as  Mas.sachusetts  Senate  Document  300,  February  i,  1918. 

Note  2  (Page  102).  The  City  of  Bridgeport  endeavored  by  ordinance  in  1920  to 
drive  the  jitneys  out  of  the  streets  entirely.  This  measure,  however,  was  declared  invalid 
by  the  courts  on  July  22  of  that  year,  and  on  August  2  the  Connecticut  Company  ceased 
operation  in  Bridgeport,  contending  that  it  could  not  operate  with  the  jitneys  competing 
and  uncontrolled.  On  September  7,  the  City  Council  pas.sed  a  new  ordinance  outlining 
certain  traffic  routes  to  which  the  jitneys  were  restricted.  The  effect  was  to  bar  the 
jitneys  entirely  from  the  center  of  the  city,  leaving  them  the  right  to  operate  in  the 
outlying  sections  only.  As  a  result,  the  Connecticut  Company,  on  September  20.  1920, 
resumed  operations  in  Bridgeport. 

By  an  act  effective  April  15,  1921,  the  State  of  Connecticut  placed  regulation  of 
the  jitneys  in  the  hands  of  the  State  Public  Utilities  Commission.  After  July  15.  1921, 
any  person  desiring  to  operate  a  jitney  must  apply  to  the  commission  for  a  certificate 
and  must  .satisfy  the  detailed  requirements  of  the  law.  An  applicant  for  a  certificate 
must  indicate  the  route  over  which  he  intends  to  operate  and  must  show  the  necessity 
for  operation  over  such  route.  The  commission  has  power  to  establish  such  rules  as  it 
sees  fit  for  the  further  regulation  of  the  jitneys. 

Note  3  (Page  106).    Public  Utilities  Reports.  ig2oB.  page  86. 

Note  4  (Page  106).  "Report  of  the  Special  Commission  for  the  Investigation  of 
the  Affairs  of  the  Rhode  Island  Company,  made  to  the  General  Assembly  of  the  State 
of  Rhode  Island,  March,  191 8." 

Chapter  XXI 

Note  i  (Page  //.?).  See  Note  i.  Chapter  II,  and  Note  i,  Chapter  XLIII.  Appar- 
ently street  railway  wages  reached  their  peak  in  1920.  Since  the  beginning  of  1921 
marked  reductions  have  taken  place. 

Chapter  XXII 

Note  I  (Page  127).  "Street  Railway  Fares:  Their  Relation  to  Length  of  Haul 
and  Cost  of  Service,"  by  Dugald  C.  Jackson  and  David  J.  McGrath,  McGraw-Hill  Book 
Company,  239  West  39th  Street,  .New  York  City.     First  edition,  1917. 

ClIAITER   XXIII 

Note  I  (Page  /^?5).  The  New  York  Evening  Post  (June  18,  1921)  quotes  New 
York  City  3V2  per  cent  bonds,  due  in  1954,  at  70;  4  per  cent  bonds,  due  in  1959.  at  80; 
4V4  per  cent  bonds,  due  in  igfw,  at  82%  :  4I  o  per  cent  bonds,  due  in  1957,  at  88  and  S-^V^. 

Note  2  (Page  ijio).  I'pon  cross-csamination  by  Commissioner  Sweet,  Mr.  Bertron 
further  elaborated  his  ideas  about  municipal  ownership.  This  additional  testimony,  not 
cited  in  the  te.\t  of  this  report,  is  found  at  pages  549  to  552  of  the  Proceedings,  as  follows: 

"Commissioner  Sweet:    You  exprcs.scd  a  fairly  favorable  opinion  of  municipal  ownership? 
"Mr.  BertPon:     I  personally  think  it  will  come  to  that  in  time. 


Notes  and  References  755 

"Commissioner  Sweet:     You  think  it  will  come  to  that? 

"Mr.  Bertron  :     Yes;  that  is  only  a  personal  opinion. 

"Commissioner  Sweet :  Do  you  base  that  on  your  idea  of  the  situation  as  it  is,  especially 
with  regard  to  public  sentiment,  etc.,  or  upon  what  you  regard  as  really  the  best  for  the 
public? 

"Mr.  Bertron  :  Well,  there  is  a  general  disposition  on  the  part  of  any  municipality  to 
run  thtir  own  property.     They  dislike  having  it  owned  and  operated  from  a  distance. 

"Commissioner   Sweet :     Yes. 

"Mr.  Bertron  :  They  would  like  to  have  it  operated  at  home,  very  naturally.  Well,  it 
is  not  a  far  step  from  that,  if  you  are  going  to  operate  at  home,  to  work  out  a  business  plan 
for  operating  it.  and  they  will  not  concede  that  someone  else,  living  at  a  distance,  has  any 
better  business  judgment  than  they  have  for  operating  the  company,  and  they  know  that 
they  will  be  able  to  get  the  money  cheaper,  and  hence  should  get  the  service  cheaper.  There- 
fore, the  logic  of  the  situation  is,  isn't  it,  that  it  should  come  to  that  in  these  distinctly  local 
affairs  ? 

"Commissioner  Sweet:  Do  you  know  of  any  objection  on  the  part  of  chambers  of 
commerce  or  of  the  communities  generally  to  having  foreign  capital  come  in  and  invest  in 
industries  of  other  kinds — manufacturing,  for  instance? 

"Mr.  Bertron:  No;  not  so  much  that,  but  there  is  a  distinct  feeling  in  most  munici- 
palities that  they  would  like  to  be  their  own  doctors  on  their  own  municipal  problems. 

"Commissioner  Sweet :  Don't  you  think  there  is.  and  ought  to  be,  a  distinction  between 
water  supplies  and  street  railways  in  regard  to  ownership  by  the  city? 

"Mr.  Bertron :     Somewhat. 

"Mr.  Warren:     What  is  your  answer,   Mr.   Bertron? 

"Commissioner  Sweet :     Somewhat. 

"Mr.  Bertron :     Somewhat. 

"Mr.  Warren:     Somewhat? 

"Mr.  Bertron:  There  is  not  much  danger  of  the  water  company  being  utilized  politically, 
less  than  with  the  street  railway,  on  account  of  the  number  of  employes,  and  all  that 

"Commissioner  Sweet :     The  water  supply  is  somewhat  of  a  natural  monopoly,  is  it  not  ? 

"Mr.  Bertron :     Yes. 

"Commissioner  Sweet :  There  is  a  disadvantage  to  the  municipality  in  having  more 
than  one  water  supply,  ordinarily  ? 

"Mr.  Bertron  :     The  same  is  true  with  the  street  railway.     It  is  a  natural  monopoly. 

"Commissioner   Sweet:     A  natural  monopoly? 

"Mr.   Bertron  :     Yes ;  and  recognized  as  such. 

"Commissioner  Sweet:     Is  not  the  same  thing  true  of  telephone  companies? 

"Mr.  Bertron  :  Well,  that  is  not  local  so  much.  You  have  telephone  .systems  that  are 
a  part  of  great  trunk  lines  rutuiing  all  over  the  country-. 

"Commissioner  Sweet:  Don't  you  think  it  is  a  nuisance  in  a  community  to  have  more 
than  one  company  operatin.g  there? 

"Mr.  Bertron  :     Oh,  unquestionably. 

"Conimis'iioner  Sweet:  If  the  street  railway  company  is  a  natural  mnnopolv  in  the 
same  sense  that  the  water  supply  is  a  natural  monopoly,  why  did  you  make  a  distinction 
between  the  two  with  regard  to  municipal  ownership? 

"Mr.  Bertron  :  The  point  I  made  was  that  there  would  be  more  objection,  probably,  on 
the  part  of  citizens  to  a  municipally  owned  street  raihvay  than  to  a  water  company,  fearing 
lest  they  might  not  have  as  good  business  management.  It  is  a  little  more  complicated 
problem.  They  have  engineers  on  the  outside  and  various  other  things.  They  have  to  keep 
in  touch  with  operations  in  other  cities  and  other  developments  that  take  place. 

"Commissioner  Sweet :     Yes. 

"Mr.  Bertron  :  .And  then,  too,  a  great  many  people  think  it  would  be  a  mistake  to  have 
such  a  large  body  of  men  who  are  employed  upon  street  railways  subject  to  political  influence 
of  various  parties. 

"Commissioner  .Sweet:     Don't  you  think  that  would  he  a  serious  objection? 

"Mr.  Bertron  :  I  think  it  can  be  overcome.  I  think  the  street  railways  can  be  taken 
out  of  politics,  just  as  much  as  the  water  companies,  and  made  an  economic  business  propo- 
sition in  the  municipality.     I  think  it  quite  possible  to  do  it. 

"Commissioner  Sweet  :  You  arc  rather  optimistic  with  regard  to  city  government,  are 
you  not.  then  ? 

"Mr.  Bertron :  Well.  T  think  we  are  on  the  up-grade.  I  am  a  great  believer  in  the 
honestv  of  the  .■American  people,  when  they  know  the  facts. 

"Commissioner  Sweet :  Do  you  think  the  introduction  of  the  commission  form  of  city 
government  has  helped  materially  in  the  (pialitv  and  character  of  those  governments? 

"Mr.  Bertron  :     That  depends  unon  the  localitv.     It  has  in  some,  and  it  has  not  in  others. 

"Commissioner  Sweet :  Do  you  think  at  the  present  time  there  is  a  greater  freedom 
from  hriberv  and  dishonestv  than  there  was  2S  vears  ago? 

"Mr.  Bertron :     I  do,  very  much,  and  I  think  that  when  this  great  body  of  young  men 


756  Electric  Railway  Problem 

that  we  are  dcmol)ili2ing  from  the  military  service,  are  disseminated  throughout  the  country, 
men  who  have  had  discipline,  who  have  had  patriotism,  and  who  have  had  experience,  I  think 
they  are  going  to  be  more  public  spirited,  and  1  look  for  a  distinct  improvement  in  our 
whole  civic  morale  as  a  result  of  what  these  young  men  have  gone  through. 

'"Commissioner  Sweet :  Do  you  think  the  management  under  municipal  ownership  and 
operation  would  Ix;  as  efficient  as  under  private  ownership? 

"Mr.   Bertron :     It  can  be  made  so. 

"Commissioner  Sweet:     Would  it  Ije  likely  to  be? 

"Mr.  Bertron  :  W  ell,  it  can  be  made  so.  Now.  whether  it  would,  would  depend  entirely 
on  how  it  is  handled.  There  are  cities  in  which  they  could  provide  in  the  arrangement  that 
you  have,  say,  two  memlx^rs  of  the  chambers  of  commerce  on  the  board,  a  memlier  of  the 
merchants'  association,  and  two  men  representing  labor,  etc.,  and  take  it  out  of  politics,  and 
run  it  as  a  business  enterprise,     it  can  be  done,  and  I  think  the  people  will  welcome  it. 

"Commissioner  Sweet :  Do  you  think  they  would  have  the  feeling  that  it  was  their 
own  business? 

"Mr.  Bertron:     .\nd  they  would  take  a  pride  in  it. 

"Commissioner  Sweet :  .\nd  you  think  it  would  so  develop  that  they  would  acquiesce  in 
changes  of   fares  with  less  skepticism? 

"Mr.  Bertron:     Oh,  infinitely  less. 

"Commissioner  Sweet :  .\l  the  same  time,  Mr.  Bertron,  don't  you  know  that  up  to  date. 
where  municipal  ownership  has  been  tried,  it  has  not  been  as  efficient  as  private  ownership  ' 

"Mr.   Bertron :     Rarely. 

"Commissioner  Sweet:     What? 

"Mr.   Bertron:     \'ery  rarely. 

"Commissioner  Sweet:     Well,  as  a  rule,  it  has  not  been? 

"Mr.  Bertron:     Yes;  as  a  rule  it  has  not  been. 

"Commissioner  Sweet:  Iton't  you  think  your  discounting  the  future  on  th.it  line  is 
conservative  for  a  banker,  in  assuming  the  conditions  are  going  to  be  better  in  the  hereafter 
than  they  have  been  in  the  past — materially  l)ctter  in  that  regard? 

"Mr.  Bertron  :     I  think  it  will  come. 

"Commissioner  Sweet:  I'ormer  President  Taft,  when  he  appeared  before  us.  expressed 
the  opinion  that,  under  the  i)resent  situation  of  the  street  railway  companies,  they  would 
come  to  municipal  ownership.  ■ 

"Mr    Bertron:     Not  necessarily.  I 

"Commissioner  Sweet:     If  relief  were  not  given  to  the  companies  in  some  wav.  " 

"Mr,  Bertron  :     Oh.  well. 

"Commis.sioner  Sweet :  He  said  he  thought  it  would  be  an  unfortunate  thing  to  have 
to  adopt  municipal  ownership. 

"Mr.  Bertron:     I'nlcss  it  was  properly  safeguarded  and  removed  from  politics,  yes. 

"Commissioner  Sweet :  Well,  that  is  the  problem,  hut  you  can't  remove  anything  that 
is  under  the  control  of  elected  officials  from  politics.  .\  man  who  is  elected  to  office,  the 
mayor  of  a  city  or  an  alderman,  or  whatever  the  office  may  be.  if  he  wants  re-election,  as  most 
officials  do,  is  bound  to  consider  the  methods  by  which  that  may  Ix-  attained,  if  he  is  an 
ordinary,  everyday  human  Ix-ing. 

"Mr.   Bertron :     He  thinks  so,  but   he  makes  a  big   mistake.     T  think  the   people  would    ' 
much   rather  vote   for  a  man   who  was  brave  enough   to  stand   up    for  something —  I 

"Commissioner  Sweet  :     That  is  very  true  i 

"Mr.  Bertron:  (continuing^— than  a  man  who  would  attempt  to  adjust  hira.scif  to  what 
he  thnucht  were  their  wi.-^hes 

"Comtpissioncr  Sweet :  Rut  those  arc  his  purposes,  and  tho.se  arc  his  morals.  Tb.it 
is  almost  inrariably  the  case  He  wants  at  least  one  re-election  as  a  sort  of  endorseme"' 
Now,  aceorcling  to  Im  breadth,  according  to  his  vision,  will  be  the  course  that  be  will  t.i' 
and  1  think  von  will  agree  with  me  that  a  very  large  proportion  of  officials  are  ratlur 
narrow,  not  altniiether  wise,  and  instead  of  taking  a  broader  view  and  doin-j  what  is  ricbt 
and  depending  uiMin  that  for  public  endorsement  in  re-election,  thev  indulge  in  what  w  ■ 
call  ix-ttv  politics  and  seek  to  get  vote.s  here  and  there  by  cultivating  the  good  will  of  t' 
one  or  the  other;  is  not  that  true? 

"Mr    Bertron:     \'er\-    frcfuientlv. 

"CiMumissionrr  S\<eet:     .\\  Ica^t  it  has  Ix-en  true  in  the  past? 

"Mr.   Bertron:     \'crv    freiiuently. 

"Commissioner  Sweet  :  And  vou  are  looking  now  for  a  broader  knowledge  and  a  bigger 
lot  of  "ublic  officials,  tb.isc  who  will   not  ho  controlled  bv  such  narrow  methods' 

"Mr.  Bertron:     In  the  c.rganization,  the  remo\-al  of  the  staff  from  political  atmospli' 
ontirrb-     I  think  that  can  Ik*  Hone. 

"Commissioner  Swre' :  One  nuesiir.n  more  on  this  noint :  Do  vou  think  the  saine 
man  servine  as  !>n  elected  official  or  serving  at  the  head  of  a  street  raijwav  comnanv  as  an 
appointee  of  an  e'ertefl  official,  would  do  as  good  work,  would  Ix-  as  efficient  as  he  would  if 
he  were  employed  by  a  pri^'ale  corporation? 


Notes  and  References  757 

"Mr.  Bertron:     He  should  be. 

"Commissioner  Sweet:     I  am  not  asking  what  he  should  be,  but  do  you  think  he  would  be? 

"Mr.  Bertron :  Well,  I  think  he  would  have  as  much  or  even  more  civic  pride  in  doing 
well  for  his  community  than  he  would  for  a  corporation.  It  would  depend  on  the  man, 
largely. 

Please  don't  misunderstand  me  about  advocating  municipal  ownership  of  these  properties. 
I  think  it  is  better  not  at  this  time.  I  think  we  can  work  out  a  plan,  as  I  said,  an  automatic 
adjustment  on  a  fair  valuation,  to  give  a  fair  return,  and  that  is  the  way  it  should  be  handled; 
but  I  said,  ultimately.  I  think  it  will  come  to  the  other  thing,  because  it  is  the  rational  thing, 
and  the  cheaper  thing. 

"Commissioner  Sweet :  When  you  say  'rational,'  you  mean  in  theory  it  should  be  a 
better  thing? 

"Mr.  Bertron :    Yes. 

"Commissioner  Sweet :  But,  in  practice,  I  do  not  understand  you  to  say  that  now,  at 
the  present  time,  you  consider  that  it  is  the  better  thing? 

"Mr.  Bertron :     I  prefer  to  see  the  other  adopted  first." 

Chapter  XXV 

Note  i  {Page  130).  The  Annals  of  the  American  Academy  of  Political  and  Social 
Science,  January,  1915,  Volume  LVII,  Whole  No.  146,  "Public  Policies  as  to  Municipal 
Utilities."  The  article  referred  to  in  the  text  is  entitled  "Fundamental  Planks  in  a 
Public  Utility  Program,"  and  appears  at  page  8  of  the  volume. 

Chapter  XXVII 

Note  I  (Page  160).  See  Note  i,  Chapter  XV.  Since  February,  1920,  many  of 
the  important  cities  which  then  retained  the  five-cent  fare  have  had  fare  increases, 
including  Philadelphia,  Cleveland,  Buffalo,  Los  Angeles,  Minneapolis,  St.  Paul,  Roches- 
ter, Louisville,  and  others.  However,  the  tide  seems  to  be  turning,  and  the  movement 
looking  to  the  restoration  of  the  S-cent  fare  is  noticeable  in  certain  places. 

Note  2  (Page  161).  Since  the  text  was  written,  some  readjustment  of  fares,  up  or 
down,  has  taken  place  in  a  number  of  these  cities.  The  Public  Trustees  of  the  Boston 
Elevated  Railway  have  experimented  with  a  5-cent  fare  on  certain  lines.  In  their  report 
to  the  Massachusetts  legislature  in  April,  1921,  they  stated  that  eight  of  such  lines  had 
been  established,  with  the  5-cent  fare  restricted  to  certain  hours  and  to  days  other  than 
holidays  and  Sundays.  Five  proved  failures  and  had  been  discontinued,  but  three  were 
still  in  operation  at  that  time. 

It  is  also  noteworthy  that,  following  a  12V2  per  cent  reduction  in  wages  on  the  lines 
of  the  Eastern  Massachusetts  Street  Railway  Company,  as  a  result  of  arbitration,  the 
Board  of  Public  Trustees  on  May  23,  1921,  put  into  effect  a  series  of  fare  reductions  in 
the  form  of  reduced  ticket  rates.  These  reductions  affected  the  street  railway  lines  in 
Lowell,  Lawrence,  Lynn,  Haverhill,  Brockton,  and  other  cities  of  eastern  Massachusetts. 

In  New  Jersey  the  Public  Service  Railway  Company  endeavored  to  put  into  effect 
the  lo-cent  fare  at  the  beginning  of  1921,  but  the  new  rate  was  suspended  by  the  Board 
of  Public  Utility  Commissioners.  Later  on,  in  May,  1921,  after  public  hearings,  the 
company's  application  for  the  lo-cent  fare  was  denied  by  the  hoard,  and  in  July  the 
permanent  fare  was  fixed  at  7  cents  with  a  2-cent  charge  for  transfers. 

Note  3  (Page  164).  Following  the  wage  increase  of  May  i,  1920,  the  Cleveland 
"interest  fund"  was  gradually  depleted  until  on  November  14,  1920,  it  was  found  neces- 
sary to  put  the  fare  up  to  the  maximum  allowed  under  the  Tayler  franchise,  viz.,  6 
cents  cash  and  9  tickets  for  50  cents,  with  a  penny  for  a  transfer.  On  account  of  a 
considerable  decrease  in  traffic,  due  in  part  to  the  industrial  depression  in  Cleveland,  the 
maximum  fare  proved  insufficient  to  cover  the  entire  cost  of  service,  and  at  the  end  of 
February,  1921,  the  "interest  fund,"  originally  established  at  $500,000,  was  entirely  wiped 
out  and  replaced  by  a  deficit  of  $53,425.    Under  normal  conditions  this  fund  acts  as  a 


758  Electric  Railway  Problem 

fare  barometer.  Whon  it  rises  to  $700,000,  the  fare  goes  down.  When  it  sinks  to 
$300,000,  the  fare  goes  up.  Jn  this  case,  the  maximum  fare  allowed  under  the  franchise 
having  failed  to  provide  the  full  cost  of  service,  the  Tayler  plan  appeared  to  be  on  the 
verge  of  breaking  down.  Neither  the  city  nor  the  company  desired  the  fare  to  go  above 
six  cents.  The  only  other  solution  apparent  lay  in  a  reduction  of  operating  expenses. 
The  decrease  in  traffic  permitted  some  decrease  in  the  amount  of  service  given,  and  a 
cut  in  salaries  and  wages  other  than  those  of  the  platform  employes  had  the  effect  of 
improving  the  company's  condition.  The  month  of  March  showed  a  reduction  in  the 
deficit  in  the  interest  fund  from  $53,425  to  $12,090.  It  is  expected  that  the  20  per  cent 
reduction  in  trainmen's  wages,  effective  May  i,  1921,  by  saving  the  company  about 
$100,000  a  month,  will  restore  the  interest  fund  and  ultimately  make  a  reduction  in 
fares  again  possible. 

The  maximum  fare  permitted  under  the  Dallas  franchise  of  191 7  was  5  cents.  But 
in  June,  1920,  permission  was  given  the  company  to  increase  the  fare  to  6  cents  for 
the  period  of  one  year.  Later  on,  the  company  asked  for  an  increase  to  7  cents,  but 
got  the  6-cent  fare  for  another  year.  In  Voungstown  the  fare  went  up  to  9  cen;> 
before  the  end  of  1920,  and  in  Cincinnati  to  9  cents  cash,  with  2  tickets  for  17  cents. 

Chai'TEr  XW'III 

Note  i  (Page  17S).  See  pages  1504  and  2200  of  the  Proceedings;  also  page  no 
of  "Argument  and  Brief"  submitted  to  the  Commission  on  behalf  of  the  Committee  of 
One  Hundred  acting  for  the  American  Electric  Railway  Association,  November  22,  1919. 

Note  2  {Page  195).  On  April  5.  1920,  the  electors  of  Detroit  authorized  a  $15,000,- 
000  bond  issue  for  the  construction  of  an  independent  municipal  street  railway  system. 
Immediately  thereafter,  construction  of  the  new  lines  was  undertaken  by  the  Detroit 
Street  Railway  Commission,  and  on  February  I,  1921.  the  first  section  of  the  system  w,^^ 
placed  in  operation. 

Note  3  {Page  196).  During  the  calendar  year  1919  the  Boston  Elevated  Railway 
deficit  under  the  service-at-cost  plan  was  $2,366,495  with  the  lo-cent  fare  in  effect  after 
July  10.     During  the  year  1920  the  deficit  was  only  $346,952. 

Note  4  {Page  216).  After  an  increase  m  trainmen's  wages,  the  fares  of  the  Mon- 
treal Tramways  Company  were  increased  September  i,  1920,  to  the  following  schedule: 
Cash  fare  7  cents,  with  four  tickets  for  25  cents  or  fifty  tickets  for  $3.  During  the 
period  from  February  10,  1918,  when  the  service-at-cost  contract  went  into  effect,  until 
June  30,  1920,  a  deficit  of  $1,728,811.94  was  accumulated,  of  whicli  $364,700.20  was 
attributable  to  the  12  months  ended  June  30,  1920.  See  "Second  Annual  Report  of  the 
Montreal  Tramways  Commission  to  the  City  of  Montreal,  1919-1920."  On  account  of 
this  deficit,  the  company  had  been  unable  to  pay  to  the  City  of  Montreal  the  sum  of 
$500,000  per  annum  as  rental  for  the  use  of  the  streets. 

Note  5  {Page  217).  At  the  present  writing  (June.  1921 )  negotiations  are  under 
way  for  the  purchase  of  the  Toronto  Railway  Company's  lines  by  the  City  of  Toronto 
on  September  I,  1921.  This  purchase  will  result  in  the  consolidation  of  the  local  street 
railway  lines  of  Toronto  under  municipal  ownership  and  ojieration.  The  price  to  be 
paid  for  the  private  company's  lines  will  l)e  fixed  by  a  Board  of  .Arbitrators,  consisting 
of  Sir  .Adam  Beck  for  tlu-  city.  Sir  Thomas  White  for  the  company,  with  the  chairman 
still  to  be  selected. 

CnAiTER  XXIX 

Note  i  {Page  -v?).  The  Milwaukee  fare  schedule  was  again  modified  on  June 
24,  1920,  by  an  order  of  the  Wisconsin  Railroad  Commission  which  is  still  in  etTcct 


Notes  and  References  759 

(June,  1921).  Under  this  order  the  7-cent  cash  fare  in  the  single-fare  area  was  con- 
tinued, but  the  ticket  rate  was  increased  to  8  tickets  for  50  cents.  In  the  suburban  area 
the  rate  of  3  cents  cash  per  zone,  with  25  tickets  for  50  cents,  was  continued. 

Note  2  (Page  224).  The  average  length  of  the  Providence  zones  as  stated  in  the 
text  is  air  line  measurement.  The  average  track  mileage  in  the  central  2-mile  zone  is 
about  2.4  miles;  in  the  1.75  mile  zone,  about  2  miles,  and  in  the  succeeding  1.5  mile  zones 
about  1.7  miles.  This  zone  plan,  with  the  fares  established  in  September,  1919,  is  still 
in  effect  (June,  1921).  Operating  statistics  of  the  last  two  months  of  1919  show  an 
increase  of  5.65  per  cent  in  the  number  of  revenue  passengers  carried  and  an  increase 
of  24.55  psr  cent  in  the  passenger  revenue  as  compared  with  the  corresponding  period  of 
the  preceding  year.  For  the  full  year  1920  the  increase  in  the  number  of  revenue  passen- 
gers was  4.91  per  cent  and  in  passenger  revenue  20.42  per  cent.  The  first  four  months 
of  1921  showed  a  decrease  of  i  per  cent  in  the  number  of  revenue  passengers  carried, 
and  of  0.91  per  cent  in  the  passenger  revenue.  These  figures  were  furnished  by  A.  E. 
Potter,  General  Manager,  in  a  letter  dated  May  24,  1921.  Their  chief  significance  is 
in  the  fact  that  the  zone  fares  produced  a  substantial  increase  in  passenger  revenue  and 
that  the  system  is  still  in  effect  (June,  1921).  The  increases  for  revenue  passengers  are 
not  entirely  reliable  for  comparative  purposes,  since  the  method  of  counting  the  passen- 
gers changed  more  than  once  with  the  changes  in  the  fare  system  prior  to  September 
28,  1919. 

Note  3  {Page  226).  A  brief  description  of  the  ticket  rates  put  in  force  on  May 
23,  1921,  by  the  Board  of  Public  Trustees  of  the  Eastern  Massachusetts  Street  Railway 
will  be  found  in  the  Electric  Railway  Journal  of  June  4,  1921,  at  page  1057. 

Note  4  {Page  227).  The  zone  system  and  rates  described  in  the  text  are  still  in 
effect  in  Springfield,  Mass.  (June,  1921).  Under  this  plan  the  Springfield  Street  Rail- 
way Company  has  enjoyed  a  substantial  increase  in  operating  revenue,  as  will  be  seen 
from  the  fact  that  for  the  calendar  year  1920  its  revenue  was  13,805,563.94.  as  compared 
with  $2,495,234.98  for  the  calendar  year  1917. 

XoTE  5  {Page  229).  On  August  I,  1920,  the  rates  in  Portland,  Me.,  were  further 
increased  to  10  cents  cash  and  8  cents  ticket  fare. 

Note  6  {Page  234).  On  August  8,  1920,  a  new  rate  schedule  was  put  in  effect  in 
Connecticut  with  7  cents  cash  fare  for  the  initial  zone.  An  outer  zone  about  2  miles 
long  was  created,  in  which  the  fare  was  6  cents.  The  suburban  fare  became  6  cents  for 
2-mile  zones. 

"This  presented  difficulties  in  two  ways,"  writes  President  Storrs  of  the  Connecticut 
Company  in  the  Electric  Railway  Journal  of  January  i,  1921 ;  "it  neither  provided  the 
necessary  revenue  nor  was  satisfactory  to  the  public."  He  then  continues:  "Finally,  on 
November  i,  1920,  a  return  was  made  to  the  old  5-cent  areas,  with  a  lo-cent  fare  and 
commutation  ticket  under  same  conditions  as  before  at  2I2  cents  per  mile.  Its  effect 
cannot  yet  be  correctly  analyzed,  for  it  has  been  in  effect  but  two  months,  months  that 
have  suffered  from  the  general  industrial  depression.  It  is  only  fair  to  state,  however, 
that  from  the  standpoint  of  company  revenue  this  system  seems  to  be  proving  satisfac- 
tory. As  compared  with  corresponding  periods  of  previous  years,  the  increase  in  fare 
has  not  proved  so  objectionable  to  the  public  as  might  have  been  anticipated,  for  the 
number  of  passengers  carried  has  decreased  but  slightly.  Estimates  in  Connecticut  are 
complicated  by  the  jitney  problem." 

Chapter  XXXI 

Note  i  {Page  272).    See  Note  3,  Chapter  XI 11.  \ 


750  Electric  Railway  Problem 

Chapter  XXXIV 

Note  i  {Page  311).  Operation  of  the  first  section  of  the  Detroit  independent  muni- 
cipal railway  lines  commenced  February  I,  1921.  The  operating  deficit  for  the  month 
of  February  was  $2,928.78.  and  for  the  month  of  March.  $3,829.78.  A  portion  of  this 
deficit  was  accounted  for  by  the  fact  that  the  Municipal  Railway  Department  was  charged 
$2,250  per  month  by  the  Detroit  Edison  Company  for  the  reservation  of  machines  in 
one  of  the  Detroit  Edison  Company's  substations.  The  municipal  lines  used  only  a 
small  percentage  of  the  maximum  power  output  of  the  machines  reserved.  It  is  expected 
that  the  ratio  of  operating  expenses  to  operating  revenue  will  decrease  as  the  service  is 
extended.  Under  the  Detroit  charter  the  Street  Railway  Commission  is  obliged  to  make 
the  municipal  street  railway  system  a  self-sustaining  one  as  soon  as  practicable.  .\t  the 
election  held  April  4,  1921,  the  voters  of  Detroit  approved  the  extension  of  the  Municipal 
Railway  by  the  purchase  of  portions  of  the  Detroit  United  Railway  lines  built  under 
day-to-day  agreements,  by  a  vote  of  96.308  to  47,717.  and  at  the  same  time  rejected  a 
30-year  service-at-cost  franchise  proposed  by  the  company,  by  a  vote  of  91.490  to  53.302. 

Note  2  (Page  311).  "Report  of  Street  Railway  Commission  appointed  under  Chap- 
ter 359  of  the  General  Acts  of  1919  to  make  an  Investigation  and  Study  of  the  Street 
Railways  of  the  Commonwealth."  The  members  of  the  commission  were :  From  the 
Senate:  James  F.  Cavanagh,  Leonard  F.  Hardy.  John  J.  Walsh.  From  the  House: 
Wm.  A.  Kneeland,  Benjamin  Loring  Young,  Frank  G.  Allen,  David  J.  Maloney,  Wm. 
H.  McDonnell.  Appointed  by  the  Governor:  Chas.  G.  Washburn,  Roland  W.  Boyden, 
David  A.  Belden,  Charles  S.  Ashley,  Charles  Giddings. 

Note  3  (Page  314).  The  subsidy  policy  as  applied  to  street  railways  seems  not  to 
have  made  much  progress  in  Massachusetts  since  1919.  In  New  York,  the  1921  legis- 
lature, acting  upon  Governor  Miller's  recommendation,  passed  an  act  establishing  a  state- 
appointed  transit  commission  for  New  York  City.  (Chapter  134.  Laws  of  1921.)  One 
of  the  declared  purposes  of  this  act  is  the  adoption  of  a  plan  of  readjustment  for  the 
relief  of  the  transit  emergency  declared  to  exist,  which  shall  contain  provisions  to  bring 
about  "the  receipt  by  the  city  of  sufficient  returns  from  the  operation  of  the  railroads  so 
that  the  corporate  stock  or  bonds  issued  by  the  city  for  the  construction  of  rapid  transit 
railroads  may  be  exempted  in  computing  the  debt-incurring  power  of  the  city  under  the 
constitution  of  the  state."  The  obvious  meaning  of  this  declaration  is  that  the  rapid 
transit  subways  must  be  made  self-sustaining,  and  this  policy  is  to  be  given  effect  even 
if  it  requires  the  abandonment  of  the  5-cent  fare,  which  has  hitherto  been  heavily  subsi- 
dized by  the  City  of  New  York  under  the  "dual"  subway  contracts  of  1913. 

It  is  noteworthy  also  that  the  general  municipal  ownership  law  of  Illinois,  enacted 
in  1913.  expressly  provides  that  the  charges  fixed  by  a  municipality  for  any  public  utility 
service  which  it  may  render  "shall  be  high  enough  to  produce  a  revenue  suflicient  to 
bear  all  cost  of  maintenance  and  operation  and  to  meet  interest  charges  on  bonds  and 
certificates  issued  on  account  thereof  and  to  permit  the  accumulation  of  a  surplus  or 
sinking  fund  that  shall  be  sufficient  to  meet  all  the  outstanding  bonds  or  certificates  at 
maturity." 

Note  4  (Page  3^0).  The  bill  referred  to  in  the  text  was  known  as  the  "Jcnks"  bill. 
It  was  defeated  in  the  legislature  at  the  1920  session,  but  a  year  later,  under  Governor 
Miller's  leadership,  the  legislation  mentioned  in  the  preceding  note  was  enacted.  See 
also  Note  3,  Chapter  XL,  and  text  pages  463  and  464. 

Chapter  XXXVI 

Note  I  (Page  327).  According  to  a  report  compiled  by  the  American  Electric 
Railway  Association,  sixteen  additional   companies  went   into  receivers'  hands  during 


Notes  and  References  761 

the  calendar  year  1920,  as  compared  with  forty-eight  during  the  preceding  year.  The 
most  important  companies  in  the  1920  list  were  the  Denver  Tramways  Company  and  the 
Kansas  City  (Mo.)  Railways. 

Note  2  {Page  334).  Public  Utilities  Reports,  191 9B,  page  152;  also  pamphlet  pub- 
lished by  the  Public  Service  Commission  of  Indiana,  Case  No.  3505:  "In  Re  Petition  of 
Indianapolis  Traction  and  Terminal  Company  for  Authority  to  Make  Changes  in  Fares 
to  be  Charged  on  the  Street  Railways  in  the  City  of  Indianapolis." 

Chapter  XXXVIII 

Note  i  (Page  348).  Under  state  commission  control,  valuation  is  used  chiefly  as 
a  basis  for  rate-making;  but  in  connection  with  service-at-cost  plans,  the  capital  value 
established  by  agreement  is  generally  used  as  a  basis  not  only  for  rate  adjustments  but 
also  for  possible  future  purchase  by  the  municipality. 

Note  2  (Page  371).    Public  Utilities  Reports,  1920C,  page  458. 

Note  3  (Page  373).  "Second  Annual  Report  of  the  Public  Service  Commission," 
Massachusetts,  1914,  Vol.  I,  page  99. 

Note  4  (Page  374).  Bay  State  Rate  Case:  "Fourth  Annual  Report  of  the  Public 
Service  Commission,"  Massachusetts,  1916,  part  i,  page  i ;  Public  Utilities  Reports, 
1916F,  page  221. 

Note  5  (Page  376).  "An  Act  to  amend  an  Act  entitled  'An  Act  to  regulate  car- 
riers,' approved  February  4,  1887,  and  all  acts  amendatory  thereof  by  providing  for 
physical  valuation  of  the  property  of  the  carriers  subject  thereto  and  securing  informa- 
tion concerning  their  stocks  and  bonds  and  boards  of  directors,"  March  i,  1913,  Section 
19a  of  the  Interstate  Commerce  Commission  law. 

Note  6  (Page  376).  Valuation  Reports  of  the  Interstate  Commerce  Commission, 
Valuation  Docket  No.  2,  Texas  Midland  Railroad. 

Note  7  (Page  380).    Smyth  vs.  x\mes,  169  U.  S.  466  (March  7,  1898). 

Note  8  (Page  382).    Nebraska  Rate  Case:  Smyth  vs.  Ames. 

Note  9  (Page  382).  Minnesota  Rate  Cases:  Simpson  vs.  Shepard,  230  U.  S.  352 
(June  9,  1913). 

Note  10  (Page  382).  Kings  County  Lighting  Co.  vs.  Willcox,  156  App.  Div.  603; 
210  N.  Y.  479.    Des  Moines  Gas  Co.  vs.  City  of  Des  Moines,  238  U.  S.  113. 

Chapter  XXXIX 

Note  i  (Page  386).  Lincoln  Gas  and  Electric  Co.  vs.  City  of  Lincoln,  250  U.  S. 
255  (June  2,  1919). 

Note  2  (Page  387).  Passaic  Gas  Case:  Public  Service  Gas  Co.  vs.  Board  of  Public 
Utility  Commissioners  (N.  J.),  85  N.  J.  63  (July  7,  1913). 

Note  3  (Page  392).  Pursuant  to  the  recommendation  of  the  Board  of  Arbitration, 
the  City  Council  of  Cleveland  passed  an  ordinance  amending  the  Tayler  franchise  by 
increasing  the  rate  of  interest  on  the  Cleveland  Railway  Company's  stock  from  6  per 
cent  to  7  per  cent.  On  April  i,  1920,  the  company  paid  one  quarterly  dividend  at  the  7 
per  cent  rate.  Thereafter,  on  August  10,  1920,  the  ordinance  amending  the  franchise, 
upon  referendum,  was  defeated  and  the  company  was  compelled  to  go  back  to  6  per  cent 
dividends.     See  also  Note  2,  Chapter  XLL 

Note  4  (Page  395).  City  of  Milwaukee  vs.  Milwaukee  Electric  Railway  and  Light 
Co.,  Wisconsin  Railroad  Commission  Reports,  Vol.  10,  page  i. 


762  Electric  Railway  Problem 


Chapter  XL 


Note  i  (Page  413)-  By  Chapter  278  of  the  Laws  of  1921,  in  effect  April  14,  1921, 
entitled  "An  Act  relating  to  Street  Railways,"  the  Minnesota  legislature  conferred  upon 
the  Railroad  and  Warehouse  Commission  (a  state  body)  exclusive  initial  jurisdiction 
over  street  railway  rates.  By  this  act.  cities  were  given  the  authority  to  acquire 
street  railway  properties  by  eminent  domain,  by  purchase  through  agreement  or  by  pur- 
chase at  the  fair  value  to  be  determined  by  the  commission.  Cities  were  also  given 
authority  to  operate  street  railways  owned  by  them  or  to  lease  or  resell  them.  Exclusive 
authority  for  granting  franchises  was  vested  in  the  city  government,  with  the  proviso 
that  no  lease,  permit  or  franchise  to  operate  a  street  railway  in  any  city  where  a  street 
railway  is  already  operating  may  be  granted  by  the  city  council  unless  a  certificate  of 
convenience  and  necessity  is  first  obtained  from  the  state  commission.  Every  street 
railway  franchise  becomes  an  indeterminate  permit  at  the  option  of  the  company  under 
this  act. 

Note  2  {Page  413).  The  State  Public  Utilities  Commission  law  of  Illinois  went 
into  effect  January  i,  1914.  Ever  since  then  a  struggle  has  been  going  on  to  get  the 
act  repealed  or  amended  in  the  interest  of  municipal  home  rule.  After  the  commission 
had  revoked  the  5-cent  fare  provisions  of  the  Chicago  street  railway  settlement  ordi- 
nances, the  question  of  the  form  of  utility  regulation  became  a  state-wide  political  issue, 
and  in  1920  a  Governor  was  elected,  with  the  support  of  Mayor  Thompson  of  Chicago, 
pledged  to  reorganize  the  commission  and  to  change  the  law  so  as  to  restore  municipal 
control  of  local  utilities.  The  old  commission  was  duly  thrown  out  of  office,  and  the 
legislature  at  its  192 1  session  passed  a  new  utilities  law  containing  partial  provision  for 
home  rule. 

Note  3  (Page  413).  See  Note  3,  Chapter  XXIV.  The  New  York  legislature,  by 
Chapter  134  of  the  Laws  of  1921,  not  only  established  a  special  Transit  Commission 
for  New  York  City,  but  revised  generally  the  public  service  commission  law  and  imposed 
upon  the  new  Public  Service  Commission  and  the  Transit  Commission  the  duty  of  deter- 
mining and  fixing  "just  and  reasonable  rates,  fares  and  charges"  as  the  maximum  to  be 
charged  for  the  service  performed,  "notwithstanding  that  a  higher  or  lower  rate,  fare  or 
charge  has  been  heretofore  prescribed  by  general  or  special  statute,  contract,  grant, 
franchise  condition,  consent  or  other  agreement."  Thus  it  appears  that  the  state  legis- 
lature has  gone  as  far  as  it  can  to  confer  upon  the  commissions  authority  to  increase 
street  railway  fares  in  New  York  City  and  other  cities  of  the  state,  regardless  of  local 
franchise  conditions. 

Note  4  (Page  417).  In  1919  the  original  Public  Service  Commission  for  the  First 
District  (New  York  City),  composed  of  five  members,  was  replaced  by  a  single  Com- 
missioner with  three  deputies.  By  Chapter  134  of  the  Laws  of  1921  the  five-headed 
up-state  commission  and  the  single-headed  first  district  commission  were  abolished,  and 
in  (heir  place  a  single  Public  Service  Commission  of  five  members  was  established,  with 
state-wide  jurisdiction  over  regulated  utilities  other  than  the  transit  lines  of  New  York 
City.  This  act  also  established  a  Transit  Commission  of  three  members  for  New  York 
City.  The  members  of  both  commissions  receive  salaries  of  $15,000  per  annum.  The 
term  of  oflicc  of  the  public  service  commissioners  is  fixed  at  10  years,  the  term  of  one 
member  expiring  every  second  year.  Members  of  this  commission  may  be  removed  only 
by  re.solution  concurred  in  by  two-thirds  of  the  members  elected  to  each  house  of  the 
legislature.  The  members  of  the  Transit  Commission  arc  appointed  by  the  Ciovernor  for 
a  term  of  five  years  and  may  be  removed  by  him  upon  charges  of  inefficiency,  neglect 
of  duty  or  misconduct  in  office. 


Notes  and  References  763 

Note  5  (Page  4^1).  At  the  present  writing  (June.  1921)  San  Francisco  still  retains 
a  5-cent  cash  fare  on  both  the  municipal  and  the  privately  owned  lines.  In  Los  Angeles 
a  6-cent  cash  fare  has  just  been  established,  but  the  5-cent  rate  is  preserved  through  the 
sale  of  ten  tickets  for  50  cents.  San  Diego  is  now  divided  into  two  5-cent  fare  zones. 
Oakland  and  other  East  Bay  cities  went  to  the  6-cent  fare  in  1918. 

Note  6  {Page  426).  Toledo  joined  the  ranks  of  the  service-at-cost  cities  by  vote 
of  the  electors  on  November  2,  1920.  The  so-called  Milner  service-at-cost  plan  was 
approved  by  a  vote  of  45.990  to  18,029,  while  at  the  same  time  two  municipal  ownership 
proposals  were  defeated — one  by  a  vote  of  16.469  in  favor  and  46.369  against  and  the 
other  by  a  vote  of  17,770  in  favor  and  43,125  against.  The  Toledo  service-at-cost  plan 
provides  for  the  automatic  achievement  of  ultimate  municipal  ownership  through  the 
gradual  amortization  of  the  capital  value,  which  was  fixed  in  the  Milner  ordinance  at 
$8,000,000.  The  new  ordinance  went  into  effect  February  i,  1921,  after  the  transfer 
of  the  properties  of  the  Toledo  Railways  and  Light  Company  to  the  Community  Trac- 
tion Company,  which  had  been  organized  by  the  owners  of  the  property  to  receive  the 
new  franchise  and  operate  under  the  new  plan.  For  some  time  previous  to  this  date  the 
Toledo  fare  had  been  7  cents  viith  a  2-cent  transfer  charge.  When  the  service-at-cost 
plan  went  into  effect  the  initial  rate  provided  for  in  section  27  of  the  Milner  ordinance, 
viz.,  6  cents  cash  fare  with  5  tickets  for  30  cents  and  i  cent  transfer  charge,  was  estab- 
lished. L'nder  the  ordinance  this  fare  schedule  must  continue  in  force  six  months.  There- 
after, the  fare  is  to  be  increased  or  decreased  according  to  the  condition  of  the  "stabiliz- 
ing fund."  After  four  months'  operation,  at  the  end  of  May,  a  deficit  of  $260,672  had 
accrued  and  it  was  expected  that  the  fare  would  have  to  be  increased  to  7  cents  in 
August.  However,  attention  is  called  to  the  fact  that  the  trainmen  in  June,  1921,  accepted 
a  v\-age  agreement  providing  for  a  reduction  of  10  cents  per  hour  as  compared  with  last 
year's  wage  scale.  Street  Railway  Commissioner  Wilfred  E.  Cann  is  reported  as  stating 
that  in  his  opinion  the  reduced  cost  of  labor  and  expected  operating  economies  will  bring 
back  a  5-cent  fare  in  Toledo  within  a  year. 

Ch.\pter  XLI 

Note  i  {Page  433).  Recent  additions  to  the  list  of  service-at-cost  cities  are  Mem- 
phis. Rochester  and  Toledo.  The  Memphis  plan  was  put  into  effect  April  I,  1920,  by  the 
Tennessee  Railroad  and  Public  Utilities  Commission  as  a  part  of  its  scheme  of  state 
regulation.  In  Rochester  a  service-at-cost  agreement,  effective  August  i,  1920,  was 
entered  into  by  the  city  and  the  New  York  State  Railways  for  a  period  of  10  years. 
As  stated  in  Note  6,  Chapter  XL.  the  Milner  service-at-cost  plan  became  effective  in 
Toledo  February  I.  1921.  Since  the  report  of  the  Federal  Electric  Railways  Commission 
was  issued,  in  August,  1920,  service  at  cost  has  been  under  consideration  in  a  great 
many  places,  but  the  number  of  cities  actually  adopting  it  continues  to  be  small. 

Note  2  {Page  441).  At  the  referendum  election,  August  10,  1920,  the  ordinance 
increasing  the  rate  of  return  on  the  Cleveland  Railway  stock  from  6  per  cent  to  7  per 
cent,  as  recommended  by  the  majority  of  the  board  of  arbitrators,  was  defeated  by  a 
vote  of  10,660  in  favor  to  35,964  against.     See  also  Note  3.  Chapter  XXXIX. 

Note  3  {Page  445).  On  November  14,  1920,  the  Cleveland  fare  went  up  to  6 
cents  cash  with  9  tickets  for  50  cents  and  i  cent  for  a  transfer,  the  maximum  permitted 
under  the  Tayler  service-at-cost  ordinance  as  amended.  See  also  Note  i.  Chapter  Xllt. 
and  Note  3.  Chapter  XXVII. 

Note  4  {Page  476).  "An  act  to  provide  for  service  at  cost  by  street  railway  com- 
panies." Chapter  280  of  the  Laws  of  1918  (Massachusetts),  approved  May  31.  1918. 

Note  5   {Page  487).     The  Cincinnati  service-at-cost  plan  has  not  been  working 


764  Electric  R^mlway  Problem 

smoothly.  Both  the  city  and  the  company  appear  to  have  realized  that  the  fares  have 
gone  too  high.  In  June,  1921,  an  amending  ordinance  was  passed  to  provide  for  a 
reduction  in  the  cost  of  passenger  service  by  the  suspension  of  certain  payments  and 
accruals  specified  in  the  original  ordinance.  It  was  announced  that  a  reduction  in  fares 
might  be  expected  .Xugust  i,  1921,  and  a  further  reduction  on  November  i.  1921.  but 
later  on  this  ordinance  was  suspended  by  referendum  petitions.  On  May  i,  1921.  William 
C.  Culkins,  the  first  Director  of  Street  Railways  under  the  Cincinnati  ordinance,  retired 
to  become  Secretary  of  the  local  Chamber  of  Commerce. 

Note  6  {Page  490).  The  corporation  counsel  of  Indianapolis,  the  attorney  for  the 
local  street  railway  company  and  the  chairman  of  the  Indiana  Public  Service  Commis- 
sion made  a  joint  investigation  of  service  at  cost  and  were  unable  to  learn  that  the 
problem  of  incentive  has  anywhere  been  solved  satisfactorily  under  this  plan.  As  a 
result  of  this  investigation,  the  plan  originally  suggested  by  the  city  of  Indianapolis  in 
May,  1920,  was  withdrawn  several  months  later  with  the  permission  of  the  Public 
Service  Commission.  For  a  discussion  of  the  matter,  see  paper  entitled  "Service  at 
Cost — Panacea  or  Nostrum,"  by  E.  I.  Lewis,  read  before  the  Indianapolis  conference 
of  the  National  Municipal  League  in  November,  1920,  and  published  in  the  "Service  at 
Cost"  sui^plement  of  the  National  Municipal  Review  for  February,  1921.  At  the  time, 
Mr.  Lewis  was  chairman  of  the  Indiana  Public  Service  Commission.  He  has  since  been 
appointed  to  the  Interstate  Commerce  Commission. 

Note  7  {Page  401).  "The  Cost  of  Urban  Transportation  Service,"  by  F.  W. 
Doolittle,  Chapters  XXII  to  XXVL 

Note  8  {Page  504).  Since  the  text  was  written,  the  City  of  Detroit  on  April  4. 
1921,  directly  rejected  service  at  cost  by  a  decisive  vote.    See  Note  i.  Chapter  XXXIV. 

Chapter  XLII 

Note  i  {Page  306).  The  American  Electric  Railway  Association  brief  is  printed 
at  pages  2149  to  2215  of  the  Proceedings. 

Note  2  {Page  316).  See  Remington  and  Ballinger's  Code,  State  of  Washing^ton, 
Sections  8005,  8006,  8007,  and  8008.  This  law  originated  in  Chapter  150  of  the  Laws 
of  Washington,  1909,  page  605,  entitled  "An  Act  authorizing  cities  and  towns  to  con- 
struct, condemn  and  purcha.'^e,  purchase,  acquire,  add  to,  maintain,  conduct  and  operate 
certain  public  utilities,  providing  for  modes  of  payment  therefor,  repealing  all  acts  in 
conflict  herewith,  and  declaring  an  emergency." 

Note  3  {Page  310).  Twichell  vs.  City  of  Seattle  and  Puget  Sound  Traction,  Light 
and  Power  Co.,  106  Wash.  32. 

Note  4  {Page  .S-?/).  In  1920  Seattle  found  it  necessary  to  abandon  the  5-cent  fare 
in  order  to  make  provision  for  a  depreciation  reserve,  and  for  the  amortization  of  the 
purchase  price  of  the  property,  as  required  under  the  state  laws  and  the  city's  contract 
ordinances.  In  the  summer  of  1920  the  fare  was  put  up  to  10  cents  cash,  with  a  ticket 
rate  of  6%  cents.  Later  on,  the  ticket  rate  was  further  increased  to  8''^  cents.  Mean- 
while, Councilman  Oliver  T.  Hrickson.  for  many  years  the  leading  official  advocate  of 
municipal  ownership  and  operation  in  Seattle,  has  started  a  movement  for  an  amendment 
to  the  city  charter  to  reduce  the  car  fare  to  3  cents  and  make  up  any  resulting  deficiency 
out  of  the  general  fund.  Mr.  Erickson,  in  a  public  statement  issued  in  November,  1920, 
said: 

"Cheap  transportation  is  the  lifc-hlood  of  the  city.  Incrcasini;  carfares  is  injurimis  to 
all  who  have  any  useful  occupation.     I   l>elicvc  in  rcducinR  and  ultimately  abolishing  them." 

Mr.  Hrickson  strongly  opposed  the  purcha.se  of  the  Puget  Sound  Traction  lines  by 
the  city  in  1919  for  $15,000,000,  believing  that  the  purchase  price  was  grossly  excessive. 


Notes  and  References  765 

The  deal  was  put  through,  however,  by  Mayor  Ole  Hanson  and  the  majority  of  the 
City  Council.  As  an  aftermath  to  the  discovery  that  fares  would  have  to  be  increased 
radically  to  enable  the  municipal  street  railway  system  to  meet  its  obligations,  the  City 
Council,  on  June  7,  1920,  authorized  the  mayor  to  make  a  special  investigation  of  the 
facts  relating  to  the  purchasing  of  the  Puget  Sound  lines  from  Stone  &  Webster.  Pur- 
suant to  this  authority.  Mayor  Caldwell,  in  August,  1920,  selected  William  Tucker,  Esq., 
to  conduct  the  investigation,  and  six  months  later  received  his  report.  Mr.  Tucker  had 
secured  the  services  of  an  experienced  appraisal  engineer,  Mr.  Cyrus  A.  Whipple,  who 
reached  the  conclusion  that  the  value  of  the  property  at  the  date  of  purchase  did  not 
exceed  $7,843,000,  instead  of  the  $15,000,000  paid  to  Stone  &  Webster. 

This  Seattle  experience  illustrates  the  danger  to  municipal  ownership  in  the  purchase 
of  old  properties  at  the  valuation  claimed  for  them  by  their  owners. 

The  Seattle  street  railway  situation  was  discussed  in  an  illuminating  way  by  Pro- 
fessor Paul  H.  Douglas,  of  the  University  of  Chicago,  formerly  of  Seattle,  in  an  address 
before  the  City  Club  of  Chicago,  April  28,  1921,  entitled  "An  Experiment  in  Municipally 
Owned  Traction :  Seattle."  Professor  Douglas'  address  appears  in  the  June  issue  of  the 
Journal  of  Political  Economy,  published  at  the  University  of  Chicago. 

Chapter  XLIII 

XoTE  I  {Page  SS^)-  The  tabulation  given  on  pages  766  and  767  shows  the  con- 
ductors' wage  scale  in  each  city  and  local  as  of  January  i,  1921,  for  comparison  with 
the  tabulation  given  in  the  text. 

Note  2  {Page  5,?-/).  The  labor  disturbances  in  the  electric  railway  field  during  1920 
and  the  first  half  of  1921  were  fewer  than  might  have  been  expected.  Disastrous  strikes. 
involving  violence,  occurred  on  the  Denver  Tramway  lines,  the  Brooklyn  Rapid  Transit 
lines  and  the  United  Traction  lines  in  Albany,  Troy  and  the  neighboring  towns.  During 
1920  the  companies  generally  yielded  to  the  demands  of  the  employes  for  higher  wages, 
while  on  the  other  hand,  during  the  first  half  of  1921.  with  the  cost  of  living  on  the 
down-grade  and  the  labor  supply  plentiful,  the  men  have  in  numerous  cases  accepted 
considerable  decreases  in  wages. 

XoTE  3  {Page  534).  The  wage  booklet  of  the  Amalgamated  Association  issued 
January  I,  1921,  shows  a  further  increase  of  47  in  the  number  of  locals,  the  total  on 
that  date  being  375.  While  this  would  seem  to  indicate  a  continued  growth  in  the  influ- 
ence of  the  Amalgamated,  it  is  not  certain  what  the  effect  will  be  of  the  present  indus- 
trial depression  and  the  general  "open  shop"  campaign  now  being  carried  on.  In  Albany 
and  Troy,  for  example,  local  divisions  148  and  132  have  been  fighting  for  their  lives 
during  the  entire  first  half  of  1921. 

Chapter  XLVI 

Note  i  {Page  579).  B.  Seebohm  Rountree.  "The  Human  Needs  of  Labour,"  Lon- 
don, 1918. 

Note  2  {Page  570).  "The  Monthly  Review  of  Credit  and  Business  Conditions  in 
the  Second  Federal  Reserve  District"  (published  by  the  Federal  Reserve  agent,  the 
Federal  Reserve  Bank  of  New  York),  issue  of  July  i,  1921.  shows  that  the  cost-of- 
living  index  for  the  United  States,  compiled  by  the  National  Industrial  Conference 
Board,  stood  on  June  i.  1921.  at  161.9,  as  compared  with  100  for  the  pre-war  level.  This 
showed  a  decline  of  only  20.8  per  cent  from  the  maximum.  Wholesale  prices,  as  meas- 
ured by  the  United  States  Department  of  Labor  index,  stood  at  151  for  May,  showing 
a  decline  of  44  per  cent  from  the  high  point. 


766 


Electric  Railway  Problem 


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Notes  and  References 


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768  Electric  Railway  Problem 

Note  3  (Page  501).  Chart  C-5,  referred  to  in  the  text,  and  other  charts  dealing 
with  trainmen's  wages,  trainmen's  efficiency  and  the  cost  of  living  appeared  in  the  printed 
"Argument  and  Brief."  submitted  on  behalf  of  the  Amalgamated  Association  by  W.  Jett 
Lauck,  Southern  Building,  Washington,  D.  C. 

Note  4  (Page  592).  This  exhibit,  comprising  179  typewritten  pages,  is  an  impor- 
tant source-document  of  information  in  the  history  of  street  railway  overcapitalization. 
It  was  submitted  in  typewritten  form,  and,  unfortunately,  was  not  included  in  the  pub- 
lished Proceedings  of  the  Commission. 

Chapter  XLVII 

Note  i  {Page  3q8).  The  situation  revealed  by  the  Amalgamated's  wage  booklet 
of  January  I,  1921,  is  about  the  same  as  it  was  a  year  earlier  with  respect  to  the  matter 
mentioned  in  the  text,  except  that  a  local  has  been  organized  at  AUentown  on  the  Lehigh 
Valley  Transit  system,  and  the  local  on  the  Louisville  Railway  lines  has  been  dropped  out. 

Summary 

Note  i  (Page  64./) .  This  summary  is  included  in  the  Proceedings,  Volume  III, 
pages  2135  to  2148. 

Note  2  (Page  65^).  The  increase  in  the  rate  of  return  from  6  per  cent  to  7  per 
cent  on  the  Cleveland  Railway  stock  was  defeated  by  popular  vote  after  having  been 
recommended  by  a  board  of  arbitration.  See  Note  3.  Chapter  XXXIX.  and  Note  2. 
Chapter  XLI. 

Appendix  A 

Note  i  (Page  66j).  Ford,  Bacon  &  Davis  were  selected  to  do  this  work,  and 
Colonel  Chas.  N.  Black,  a  member  of  the  firm,  had  direct  charge  of  the  appraisal.  Colo- 
nel Black  had  already  appeared  (.-Xpril  17.  1919)  before  the  New  Jersey  Board  of 
Public  Utility  Commissioners  as  an  expert  witness  for  the  Public  Service  Railway  Com- 
pany in  the  very  valuation  proceeding  for  which  the  new  valuation  was  to  be  substituted. 
It  is  noteworthy,  also,  that  Ford.  Bacon  &  Davis  financed  the  New  Jersey  &  Hudson 
River  Railway  &  Ferry  Company,  reconstructed  some  of  its  lines  and  then  disposed  of 
it  to  the  Public  Service  Railway  in  1910. 

Note  2  (Page  66^).  By  Chapter  331.  of  the  Laws  of  1921,  approved  April  13. 
1921,  one  day  before  the  Ford,  Bacon  &  Davis  report  was  filed,  the  valuation  act  of 
1920  was  an  ended  so  as  to  take  away  from  the  engineering  concern's  vahiatimi  tlu- 
finality  which  tlie  original  act  attempted  to  give  it.  Section  9  of  this  unique  valuation 
act.  with  amendments  made  in  1921  shown  in  italics,  is  as  follows: 

"When  the  vahiatinii  of  thi'  property  of  any  street  railway  or  traction  company  is  com- 
pleted as  herein  directed,  the  ciiRlnceriiiK  concern  so  selected  to  make  siicli  valuation  shall 
file  with  the  commission  herein  constituted  a  complete  and  detailed  report  of  such  valuation 
in  form  availalilo  for  use  for  the  pur|)osc  of  fixing  rates  under  existini;  laws,  which  report, 
toscllicr  with  all  docnmonts  and  maps,  and  other  papers  acrompanyint;  same  shall  be  imme- 
diatclv  Iransnnttod  to  and  fdod  with  the  Hoard  of  Public  Utilitv  Commissioners  of  this  Statt- 
and  shall  U-  a  pnlilic  recunl.  o|vn  to  the  inspection  of  the  puMic  at  all  reasonable  times,  aii'l 
shall  be  admitted  as  evidence  in  the  conrts  of  this  State  and  shall  be  evidence  of  the  facl> 
thrrein  contained  to  the  same  extent  as  thouRh  the  same  h.id  been  prtKlnced  and  i>roved  an  ' 
the  \-alne  of  the  property  as  set  forth  in  said  report  shall  be  accepted  by  the  Board  of  Piihl' 
Utility  Commissioners  of  this  State  as  f<r,\<:umt'li:r  rT'i'i/riiri-  o/  the  value  of  said  propert' 
as  of  the  date  siH-cified  in  said  report  in  anv  rate  proccedinij  under  any  law  of  this  .'^tate  t 
the  exirnt  that  tlie  vn]\\c  of  said  pronerly  is  a  factor  in  the  fixinif  of  a  rale;  prov'dcii.  th 
Ihf  roiiii.ti-/  nf  (jiiy  .tiii/i  slrcrl  roihcay  or  tniclinii  cnm'<ii'iy,  or  nf  any  itiunicif<nlily  >" 
>iiuiiiiif>nlili,\<  nfffclfd  by  .ft(</i  rait-  or  cluiriir,  or  of  Ihr  Board  of  Pu'dlf  I'lilily  Commis- 
.riVidiTf.    iiMv    rr,ict-<Ti7iirini'    Ihf    pi-ruin    or    ^.Tciiic    prcpaniiii    such    rcjiort    uf'nn    any    fads. 


I 


Notes  and  References  769 

statements  or  figures  therein;  provided,  further ,  that  the  Board  of  Puhlie  Utility  Commis- 
sioners, at  any  hearing  or  hearings  for  the  purpose  of  fixing  rales  or  charges  of  such  street 
railway  iir  traction  company,  may  request  such  street  railway  or  traction  company,  or  any) 
municipality  or  municipalities  affected  by  such  rates  or  charges,  to  submit  other  evidence  of 
the  value  of  the  property  of  sucli  street  raihcay  or  traction  company,  subject  to  cross- 
examination  by  any  interested  party;  provided,  further,  that  the  .mid  Board  of  Public  Utility 
Commissioners  may  also,  on  its  otcn  initiative,  submit  such  other  evidence,  subject  to  cross- 
e.ramination  by  an  interested  party:  and  may  also  consider  the  evidence  heretofore  duly 
submitter!  to  it  in  any  hearing  or  investigation  before  said  board  involving  the  reasonableness 
of  the  rates  or  charges  of  such  street  raihvay  or  traction  company,  in  so  far  as  such  evidence 
relates  to  the  z'ahie  of  the  property  of  any  such  street  raihway  or  traction  company;  and 
provided,  further,  that  any  hearing  or  hearings  for  the  purpose  of  fixing  rates  or  charges 
of  such  street  railway  or  traction  company  shall  be  preferred  over  all  other  hearings  before 
said  Board  of  Public  Utility  Commissioners,  and  shall  be  determined  and  decided  n'ithin  three 
months  from  the  date  of  the  filing  of  the  said  re:port  of  the  valuation  of  such  street  railway 
or  traction  company." 

XoTE  3  (Page  66^).  Under  date  of  June  5,  192c,  in  response  to  this  letter,  State 
Comptroller  Bugbee  made  the  following  statement  of  his  position:  "The  Legislature 
having  instructed  the  State  House  Commission  to  perform  a  certain  task  in  connection 
with  the  valuation  of  the  Utilities  of  the  State  of  New  Jersey,  there  is  nothing  for  me, 
as  an  Officer  of  the  State,  to  do  except  to  go  ahead,  and  perform  that  task  which  I 
expect  to  do,  as  soon  as  possible."  The  Governor,  the  State  Treasurer  and  the  State 
Comptroller  in  Xew  Jersey  constitute  the  State  House  Commission.  These  same  officials 
were  constituted  the  Street  Railway  Valuation  Commission  by  the  act  referred  to  in 
the  text,  which  was  passed  over  the  Governor's  veto.  Governor  Edwards  refused  to  act 
with  his  colleagues,  Messrs.  Read  and  Bugbee.  but  these  two  officials,  nothing  daunted, 
entered  into  a  contract  with  Ford,  Bacon  &  Davis  under  date  of  August  30,  1920,  for 
the  valuation  of  the  Public  Service  Railway  property  for  approximately  $100,000.  The 
appraisal  report  was  filed  in  April,  1921. 

Note  4  (Page  666).  The  Public  Service  Raihvay  was  un'successful  in  its  injunc- 
tion suits  against  the  jitneys,  but  it  did  succeed  finally  in  getting  a  bill  through  the  legis- 
lature of  1921  looking  toward  the  restriction  of  jitney  competition.  Under  this  new  law, 
jitneys  in  operation  on  March  15.  1921,  continue  to  be  free  from  regulation  by  the  utili- 
ties commission,  but  any  new  jitney  desiring  to  start  operation  on  a  street  occupied  by 
a  street  railway  must  not  only  get  the  usual  city  license,  but  must  also  (procure  a  certifi- 
cate of  public  convenience  and  necessity  from  the  state  commission. 

Note  5  (Page  667).  For  the  twelve  months  from  June.  1920,  to  May,  1921,  inclu- 
sive, the  total  number  of  jitney  passengers  in  Newark  was  45.526,077,  or  an  average  of 
124.729  per  day.  This  shows  an  increase  of  14I2  per  cent  over  the  preceding  twelve 
months'  period.  The  jitney  traffic  reached  a  new  monthly  maximum  in  March,  1921, 
when  there  were  4,392.950  passengers,  or  141,708  per  day.  In  May,  1921,  the  total  num- 
ber of  passengers  and  the  daily  average  were  slightly  less — 4,232,517  and  136,533,  respec- 
tively. 

Note  6  (Page  670).  On  June  22,  1921,  the  Public  Service  Railway  Company  made 
a  new  wage  agreement  with  its  motormen  and  conductors  covering  a  two-year  period 
from  August  i.  1921,  by  which  the  hourly  wage  rates  were  reduced  about  ten  per  cent 
from  the  level  reached  in  1920.  Mr.  Thos.  N.  McCarter.  president  of  the  company, 
testifying  Iiefnre  the  utilities  board  on  June  30,  I92r,  estimated  that  this  wage  reduction 
would  amount  to  about  $900,000  per  annum. 

Note  7  (Page  670).  In  December,  1920,  not  having  succeeded  in  getting  rid  of 
jitney  competition,  the  Public  Service  Railway  Company  filed  a  new  rate  schedule  call- 
ing for  a  lo-cent  fare,  to  be  effective  January  i,  1921.  This  rate  was  suspended  by  the 
old  Board  of  Public  Utility  Commissioners  for  three  months.     During  a  part  of  this 


770  Electric  Railway  Problem  I 

period  the  regulating  power  in  New  Jersey  was  paralyzed  by  a  deadlock  between  the 
Governor  and  the  Legislature  with  respect  to  the  appointment  of  a  new  board,  after 
the  members  of  the  old  board  had  been  removed.  Finally,  when  the  new  board  got  to 
functioning,  the  Public  Service  Railway  lo-cent  fare  schedule  was  suspended  for  another 
three  months'  period  until  July  i,  1921.  After  public  hearings,  the  new  board  refused 
to  recognize  the  continuance  of  the  emergency  that  arose  during  the  war  period,  and  on 
May  20.  1921.  dismissed  the  lo-ccnt  fare  application,  pending  the  final  completion  of  the 
valuation  proceeding  started  two  years  earlier. 

The  Ford,  Bacon  &  Davis  appraisal,  procured  by  the  State  House  Commission  under 
the  terms  of  the  1920  street  railway  valuation  act,  fixed  the  value  of  the  Public  Service 
Railway  property  at  $125,000,000.  This  valuation  was  considered  by  the  Utilities  Board 
along  with  the  testimony  of  witnesses  for  the  company,  for  the  municipalities  and  for 
the  board  itself  in  the  old  proceeding.  On  July  14,  1921,  the  board  rendered  its  decision, 
fixing  the  valuation  of  the  property  at  $82,000,000,  and  the  "permanent"  fare  at  seven 
cents  with  a  charge  of  two  cents  for  a  transfer. 

Note  8  (Page  7ii).  For  changes  in  this  law  made  by  the  1921  legislature,  see 
Note  2  of  Appendix  A. 


INDEX 


TO 


ANALYSIS   OF  THE   ELECTRIC   RAILWAY   PROBLEM 


Abandonment  of  unprofitable  lines :  effect  of, 
on  new  capital  requirements,  29;  due  to  over- 
building, 63-64;  Eastern  Massachusetts  Street 
Railway  Company,  64;  general  discussion, 
Ch.  XXXV,  322-326. 

Accident  expense :  reduction  of,  in  Philadel- 
phia  (C.  J.  Joyce),  270. 

Adamson  Law :  Chief  Justice  White  on,  550- 
551. 

.Ainey,  William  D.  B. :  on  overcapitalization, 
40-41;  on  effect  of  fare  increases,  174;  on 
service  at  cost,  491. 

.Akron,  Ohio:  (See  also  Northern  Ohio  Trac- 
tion &  Light  Co.)  ;  wage  rates,  533,  Note  1 
of  Ch.  XLIIL 

Albany,  N.  Y. :  (See  also  United  Traction 
Company)  ;  Note  2  of  Ch.  XLIH,  Note  3 
of  Ch.   XLIIL 

AUentown,  Pa.:  (See  Lehigh  Valley  Transit 
Co.) 

Almert,  Harold :  connection  with  Public  Serv- 
ice Railway  valuation,  662,  688.  707-708. 

Amalgamated  Association  of  Street  and  Elec- 
tric Railway  Employes:  (See  also  Labor); 
defends  wage  increases,  11-12;  wage  theory 
(W.  J.  Lauck),  13-14,  wage  scales,  Jan.  1, 
1920,  532-533,  Jan.  1.  1921,  Note  1  of  Ch. 
XLIII;  increase  in  number  of  locals,  534; 
program  of,  Ch.  XL\T,  564-597 ;  extent  of 
organization.  598;  relation  to  Philadelphia 
plan  (T.  E.  Mitten),  603-604;  relation  to 
Milwaukee  plan  (J.  D.  Mortimer),  612;  pro- 
gram contrasted  with  cooperative  and  Plumb 
plans,  616. 

.American  Electric  Railway  Association :  mini- 
mizes overcapitalization,  41-42;  compilation 
to  show  effect  of  fare  increases,  criticized. 
178-180;  statistics  of  track  abandonment, 
323 ;  statistics  of  track  in  receivers'  hands, 
329;  on  continuation  of  private  ownership, 
529. 

Committee  on  Valuation :  treatment  of  de- 
preciation, 53.  698;  personnel  of,  345-346; 
report  of,  346-352,  Note  1  of  Ch.  XI ;  the- 
ory of  "created  value,"  350,  689. 


Committee  on  Zone  Systems  :  definitions,  and 

discussion  of  zone  rates,  221-222. 
Committee  on  One-Man  Car  Operation :  272- 
273,  276,  277,  278-280. 
Amortization :  of  excess  capitalization,  neglect 
of,  Ch.  X,  43-45 ;  of  normal  accrued  depreci- 
ation, Ch.  XI,  46-54,  401-402;  of  entire  capi- 
tal, Glasgow,  53;  of  superseded  property,  (C. 
W.  Beall)    151-152,    (G.   E.  Tripp)    366-367; 
of  capital,  under  service  at  cost,  438-439;  of 
capital,   proposed   policy   for   Cleveland,   453- 
454,   (D.   F.  Wilcox)    455. 
.Anderson,    Henry   C. :   connection   with    Public 

Service  Railway  valuation,  661. 
.Appreciation    of    land :     Massachusetts    Public 
Service   Commission   on    (Bay   State   Case), 
375. 
.Arbitration:   (See  also  Wage  boards,  Continu- 
ity of  service) 

of    franchise    disputes:    in    Cleveland,    444; 
under    Jenks    bill,    463-464;    in    Cincinnati, 
484. 
of   labor  disputes:   in   Des   Moines,   537-538; 
compulsory  (T.  L.  Sidlo),  543-544;  Massa- 
chusetts  Special   Commission   on,   544-545 ; 
objections   to    Massachusetts   bill,    545-549; 
Canadian     compulsory     investigation     act, 
549;  Samuel  (Rompers  on,  559;  T.  S.  Will- 
iams   on,    559;    under    Philadelphia    plan, 
608. 
.Atlanta,    Ga. :    (See   also   Georgia    Railway   & 
Power  Co.)  ;  wage  rates,  533,  Note  1  of  Ch. 
XLIII. 
.Automobiles:    (See  also  Jitneys);   number   in 
1917,  compared  with  street  cars,  2;  effect  on 
credit,  Ch.  XX,  99-112. 

Babcock,  E.  \'. :  on  regulation  (Pittsburgh), 
429,  430;  on  service  at  cost,  501,  502;  on  pub- 
lic ownership  with  private  operation,   507. 

Babson,  Roger  W. :  on  jitney  competition,  and 
regulation,  104-106,  292-293;  on  change  in 
value  of  securities,  121-122;  on  taxation, 
paving  and  other  charges,  254-255 ;  on  muni- 
cipal  ownership,   470-471. 


771 


-72 


Index 


Baker,   Newton   D. :   on   Cleveland   reorganiza- 
tion, 51 ;  on  absence  of  overbuilding  in  Cleve- 
land,  61-62;   on   zone   systems.   238-239;   on 
use  of  trailers  in  Cleveland,  269;  on  regula- 
tion, 427-428;   on   Cleveland  plan.   446-451. 
Baltimore.  Md. :  1917-1919  comparison  of  fares 
and  traffic,   184,  206.  of    fares  and   revenue;. 
190.  209. 
Banker  control :  Ch.  XIV,  67-74. 
Barker,  \V.  S. :  connection  with   Public   Serv- 
ice Railway  valuation,  707.  708-709. 
Barry,   John   G. :   on   loss  of  credit,   7;   on   in- 
creased cost  of  materials,  and  need  of   fare 
increases,  124-125. 
Battle  Creek,  Mich.:  1917-1919  comparison  of 
fares  and  tralVic,   187,  206,  of   fares  and  rev- 
enues. 193,  209;  wage  rates.  533,  Note  1  of 
Ch.  II,  Note  1  of  Ch.  XLIII. 
Bauer,   R.  S. :  on  overbuilding.  64;  on  banker 
control,   73;   advocates    free   street   car  serv- 
ice, 309;  on  Boston  Elerated  plan,  471. 
Bay    State    System:    (See    Eastern    Massaclni- 

setts  Street  Railway  Co. ) 
Beall,  Charles  W. :  on  amortization  of  super- 
seded  property,    151-152;   on   effect   of   local 
conditions  on  selling  price  of  securities,  399; 
on  effect  of  readjustment   in  rale  of  return, 
499. 
Beeler,  John  A.:  on  remedies,  137-139;  on  ef- 
fect of  fare  increases.  174-175:  on  operating 
economies    and    increased    earnings.    263-265, 
267-268;    on    standardization    of    equipment, 
269-270;  operating  economies  suggested,  271; 
on   automobile   and   jitney   competition,   288- 
289;  on  jitney  regulation,  292;  on  contribu- 
tions by  property  owners  for  extensions,  317 ; 
on  aljandonment  of  lines,  326;  on  regulation. 
433;  on  need  of  public  cooperation,  715. 
Bemis.  Edward  \V. :  on  x-aluation.  381-382;  on 
service  at  cost,  488;  connection  with  Public 
Service  Railway  valuation.  702. 
Berkeley,  Calif.:   (See  San   I'rancisco-Oakland 

Terminal  Railways  Co.) 
Bertron,  Samuel   K. :  on  demand  for  securities, 
7;   on   remedies,    135-136:   on   public   owner- 
ship. Note  2  of  Ch.  X.XIII. 
Bethlehem.    Pa.:    (See   l.chigh    \allev   Transit 

Co.) 
Birmingham.    .Ma.:    1917-1919    comparison    of 
fares  and  Iraflic.  187.  205.  of   fares  and  rev- 
enues,  19.1,  208;  wage  rates.  533.  Note  1  of 
Ch.  XLIII. 
Bliss,  William  C. :  on  increased  costs  and  lalwr 
control,    11;   on   jitney   competition.    106-107; 
on  remedies.  l.W-139;  on   Rhode  Island  zone 
system.  224-226. 
Bliss,    Zenas    \V.:    on   taxation   of    the    Rho<Ic 

Island   Company,  83. 
Blood.    William    H. :    connection    with    Public 
Service    Railway   valuation,  687-688. 


Board:   (See  also  Wage  boards) 

of  award :   Merchants  .■\ssociation  plan,  556. 
of   directors:   employe   representation   on    (J.  I 

D.  Mortimer),  613-614. 
of  conciliation:  in  Wisconsin  (J.  D.  Mor- 
timer). 615. 
Bond  discount :  American  Electric  Railway 
Association.  Committee  on  Valuation,  on, 
351 ;  treatment  of,  in  valuation  (G.  E. 
Tripp).  364. 
Bonds  of  utilities  under  public  ownership:  (See 
also  Securities)  ;  forms  of  security  for,  514- 
527;  in  State  of  Washington,  515-520;  Wis- 
consin provisions,  525-527. 
Boston  Elevated  Railway  Company :  deprecia- 
tion policy  (J.  1).  Mortimer),  56;  depreci- 
ation and  maintenance  (F.  J.  McLeod),  57- 
58;  changes  in  fare,  164;  effect  of  fare  in- 
crease (H.  Loring),  177-178;  1917-1919  com- 
parison of  fares  and  traffic,  183,  199,  207,  ol 
fares  and  revenues.  189.  210;  financial  con- 
dition. 196-197 :  comparison  of  fares  ant 
traffic  with  Philadelphia  Rapid  Transit  Com 
pany.  198;  comparison  of  fares  and  traffii 
with  New  Vork  City.  198;  public  subsidies 
311-312;  value  of  securities  of  (B.  Warren) 
398-400;  service-at-cost  plan,  464-471;  usi 
of  public  credit.  506;  1919  strike  data.  531 
wage  rates,  532,  Note  1  of  Ch.  XLIII;  wagi 
increases,  581-583;  recent  fare  experiments 
Note  2  of  Ch.  XX\  11. 
Bovden,  Roland  W. :  on  prevention  of  strikes 

545. 
Bradlec,  Henry  G. :  on  importance  of  the   in 
dustry,  2-3;   on  credit   situation.   7;   on   ne^ 
capital  requirements,  21-23.  25-28;   testimon 
criticized,    25,    27-30;    on    overcapitalizatioi 
38-39;   on    remedies,    136;    on   effect   of    far 
increases,  169;  on  savings  in  power.  269;  o 
valuation.  ,%7-.i68 ;  on  .service  at  cost.  4''v 
Bridge    repairs    and    tolls :    freedom    from,    i 
Cleveland   (J.  J.  Stanley).  251;  G.  C.  Cun 
min   on,   256;    F.   H.   Sisson   on,   257;    reli« 
from   (R.  T.  Higgins).  291. 
Bridgeport.    Conn.:     (Sec    also    Connecticut) 
jilnev  and  street  car  traffic.  102;  wage  r.;:r 
532,   Note  1  of  Ch.  XLIII. 
"Brokerage" :  defined  by  A.  E    R.  \.  Commi 

fee  on  \'aluation,  349. 
Brooklyn   Rapid   Transit  Co.:    (See  also  Ne 
York   City)  ;    1918-1919  taxes    (of   subsidi; 
ries).  86;  1917-1919  comparison  of   fare  ai 
traffic.   18,1.  of    fare  and   revenue.   189;   wai 
rates.    532.    Note    I    of    Ch.    XLIII;    strik 
Note  2  of  Ch.  XLIII. 
Budget :  company,  vmder  Cincinnati  plan,  48 
484.    (W.   A.    Draper)    487;    family    (W. 
Ogburn),  572-579. 
Buffalo.  N.  V. :   1917-1919  comparison  of   far 
and  traffic,   184,  205.  of    fares  and  revenui 


Index 


773 


190.  208:  wa-c  rates,  332.  Note  1  of  Ch. 
XLIII. 

Buffalo  &  Lake  Erie  Traction  Co.:  (See  Erie. 
Pa.) 

Bugbee.  Newton  A.  K. :  letter  of  D.  F.  Wil- 
cox to.  re  New  Jersey  situation.  661-663; 
statement  and  policv  of,  Note  3  of  Appendix 
A. 

Bullock,  Charles  J. :  on  taxation.  80,  82-83 ;  on 
taxation  relief,  257-258;  on  "equal  taxation" 
and  limited  tax  exemption,  307-308. 

Caldwell.  Hugh  M, :  investigation  of  Seattle 
railway  situation,  521. 

Calgarv.  Alta. :  wage  rates,  533,  Note  1  of  Ch. 
XLlil. 

California:  jitney  competition,  (P.  Shoup)  99- 
100.  ( R.  R.  Commission)  106;  commission 
regulation    (W.   E.   Creed),  419-420. 

Camden,  N.  J. :  (See  also  Public  Service  Rail- 
way Co.)  ;  wage  rates,  532,  Note  1  of  Ch. 
XLIII. 

Canton,  Ohio:  (See  also  Northern  Ohio  Trac- 
tion &  Light  Co.)  ;  wage  rates,  533,  Note  1 
of  Ch.  XLIII. 

Capital:  (See  also  Return  on  capital.  Credit. 
Securities,  Refunding)  ;  new,  amount  re- 
quired annually.  Ch.  VI,  21-30;  necessity  of 
new,  Ch.  VII,  31-34;  cost  of,  in  relation  to 
other  costs.  117-118;  necessary  conditions  for 
new  (H.  Erickson).  158-159;  scarcity  of 
free,  388 ;  necessity  of  stability  of  values  to 
attract,  388;   requisites   for  welfare  of,  714. 

Capital  Traction  Company :  ( See  Washington, 
D    C.» 

Capitalization:  (See  also  Overcapitalization, 
Regulation)  ;  net,  total  and  per  mile,  for 
1917,  1  ;  compared  with  steam  reailroads,  1 ; 
increase  over  1902,  16:  annual  additions  (ta- 
ble), 23,  28;  methods  of  figuring,  24-28: 
Massachusetts  policy,  39-40,  (J.  B.  East- 
man )  57 ;  Cleveland  Railway  Company,  45 ; 
holding  company  abuses  in  Massachusetts, 
67-69:  ratio  of  earnings  to,  in  Cleveland,  87; 
regulation  of,  Ch.  X\'III,  92-96;  total  net, 
1917.  330;  per  mile  of  track.  331;  relation 
to  value  (F.  H.  Sisson),  335-337;  relation 
to  value  at  beginning  of  war  (M.  L.  Cooke), 
341 ;  relation  to  fares  in  Cleveland,  446 ;  of 
Pittsburgh  Railways,  512. 

Carlton.  Frank  T. :  on  compulsory  arbitration, 
547-548. 

Carr.  lames  O  :  on  commission  regulation, 
417-419. 

Car  trust  certificates:  W.  H.  Heulings  on.  126. 

Chapin.  Robert  Cort :  on  family  incomes,  569- 
570. 

Cliicago.  Illinois:  operating  plan  not  service  at 
cost.  163;  1917-1919  comparison  of  fares  and 
traffic.  184.  199.  205,  207,  of  fares  and  rev- 
enues, 189,  208,  210;  comparison  of  fares  and 


traffic,  surface  lines  with  elevated,  201 ;  1919 
strike  data,  531  ;  wage  rates,  532,  Note  1  of 
Ch.  XLIII;  1917.  1919  and  1920  valuations 
of  surface  lines,  727,  728;  depreciation  and 
maintenance  on  surface  lines.  744 ;  1920  wage 
increase  on  surface  lines.  Note  1  of  Ch.  II ; 
fare  increase  on  surface  lines,  Note  1  of  Ch. 
XV. 

Cincinnati,  Ohio:  changes  in  fare,  164;  1917- 
1919  comparison  of  fares  and  traffic,  185,  206, 
of  fares  and  revenues,  191,  209;  franchise 
taxes  (W.  C.  Culkins),  250-251;  saving  by 
rerouting,  267 ;  rate  of  return,  403 ;  service- 
at-cost  plan.  478-487;  comments  on  plan  (C. 
K.  Robinson ) ,  502-503 ;  wage  rates,  532, 
Note  1  of  Ch.  XLIII. 

Civil  service:  relation  to  public  ownership,  Ch. 
XLVIII,  618-620. 

Clark,  Harlow  C. :  on  franchise  obligations, 
85;  on  possible  remedies,  131-132;  on  fare 
increases,    162-163;   on   regulation,  430-431. 

Clark,  William  J.:  on  overcapitalization,  39; 
on  possible  improvements  in  motors,  290; 
on  Henry  Ford's  gasoline  car,  290. 

Cleveland  Railway  Company :  wage  arbitra- 
tion, 6;  financial  policy,  19;  replacement  pol- 
icy, 33,  52,  394 ;  capitalization,  45 ;  depreci- 
ation percentage  (H.  J.  Davies),  48-49;  con- 
dition of  property  (Board  of  Arbitration), 
48-49;  criticism  (J.  D.  Mortimer),  50-52, 
55-56;  reorganization  (N.  D.  Baker,  J.  J. 
Stanley),  51;  construction  policy  (N.  D. 
Baker),  62;  policy  as  to  banker  control,  73; 
ratio,  earnings  to  capitalization,  87 ;  operat- 
ing ratios,  124;  changes  in  fare,  163-164; 
1917-1919  comparison  of  fares  and  traffic, 
184,  199,  208,  of  fares  and  revenues,  190, 
210;  taxation  and  paving  obligations  and 
comparison  with  Public  Service  Railway, 
251-252;  use  of  trailers  (N.  D.  Baker),  269; 
contributions  by  property  owners  for  exten- 
sions (J.  J.  Stanley),  317;  rate  of  return. 
391-394.  403-404:  local  regulation  in  (J.  J. 
Stanley),  426-427;  features  of  Tayler  plan, 
440-456;  wage  rates.  531-532,  Note  1  of  Ch. 
XLIII;  1919  strike  data.  531;  schedules  of 
working  time,  584-585 ;  shortcomings  of  Tay- 
ler plan,  635-636;  1919  value,  729,  730;  dis- 
cussion of  Tayler  plan,  in  connection  with 
Denver  situation,  738-743 ;  maintenance  and 
depreciation,  744 ;  recent  wage  changes.  Note 
1  of  Ch.  II;  achievements  under  Tayler  plan. 
Note  2  of  Ch.  XI ;  1920  fare  increase.  Note 
1  of  Ch.  XIII. 

Collective  bargaining:  (See  also  Unions); 
under  New  York  Public  Service  Commission 
bill,  553-554;  under  Philadelphia  plan,  605- 
608. 

Colorado  Public  L'tilitics  Commission:  valua- 
tion of  Denver  Tramway  Co.,  727-738;  treat- 
ment of  depreciation  in  Denver  case,  744. 


774 


Index 


Columbus,  Ohio:  1917-1919  comparison  of  fares 
and  traffic,  186-205,  of  fares  and  revenues, 
191,  209;  1919  strike  data,  531;  wage  rates, 
533,  Note  1  of  Ch.  XLIII. 

Competition:    (See  Automobiles,  Jitneys). 

Congestion : 
of  business  districts:  effect  of  zone  plan  (W". 
C.  Bliss),  224-225;  W.  D.  George  on,  240; 
relation  to  city  planning,  3Z2-323. 
of  population:  effect  of  fare  policy,  221;  W. 
C.  Bliss  on,  224-226 ;  effect  of  zone  fares 
(L.  S.  Storrs),  235;  N.  U.  Baker  on,  239; 
U.  C.  Jackson  on,  239-240;  W.  D.  George 
on,  240;  C.  H.  Mote  on,  240-241;  \V.  Jack- 
son on,  241-242;  relation  to  city  planning, 
322-323. 

Connecticut:  overbuilding  in  (R.  T.  Higgins), 
65;  use  of  police  power  in  (L.  S.  Storrs), 
89-90;  jitney  competition  in  (L.  S.  Storrs), 
101-103;  effect  of  fare  increases  in  (L.  S. 
Storrs),  170-171;  1917-1919  comparison  of 
fares  and  traffic  (Connecticut  Company), 
184,  206,  of  fares  and  revenues.  190-209; 
zone  systems  in  (L.  S.  Storrs),  232-235; 
public  subsidies  in  (L.  S.  Storrs),  314;  wage 
rates,  532,  Note  1  of  Ch.  XLIII. 

Constitutional  limitations:  as  to  subsidies,  in 
New  York  and  Massachusetts,  305-307. 

"Construction  costs":  defined  by  .^.  E.  R.  .•\. 
Committee   on    \'aluation,   349. 

Contingencies:  M.  E.  Cooley  on,  354-355;  treat- 
ment of,  by  Interstate  Commerce  Commis- 
sion  in   Te.\as-Midland  case.  377-378. 

Continuity  of  service :  imixirtance  of,  541  ;  In- 
dustrial Conference  on.  551-552;  plans  for 
(New  York  State),  552-560. 

Contracts:  inviolability  of,  117,  721;  municipal, 
efTect  of  regulation  on,  405 ;  of  individual 
employes    with   company,   555-556. 

Contributions  by  property  owners:  (See  also 
Subsidies)  ;  for  extensions,  in  Cleveland.  (  I. 
J.   .Stanley)   317.   (J.  .A.   Heeler)   317. 

Conway,  Thomas :  on  effect  of  wage  increases, 
12;  on  labor  relations,  1.^4-155;  on  limit.itions 
of  fare  increases,  172-174;  on  relation  of 
fare  increases  to  reveiuios.  211.  213;  on  re- 
lief from  ta.xes  and  other  burdens.  257;  on 
subsidies  and  public  ownership.  315-316;  on 
rate  of  return,  400;  on  commission  regula- 
tion, 423-425. 

Cooke.  Morris  L. :  on  lianker  control  and  hold- 
ing companies.  70-71  ;  on  inefficient  manage- 
ment and  war  conditions.  128;  on  inefficiency 
of  management.  262-263;  on  relation  of  capi- 
tali;:ation  to  value  at  beginning  of  war,  34\  ; 
on  reorganization.  341  ;  on  commission  regu- 
lation, 425-426;  on  service  at  cost,  488-489, 
.W3. 

Cooley,  Mortimer  E. :  on  effect  of  wage  in- 
creases, 12;  on  depreciation,  46-47;  experi- 
ence  in    valuation    work,   346;   on   valuation. 


353-361,  369-370;  on  increase  in  rate  of  re- 
turn,   388;    connection    with    Public    Service 
Railway  valuation,  661,  681-691,  693-706. 
Cooperation:   (See  also  Labor) 

labor:    Philadelphia  plan,   part  played   in   re- 
routing   (C.    J.    Joyce),    266-267;    W.    J. 
Lauck  on,  567;  fixing  of  wages  under.  568; 
general     discussion,     598-611;     Milwaukee 
plan,  611-616. 
public :   in  regard  to  Cleveland  plan.    ( X.   D. 
Baker)    446.     (Sanders)    452;    cannot    su- 
persede  public   control,  675 ;   the  price   of. 
715;  proper  methods  of,  725. 
Cooperative     Welfare     .\ssociation     (Philadel- 
phia) :  608-609. 
Coppage  vs.  Kansas:  Justice  Pitney  quoted  on 

freedom  of  contract,  545. 
Corunna,  Mich.:  (See  Owosso,  Mich.) 
"Cost  of  consolidation" :  A.  E.  R.  A.  Commit- 
tee on  Valuation  on,  350. 
Cost  of  living:    (See  also   Living   wage);   re- 
lation of  wage  increases  to  (\V.  J.  Lauck), 
11-12,    13-14;    amount    of    increase    in.    571; 
going  down,   Note  2  of  Ch.   XLIII.   Note  2 
of  Ch.  XLVI. 
Cost   of   .service:   defined.   303-304;   danger   of 

Ijecoming   prohibitive,  674. 
Council  Bluffs.  Iowa:   (See  Omaho  &  Council 

Bluffs    Street    Railway   Company). 
Council  of  National  Defense :  Highways  Trans- 
port Committee  on  motor  truck  competition, 
298. 
Couzens.  James:  on  public  ownership.   146-147. 
"Created   value'':   A.   E.   R.   .\.  Committee  on 
\aluation   on.   350.   689;   claimed   by    Public 
Service   Railway   Co.,   689. 
Credit:    (See  also  Receiverships.   Refunding); 
necessity   for  restoration  of.  Ch.   II.  6-8;   in- 
terrelation   with    labor   and    public    relations, 
Ch.   IV.   15;   normal  conditions   favorable  to, 
Ch.  V,  16-20;  responsibility  for  loss  of,  Ch. 
XIX.    97-98;     methods     of     restoring.     Ch. 
XXIII.  129-139;  relation  of  net  earnings  to, 
Ch.    XX\T,    157-159;    H.    Loring    on.    476; 
public,  use  of.  Ch.  XLII.  .505-529. 
Reasons  for  loss  of:  general.  Ch.  VHI.  35; 
overcapitalization,    Ch.    IX.    36-42.    Ch.    X, 
43-45 ;    unamortized   depreciation,    Ch.    XI, 
4<)-.i4 ;    unearned  dividends  and   neglect  of 
maintenance.  Ch    XII,  55-60;  overbuilding, 
Ch.    XIII,   61-66;    holding   companies   and 
banker  control.   Ch.   XIV.  67-74:   uniform 
5-cent    fare,  Ch.   X\'.  75-77;   special   taxa- 
tion  and    franchise   obligations.    Ch.    X\I. 
78-87;     service    requirements.    Ch.     X\'II. 
88-91  ;    public    regulation   of   capitalization, 
Ch.   X\lll.  92-9t);  jitnev  competition.   Ch. 
XX.  99-112;  demands  of   lalyir.   Ch.   XXI. 
113-115:    decreased    value    of    monev.    Ch. 
XXII.   116-128. 


Index 


//3 


reed,  W.  E. :  on  taxes  and   franchise  obliga- 
tions, San  Francisco-Oakland  Terminal  Rail- 
ways Co.,  83-84;  on  regulation  of  capitaliza- 
tion.   95-96;    on    commission     regulation     in 
California.  419-420. 
rrowell.    Howard   H. :   connection    with    Public 
Service   Railway   valuation,   687,  688. 
ulkins,    W.    C. :    on    franchise    ta.xes,    Cincin- 
nati,  250-251 ;   on   Cincinnati   plan,  47'l,   484- 
486;   retirement   as   Director  of   Street   Rail- 
ways. Note  5  of  Ch.  XLI. 
Cumberland    County    Power    and    Light    Com- 
l|    pany,    Portland,    Maine :    effect    of    fare    in- 
»    crease    (A.    H.    Ford),    174;   percentage    in- 
j    creases    in    fares  and   revenues    (1919),    179; 
I     1917-1919  data  on   fares  and   traffic,    188,   on 
I     revenues,    194;   zone   system    (A.   H.   Ford), 
,     228-229;    wage    rates,    533,    Note    1    of    Ch. 
I     XLIII;   recent   fare  increase.  Note  5  of  Ch. 

;   XXIX. 

Cummin.  Gaylord  C. :  on  jitney  competition  and 
classification  of  companies.  107-108;  on  rem- 
edies, 138;  on  paving  charges  and  bridge 
rentals,   255-256 ;    on   difficulty   of    valuation, 

1     i72;  on  rate  of  return,  402. 

Dallas,  Texas:  jitney  competition  in  (W.  B. 
Head).  108-109;  fare  under  service  at  cost, 
164;  1917-1919  comparison  of  fares  and  traf- 
fic, 187,  205,  of  fares  and  revenues,  193,  208; 
fare  limits  in    (\V.  B.   Head),  501. 

l^ane  County  Circuit  Court :  treatment  of  de- 
preciation and  going  value,  736. 

Danforth,  Richard  E. :  statements  regarding 
jitneys,  666-668. 

Davies,  Henry  J.:  on  Cleveland  depreciation, 
48. 

Dayton,  Ohio:  1917-1919  comparison  of  fares 
and  traffic,  187,  206,  of  fares  and  revenues, 
193,  209;  wage  rates,  533,  Note  1  of  Ch. 
XLIII. 

DeBerard.  Frederick  B. :  on  public  ownership. 
141-145. 

Denver.  Colo. :  1917-1919  comparison  of  fares 
and  traffic,  186,  206.  of  fares  and  revenues, 
192.  209;  wage  rates,  533,  Note  1  of  Ch. 
XLIII;  Report  on  Certain  Aspects  of  the 
Traction  Problem  of.  Appendix  B,  717-748; 
overheads  allowed  in  Denver  Union  Water 
Case,  733 ;  going  value  allowed  in  same,  735 ; 
strike.  Note  2  of  Ch.  XLIII. 

Depreciation:  (See  also  Amortization);  T.  D. 
Mortimer  on,  49-50,  51-52,  55-56;  Public 
Service  Railway  Co.,  53,  697-698;  A.  E.  R.  A. 
Committee  on  \'aluation.  treatment  of,  53, 
351 ;  San  Francisco  Muncipal  Railway,  53- 
54;  Boston  policy  (J.  D.  Mortimer),  56; 
Massachusetts  policy  (J.  B.  Eastman),  56- 
57;  in  valuation  (G.  E.  Tripp),  364;  Boston 
Elevated  (F.  J.  McLeod).  468-469;  L.  R. 
Nash   on.   497-498 ;   method   used   in    Seattle, 


521-524;  under  Philadelphia  plan  (J.  D. 
Mortimer),  599-6(X);  discussion  re  Denver 
situation.  7.36-737,  744-748;  Cleveland  treat- 
ment, 746. 

Normal  accrued :  effect  of  amortizing,  on 
credit,  18;  failure  to  amortize,  Ch.  XI, 
46-54;  treatment  in  Knoxville  water  case, 
746. 
Current :  M.  E.  Cooley  on.  47 :  Boston  Ele- 
vated (F.  J.  McLeod).  57-59;  Public  Serv- 
ice Railway,  59. 

Des  Moines.  Iowa:  1917-1919  comparison  of 
fares  and  traffic,  187,  205,  of  fares  and  rev- 
enues. 193,  208;  wage  rates,  533,  Note  1  of 
Ch.  XLIII;  1919  strike,  531.  538-539;  arbi- 
tration provisions,  537-539;  overhead  and 
going  value  allowance  in  Gas  Case,  733,  735. 

Detroit,  Mich.:  1917-1919  comparison  of  fares 
and  traffic,  Detroit  United  Railway,  184- 
199,  (interurban  lines)  205,  (one-fare  zone) 
206,  of  fares  and  revenues,  189,  (interurban 
lines)  208,  (one-fare  zone)  210;  ta.xation  un- 
der municipal  ownership  plan,  259;  use  of 
trailers,  269;  municipal  ownership  fare  pro- 
visions of  charter.  310-311;  determining  fare 
under  municipal  operation,  525 ;  wage  rates, 
532,  Note  1  of  Ch.  II,  Note  1  of  Ch.  XLIII; 
1919  strike  data.  531  :  schedules  of  working 
time,  584;  1915  valuation,  727.  728:  proposed 
purchase  price  (1919),  729,  730;  recent  wage 
changes.  Note  1  of  Ch.  II;  recent  fare 
changes.  Note  1  of  Ch.  XV ;  municipal  own- 
ership program.  Note  2  of  Ch.  XXVIII, 
Note  1  of  Ch.  XXXIV. 

Development  costs :  M.  E.  Cooley  on.  358-359 ; 
Massachusetts  Public  Service  Commission 
on  (Bay  State  case),  375;  in  Public  Service 
Railway  Co.  valuation,  698-701,  707,  708,  709. 

Devine.  Edward  T. :  connection  with  Denver 
investigation.   719. 

Discipline :  under  Philadelphia  cooperative  plan 
(T.  E.  Mitten),  604. 

Distance  tariff:    (See  Zone  fares). 

Dividends:   unearned,  Ch.  XII,  55-60. 

Doherty,  Henry  L. :  on  loss  of  credit.  70 ;  on 
effect  of  fare  increases.  169-170;  on  relief 
from  special  burdens.  257;  on  local  regula- 
tion  in   Toledo,  428 ;   on   regulation,  428-429. 

Douglas,  Professor  Paul  H. :  on  Seattle's  ex- 
periment with  municipal  traction.  Note  4  of 
Ch.  XLII. 

Draper,  Walter  A. :  on  regulation,  426 ;  on  in- 
centive under  service  at  cost,  486-487 ;  on 
budget  plan    (Cincinnati),  487. 

Earnings : 

gross:  totals.  1902-1917  (table).  27;  ratio  of, 
to  capitalization   in   Cleveland,  87. 

net:  statistics  of  (J.  W.  Welsh),  157;  de- 
crease in  (H.  Erickson).  157-159;  relation 
of.  to  credit,  157-159. 


776 


Index 


Eastern  Massaclmsetts  Street  Railway  Com- 
pany :  rehabilitation  of.  33 ;  abandonment  of 
track.  64;  changes  in  tare.  164;  fare  system 
and  its  effect.  176-177;  data  on  fares  and 
traffic,  184.  on  1917-1919  revenues.  190;  zone 
system,  226;  public  subsidies.  312-313;  serv- 
ice-at-cost  act  (H.  Loring),  312;  decision  of 
Massachusetts  Public  Service  Commission  in 
rate  case.  374-375;  value  of  securities.  399; 
service-at-cost  plan.  471-476;  1919  strike 
data.  531 ;  wage  rates,  532,  Note  1  of  Ch. 
XLIII;  1916  valuation,  728-729;  recent  fare 
reductions.  Note  2  of  Ch.  XXVII. 
Eastman,  Joseph  B. :  on  credit  situation,  8;  on 
overcapitalization.  40;  on  depreciation  and 
capitalization  policy  in  Massachusetts,  56- 
57 ;  on  holding  company  abuses  in  Massa- 
chusetts. 69;  on  rcRulation  of  capitalization 
in  Massachusetts.  93;  on  jitney  competition. 
100;  on  public  ownership.  145-146;  on  zone 
systems.  227-228;  on  paving  requirements, 
256;  on  operating  economies  and  proper 
maintenance.  271 ;  on  service  at  cost  in  Mass- 
achusetts, 471. 
Economics:  (See  Operation,  Power). 
Edmonton.   .Mta. :  wage  rates.   533.   Note   1   of 

Ch.  XLIII. 
Edwards.    Gov.    Edward    I.:    letter   of    D.    F. 
Wilco.x  to.  re  New  Jersey  situation.  664-665 ; 
refused   to    serve   on    valuation    commission. 
Note  3  of  .Appendix  A. 
Efficiency:    (See  Management'). 
Eight-hour  day :   sought    by    Amalgamated   .As- 
sociation, 58.? ;   in  certain  cities.  585 :  consc- 
(piences  of.  585. 
"Elastic  6c    Fare   Ordinance"    (Denver)  :   743- 

744. 
Elizabeth.  N.  J.:  (Sec  also  Public  Service  Rail- 
way Co.) ;  wage  rates,  532.  Note  1  of  Ch. 
XLIII. 
Elmes.  Cecil   Frederick :  connection  with   Pub- 
lic Service  Railway  valuation.  692. 
Employes  Mutual  Henefit  .Association:   in  Mil- 
waukee  (J.   1).   Mortimer),  612,  613-615;    in 
St.  Louis.  614. 
Engineers  Valuation  Board:   (Sec  Pittsburgh). 
F.ciuipment :   standardization  of.    (\V.    H.    Heul- 

ings)   126.   (J.  .\     Heeler >   269-270. 
Erickson.    Halford:   on   decrease   in   net   earn- 
ings.   157-159;    on   conditions    necessary    for 
new  capital,  158-159;  on  cost  of  capital,  394- 
395. 
Erickson.  Oliver  T. :   municipal  ownership  and 
fare  policies  in  Seattle.  Note  4  of  Ch.  XI. II. 
Erie,   Pa.:   1917-1919  comparison  of   fares  and 
traffic.   188.  207.  of   fares  and  revenues.   194, 
210;  wage  rates,  533.  Note  1  of  Ch.  XLIII. 
F.xlensii'us :     (See    also    .'^iH^cial    asscssnii-nts. 
Subsidies)  ;    paid    for    by    property    owners 
(J.  J.  Stanley).  317;  J.  A.   Bceler  on,  317; 
construction    of,    322;    franchise    defects    as 


to.  in  Cleveland  (F.  Sanders),  452;  neces- 
sity of.  as  affecting  fares  and  ownership, 
722-723. 

Fagan.  Charles  A.:  on  neglected  maintenance, 
60;  on  Pittsburgh  zone  experiment.  223;  on 
public  attitude  in  Pittsburgh.  425;  on  pub- 
lic regulation  in   Pittsburgh,  425. 

"Fair  value":   (See  Valuation). 

Fall  River,  Mass.:  (See  also  Eastern  Massa- 
chusetts Street  Railway  Co.)  ;  wage  rates, 
-.32.  Note  1  of  Ch.  XLIII. 

Fare  increases:  (See  also  Fares);  complexity 
of  problem.  116-118;  need  for  (J.  G.  Barn), 
125;  H.  C.  Clark  on,  131;  S.  R.  Bertron  on, 
135;  purpose  of.  Ch.  XXVII.  160-164;  effect 
of.  Ch.  XXVIII,  165-217;  discussion  of,  as 
solution  of  problem,  327-328;  effect  on  East- 
ern Massachusetts  Company  (H.  Loring), 
474-476;  service-at-cost  cities  compared  with 
others,  495;  efforts  of  Public  Service  Rail- 
way to  obtain.  .Appendix  A,  659-716;  in 
Seattle  under  municipal  ownership.  Note  4 
of  Ch.  XLII. 

I'"ares:  (See  also  Zone  fares.  Fare  increases); 
uniform  5-ceut  rate,  discussion  of,  Ch.  XV, 
75-77;  H.  J.  Pierce  on  continuing  5-cent  rate, 
132;  list  of  cities  retaining  5-cent  fare,  160; 
rates,  in  various  cities.  161-162;  effect  of 
service  at  cost  on.  163-164;  average  for  vari- 
ous cities,  203-204;  New  York  City— use  of 
motor  buses  to  compel  restoration  of  5-cent 
rate.  287-288;  regulation  of  jitney  (R.  \V. 
Babson),  292-293;  "knocking  down"  and 
failure  to  collect,  in  Indiana  (C.  H.  Mote), 
300;  low,  advocated  by  F.  F.  Ingram,  309- 
310;  Detroit  provisions  under  municipal  own- 
ership, 310-311;  early  profits  under  5-cent 
rate,  328-329;  in  Cleveland.  44.1  445-446; 
under  Montreal  contract,  462-463;  on  Bos- 
ton Elevated.  468;  on  Eastern  Massachusetts, 
474.  475:  under  Massaclmsetts  service-at-cost 
act.  477;  under  Cincinnati  plan.  482.  485; 
limits,  in  Dallas  (\V.  B.  Head).  501;  de- 
sirability of  upiicr  limit.  739;  examples  of 
pre-war  achievements  under  5-cent  fare.  Note 
2  of  Ch.  XI ;  recent  changes  re  5-cent  fare. 
Note  1  of  Ch.  XV. 
"iMtty-fifty"  bill:  (See  Loring.  Homer). 
Fire    insurance:    policv   of    Philadelphia    Rapid 

Transit  Co.   (C.  J.  Joyce).  270. 
I'isber.   Irving:   on  decreased   value  of   money, 
119-121;    on    increased    rate   of    return.    .188- 
3'A). 
I'ord.    A.    H. :   on   effect   of    fare    increases    in 
Portl.iud.  Me.  174;  on  zone  system  in  Port- 
land.  Me..  228-229. 
lord.  Henry:  substitution  of  gasoline  for  elcc- 
tricitv,   66.   281;   comment   by    W.   J.   Clark, 
290.  ' 


Index 


777 


Ford,  Bacon  &  Davis :  appraisal  cited,  44 ;  se- 
lected to  make  New  Jersey  valuation.  Note 
1  of  Appendix  A ;  report  of,  filed.  Note  3  of 
Appendix  A ;  valuation  by,  based  on  assump- 
tion of  10-cent  fare.  Note  7  of  Appendix  A. 

Fort  Wayne  &  Northern  Indiana  Traction  Co. : 
percentage  increases  in  fares  and  revenues, 
180. 

Fort  Worth,  Texas :  1917-1919  comparison  of 
fares  and  traffic.  Northern  Texas  Traction 
Co.,  188,  (city  lines)  205,  (interurhan)  206, 
of  fares  and  revenues,  194,  (city  lines)  208, 
(interurban)   209. 

Foss,  Eugene  N.:  on  banker  control,  72-73;  on 
public  ownership,  143-144,  509-510;  on  regu- 
lation in   Mas.sachusetts,  406-407. 

Fowler  municipal  ownership  bill  :  personnel 
management  provisions  of,  619;  determina- 
tion of  value  under,  639-640. 

Franchise  obligations:  discussion  of,  Ch.  XVI, 
78-87;  relief   from,  Ch.  XXX,  244-259. 

Franchises:  significance  of,  4. 

Franchise  taxes :  in  Rhode  Island  (Z.  W. 
Bliss),  83;  special,  in  New  York,  85-86,  (D. 
F.  Wilcox)  246;  L.  R.  Nash  on.  250;  in  Cin- 
cinnati (W.  C.  Culkins),  250-251;  in  Mon- 
treal, 251. 

Franchise  values :  G.  E.  Tripp  on,  248. 

Funds:  (See  also  Depreciation);  interest 
(Cleveland),  443;  contingent  reserve  (Mon- 
treal), 461;  tolls  reduction  (Montreal),  461- 
462;  reserve  (Boston  Elevated),  465-467; 
reserve  (Cincinnati),  481;  reserve  under 
Massachusetts  service-at-cost  act,  477 ;  for 
public  utility  acquisition  (State  of  Wash- 
ington), 516-517;  municipal  street  railway 
Ixnid  (Sea^ttle).  517-518;  for  municipally 
owned  utilities,  526. 

Gadsden,  Philip  H. :  on  credit  situation,  6 ;  on 
effect  of  readjustment  in  rate  of  return,  499. 

Gauges :  influence  of,  63. 

George,  W.  D. :  on  control  of  service,  88;  on 
zone  system,  240 ;  on  abandonment  of  un- 
profitable lines,  and  increased  fares,  325-326 ; 
on  commission  regulation,  425. 

Georgia  Railway  &  Power  Co. :  1917-1919  com- 
parison of  fares  and  traffic,  186,  206,  of  fares 
and  revenues,  192,  209;  wage  rates,  533,  Note 
1  of  Ch.  XLIII. 

Glasgow  municipal  tramways :  amortization 
policy,  53 ;   financial  condition,  643. 

"Going  concern" :  defined  by  A.  E.  R.  A.  Com- 
mittee on  \'aluation,  350. 

"Going  value" :  ( See  also  Created  value.  De- 
velopment costs.  Going  concern)  ;  discussion, 
735-736. 

Gompers,  Samuel :  on  compulsorv  arbitration, 
559. 

Grand  Rapids.  Mich. :  1917-1919  comparison  of 
fares  and  traffic,  188,  206,  of  fares  and  rev- 


enues, 194,  209;  wage  rates,  533,  Note  1  of 
Ch.  XLIII. 

Great  Britain:  zone  fares  in,  219,  221,  (\V. 
Jackson)  241-242;  bus  operation  in  (W. 
Jackson),  289;  comparison  of  track  mileage 
and  interurban  development  in,  and  in  United 
States,  322,  (L.  S.  Storrs)  324;  e.xtent  of 
public  ownership  in,  641 ;  comments  on  W. 
L.  Madgen's  paper  on  tramway  situation  in, 
642-643. 

Guaranties:  (See  also  Subsidies);  of  bonds 
(F.  H.  Sisson),  134-135;  on  Eastern  Massa- 
chusetts, 472;  effect  of  public,  on  credit  (L. 
R.  Nash),  316-317;  of  return  on  capital 
(Bcston  Elevated),  466-467. 

Halifax,  N.  S. :  wage  rates,  533,  Note  1  of  Ch. 
XLIII. 

Harlan,  Justice:  on  valuation  (Smyth  vs. 
.Ames),  380. 

Harrisburg.  Pa.  :  1917-1919  comparison  of  fares 
and  traffic,  188,  206,  of  fares  and  revenues, 
194,  209. 

Hartford,  Conn.:  (See  also  Connecticut); 
wage  rates,  532,  Note  1  of  Ch.  XLIII. 

Haynes,  Paul  P.:  resolution  on  valuation  (Na- 
tional .Association  of  Railway  and  Utilities 
Commissioners),   380-381. 

Head,  W.  B. :  on  jitney  competition  (Dallas), 
108-109;  on  jitney  regulation  in  Dallas.  295; 
on  regulation  in  Texas,  429;  on  fare  limits, 
501. 

Henry,  Charles  L. :  on  jitney  competition.  Pa- 
cific Electric  Co.,  100;  on  motor  truck  com- 
petition, 298;  on  Indiana  Public  Service 
Commission,  421. 

Heulings,  William  H. :  on  financing  purchases 
and   standardizing   equipment,    126. 

Higgins,  Richard  T. :  on  overbuilding  in  Con- 
necticut, 65;  on  remedies,  136;  advocates 
paving  and  ta.xation  relief,  257 ;  on  repeal  of 
public  burdens,  291  ;  on  service  at  cost,  490. 

Historical  cost  method  of  valuation:  (See  Val- 
uation). 

Hoboken,  N.  J.:  (See  also  Public  Service  Rail- 
way Co.)  ;  wage  rates,  532,  Note  1  of  Ch. 
XLIII. 

Holding  companies:  Ch.  XIV,  67-74. 

Holmes,  Justice :  quoted  on  labor  organization 
(Vegelahn  vs.  Guntner),  546. 

Holyoke,   Mass. :   zone  system,  227. 

Hornell  Traction  Company :  percentage  in- 
creases of   fares  and   revenues,   179. 

Houston,  Texas:  1917-1919  traffic,  188. 

Howell,  Horace  L. :  connection  w  ith  Public 
Service   Railway   valuation,  687,  688. 

Hudson  &•  Manhattan  Railroad  Company:  1918- 
1919  taxes,  86;  1917-1919  comparison  of  fare 
and  traffic,   18.3,  of  fare  and  revenue,  189. 


77% 


Index 


Illinois:    1913   municipal    ownership    law.    pro- 
vision as  to  self-support  of   utility,   Note  3 
of  Ch.  XXXIV. 
Illinois  Public  Utilities  Commission:  \-aluation 
of  Chicago  Surface  Lines   (1917  and  1920). 
727.    728;    recent    changes    in    organization. 
Note  2  of  Ch.  XL. 
Incentive :  under  Jenks  bill.  463 :  under  service 
at  cost.  486-487!  741-742;  M.  R.  Maltbie  on. 
487;   L.   R.   Nash   on.  500-501;   E.   V.   Bab- 
cock  on.  501 ;  C.  K.  Robinson  on.  502-503 ; 
service  vs.  profits,  Ch.  XLIX,  621-622. 
Profits  as:   151;  under  service  at  cost,  402- 
404;  in  Cleveland.  (N.  D.  Baker)  448-449. 
(F.  Sanders)  453. 
Income:   (See  Earnings). 
Indebtedness : 
municipal:  for  cities  over  30,CXK),  513.  514. 
state :  amount  of.  513. 
Indiana    Public    Service    Commission :    on    In- 
dianapolis   Traction    &    Terminal    Co..    334- 
iii:   commented  on  by   C.   L.    Henry.  421. 
Indianapolis   Traction   &   Terminal   Company : 
1917-1919    comparison    of    fares    and    traffic. 
185.  206.   of    fares   and    revenues.    191,   209; 
comparison  of  revenues  with  those  of  Phila- 
delphia Rapid  Transit  Co.,  302;  orders  of  In- 
diana Commission  and  reports  of  public  di- 
rectors,   332-335 :    service    at    cost    suggested 
for,   490;    1918   \-aIuation,   730;    recent    fare 
changes.  Note  1  of  Ch.  XV;  ser\Hce  at  cost 
rejected.  Note  6  of  Ch.  XLI. 
Industrial   Conference:   on   continuity  of   serv- 
ice. 551-552. 
Ingram.  Frederick  F. :  advocates  low  fare  and 

land  value  ta.x.  309-310. 
Interborough    Consolidated    Corporation :    for- 
mation of.  415-416. 
Interborough    Metropolitan    Company :    forma- 
tion of,  416;    relation   to   subwav   contracts, 
416. 
Interborough    Rapid   Transit    Company:    (See 
also  New  York  City);   1918-1919  taxes,  86; 
1917-1919  comparison  of  fare  and  traffic.  183. 
of  fare  and  revenues.  189;  offers  made.  415; 
preferential.   416-417;    1919   strike   data.   531. 
Interest   during   construction :    Interstate   Com- 
merce  Commission   on    (Texas-Midland    Re- 
port). 379. 
International  Railwav  Companv :  (See  Buffalo. 

N.  Y.) 
Interstate  Commerce  Commission :  importance 
of  valuation  rulings  of.  375-376;  valuation  of 
Texas-Midland  Railroad.  .V6-379;  overheads 
in  Texas-Midland  case,  733;  treatment  of  re- 
placements, 747. 
Interurban  lines:  mileage  of.  2;  effect  of  jit- 
ney competition  (C.  L.  Henry).  100;  one- 
man  cars  not  adapted  to  (C.  VV.  Kellogg). 
273;  motor  truck  competition  (C.  L.  Hcnryl. 
29fi;  de\Tlopment  in  Great  Britain  and  United 


Sutes  (L.  S.  Storrs),  324-325;  fare  situa- 
tion in  Indiana  (C.  L.  Henry).  421. 

Investment  Bankers  .\ssociation :  report  of 
committee  on  public  service  securities,  29, 
Note  1  of  Ch.  \'I. 

Investments:  (See  also  (Capital.  (Capitalization, 
Securities)  ;  nature  of  (D.  F.  Wilcox).  149- 
151. 

Jackson.  Dugald  C. :  financial  difficulties  of 
companies  antedating  war.  127;  on  zone  sys- 
tems. 237.  239-240;  on  jitney  competition  and 
regulation.  296-298;  on  service  at  cost,  491- 
493. 

Jackson,  Walter:  on  jitney  competition,  110- 
112,  289;  on  zone  system.  241-242;  on  econo- 
mies  in  power,  268-269;  on  bus  operation  in 
Great  Britain,  289. 

Jackson,  Mich. :  1917-1919  comparison  of  fares 
and  traffic,  187.  207.  of  fares  and  revenues, 
193.  210:  wage  rates.  533.  Note  1  of  Ch.  II. 
Note  1  of  Ch.  XLI II. 

Jenks  service-at-cost  bill:  rate  of  return.  401; 
chief  features  of.  463-464;  introduction,  and 
"self-sustaining"  feature,  320.  Note  4  of  Ch. 
XXXIV. 

Jersey  City,  N.  J.:  (See  also  Public  Service 
Railwav  Company)  ;  wage  rates,  532,  Note 
1  of  Ch.  XLIII. 

Jitneys:  effect  of,  on  credit,  Ch.  XX.  99-112; 
competition  of.  relation  to  fares  (T.  Con- 
way). 173:  control  of.  Ch.  XXXII.  286-299; 
Public  Service  Railway  Co."s  attack  upon, 
666-673.  Note  4  of  .\ppendix  .\ ;  general  re- 
lation of,  to  street  railways,  721-722;  begin- 
ning of  state  regulation  of,  in  New  Jersey, 
Note  4  of  .\ppendix  .\ ;  statistics  of,  in 
Newark.  Note  5  of  Appendix  .\. 

Johnson.  Tom  L. :  part  taken  in  Cleveland  val- 
uation (N.  D.  Baker).  446-447;  campaign 
methods  of   (N.  D.  Baker).  449-450. 

Jones,  Stiles  P.:  on  overcapitalization.  42.  591- 
593. 

Joyce.  Coleman  J. :  on  operating  improvements 
in  Philadelphia.  265-267 ;  on  reduction  of  ac- 
cident expense  in  Philadelphia.  270;  on  fire 
insurance  policy  of  Philadelphia  Rapid  Tran- 
sit Co..  270;  on  operating  economies  in  Phil- 
adelphia. 270-271 ;  reads  Mr.  Mitten's  state- 
ment on   Philadelphia  plan,  301. 

Kalamazoo.  Mich. :  1917-1919  comparison  of 
fares  and  traffic.  187,  205.  of  fares  and  rev^ 
enues.  193.  208;  wage  rates.  533,  Note  1  of 
Ch.  II.  Note  1  of  Ch.  XLIII. 

Kansas  City  Railways  Co.:  capitalization.  45; 
1917-1919  comparison  of  fares  and  traffic, 
185.  205.  206.  of  fares  and  revenues,  191, 
208.  209:  1919  strike  data.  531;  %-aluation. 
(1913).  727.  72a  (1920).  730. 


Index 


779 


Kellogg.  Charles  \V. :  (See  also  American 
Electric  Railway  Association.  Committee  on 
One-Man  Car  Operation);  on  one-man  cars, 
272-273,  275-276.  278,  (for  interurban  lines) 
273-274. 

Knoxville  water  case :  treatment  of  accrued  de- 
preciation. 746. 

Kutz.  Charles  W. :  on  public  ownership.  138; 
on  zone  system.  241 ;  on  paving  requirements 
and  municipal  ownership  of  roadbed.  256. 

Labor:  (See  also  Amalgamated  Association, 
\\  ages.  Strikes.  Right  to  strike.  Cost  of  liv- 
ing) ;  total  employes  (1917).  4;  fundamen- 
tal importance  of,  Ch.  III.  9-14;  interrela- 
tion with  credit,  and  public  relations  of.  Ch. 
IV.  15:  increasing  demands  of.  Ch.  XXI, 
113-115;  relative  increase  in  cost  of.  117;  at- 
titude of  (T.  Conway).  154-155;  cooperative 
relations.  Ch.  XXXl'lI.  300-302:  relation  of 
city  to,  under  Cleveland  plan  (F.  Sanders). 
452-453;  general  discussion  of.  Ch.  XLIII. 
530-536;  recognition  of  public  relations  of, 
Ch.  XLIV.  537-540;  participation  in  man- 
agement. Ch.  XL\'II.  598-617:  employes  as 
civil  ser\-ants.  Ch.  XL\III.  618-620;  wages, 
Jan.  1,  1921.  Note  1  of  Ch.  XLIII. 

Lambert.  Miles  B. :  on  increased  costs  of  ma- 
terials.  125-126. 

Lansing.  Mich.:  1917-1919  comparison  of  fares 
and  traffic.  187.  206.  of  fares  and  revenues. 
193.  206;  wage  rates.  533.  Note  1  of  Ch.  II. 
Note  1  of  Ch.  XLIII. 

Lapp.  John  A. :  report  of  D.  F.  Wilcox  on 
Denver  situation  transmitted  to,  717. 

Lauck,  W.  Tett :  on  recognition  of  union,  567- 
568;  on  living  wage.  569-570.  579,  583.  586- 
588:  on  eight-hour  day.  583;  on  increased 
productivity.  588-589:  on  early  financial  mis- 
management. 593-595 ;  on  Philadelphia  plan. 
598-599. 

Brief  for  the  .Amalgamated  Association:  de- 
fends wage  increases.  11-12:  on  wage  the- 
ory-. 13-14;  on  overcapitalization.  39-40,  41; 
on  financial  exploitation,  71-72:  on  rela- 
tion of  wages  to  revenues,  114-115;  on  im- 
portance of  public  interest,  564;  on  rights 
of  capital,  564;  on  employes'  interest  in 
rehabilitation.  565;  on  recognition  of  union, 
566-567. 

Lawrence,  Mass.:  (See  also  Eastern  Massa- 
chusetts Street  Railway  Company)  ;  wage 
rates.  532.  Note  1  of  Ch.  XLIII. 

Layovers:  reduction  of  (T.  A.  Beeler).  265. 

Lehigh  Valley  Transit  Co.:  1917-1919  com- 
parison of  fares  and  traffic.  186.  206.  of  fares 
and  revenues.  192.  209;  wages.  Note  1  of  Ch. 
XLIII. 

Lincoln  Gas  and  Electric  Company  vs.  Lincoln : 
treatment  of  rate  of  return  by  Justice  Pit- 
ney. 386. 


Living  wage :  \V.  J.  Lauck  on,  568-569 ;  R.  C. 
Chapin  on.  569-570;  Lauck  &  Sydenstriker 
on.  570;  W.  F.  Ogburn  on.  570-579. 

London.  Out.:  wage  rates,  533,  Note  1  of  Ch. 
XLIII. 

Loring.  Homer :  on  credit  situation,  8 ;  on 
Massachusetts  capitalization  policy.  39-40; 
on  jitney  competition,  103-104;  on  public 
operation  and  pri\-ate  ownership,  136-137; 
on  effect  of  fare  increases,  176-178;  on  one- 
man  cars,  276:  on  subsidies  for  Eastern 
Massachusetts  lines,  and  suggested  "fifty- 
fifty"  bill,  312-313;  on  rehabilitation  of  East- 
ern Massachusetts  property.  474;  on  effect 
of  fare  increases  on  Eastern  Massachusetts 
lines.  475 ;  on  credit  needs.  476. 

Los  .\ngeles :  jitney  competition  in,  99-100; 
1917-1919  comparison  of  fares  and  traffic, 
184.  205.  206,  of  fares  and  revenues,  190,  208. 
209:  1919  strike  data.  531;  wage  rates,  532. 
Note  1  of  Ch.  XLIII:  1913  raluation,  728; 
recent  fare  increase.  Note  5  of  Ch.  XL. 

Louisville.  Ky. :  1917  traffic  estimate,  186;  wage 
rates,  533. 

Lowell,  Mass.:  (See  also  Eastern  Massachu- 
setts Street  Railway  Co.)  :  wage  rates.  532. 
Note  1  of  Ch.  XLIII. 

Lynn.  Mass.:  (See  also  Eastern  Massachusetts 
Street  Railwav  Co.);  wage  rates,  532,  Note 
1  of  Ch.  XLIII. 

MacFarland.  Grenville  S. :  on  public  ownership. 
146;  on  Boston  and  Cleveland  plans.  469-470. 

Madgen.  William  L. :  paper  on  British  trac- 
tion situation,  commented  on.  642-643. 

Magnitude  of  industry :  ( See  also  Capital.  La- 
bor, Mileage,  Population  served.  Revenues, 
Taxation.  Traffic )  ;  Bradlee.  Henr>-  G..  on. 
3;  increase  of,  as  affecting  credit,  16-17. 

Mahoning  &  Shenango  Railway  &  Light  Co. : 
(See  Youngstown.  Ohio). 

Maintenance:  (See  also  Depreciation)  ;  neglect 
of  ordinarj-,  Ch.  XII.  55-60;  conserving 
property  by  proper  (J.  B.  Eastman).  271; 
relation  of.  to  serv-ice-at-cost  plans,  436-437 ; 
under  Montreal  contract,  459-460:  on  Boston 
Ele%-ated  (F.  J.  McLeod).  468-469. 

Maltbie.  Milo  R. :  on  overcapitalization,  41 ;  on 
neglect  of  maintenance.  60;  on  special  assess- 
ments. 317-318.  (under  private  ownership) 
318;  on  incentive.  487;  on  service  at  cost, 
489-490;  connection  with  Public  Service 
Railway  \-aIuation,  702. 

Management:  inefficient  (M.  L.  Cooke).  128; 
efficiency  in.  (J.  .\.  Beeler)  137-138.  Ch. 
XXXI.  260-285;  cooperation  with  labor.  Ch. 
XXXIII.  300-302;  labor's  participation  in, 
595-596,  Ch.  XLVII.  598-617. 

Manchester.  England :  financial  policy  in.  642- 
643. 


780 


Index 


Massachusetts :  policy  in  regard  to  capitaliza- 
tion, 39-40;  overbuilding,  64-65;  holding 
company  abuses,  67-69;  regulation  of  capi- 
talization in,  (T.  N.  McCarter)  92-93,  (J. 
B.  Eastman)  93;  automobile  competition  in 
(Legislative  Commission).  1(X)-101  ;  jitney 
competition  (L.  S.  Storrs),  101-103;  public 
initiative  and  efficiency  (E.  N.  Foss),  144; 
constitutional  obstacles  to  public  subsidies 
( Public  Service  Commission ) ,  306-307  ;  tax- 
ation to  support  electric  railways,  308-309; 
public  subsidies  in  (Boston  Elevated  and 
Eastern  Massachusetts),  311-314;  capitaliza- 
tion per  mile  of  track,  compared  with  rest 
of  country,  331 ;  Public  Service  Commission 
valuation  formula,  373-374 ;  regulation  in, 
406-407;  service  at  cost  in,  464-478. 

Massachusetts  Public  Service  Commission :  on 
constitutional  obstacles  to  subsidies.  .^06-307 ; 
on  taxation  to  support  street  railways.  308- 
309;  valuation  formula  of.  373;  Middlesex 
and  Boston  report.  .^73-374;  Bay  State  rate 
case  decision,  374-375 ;  Bay  State  valuation, 
728-729. 

Massachusetts  Special  Street  Railway  Commis- 
sion:  duties  of.  311  ;  recommends  amendment 
of  Boston  Elevated  act.  311-312;  recom- 
mends increased  public  subsidies,  313;  pro- 
poses plan  of  public  control,  with  subsidies, 
313-314;  on  public  ownership,  508:  minority 
statement.  508-509;  on  compulsory  arbitra- 
tion, 544-545;  proposes  arbitration  bill,  544- 
545;  objections  to  latter,  545-549. 

Materials,  cost  of:  increases  in.  (\V.  C.  Bliss) 
11.  (B.  \V.  \Varren>  \.l  (].  G.  Barry)  124- 
125,  (M.  B.  Lambert)  125-126;  relation  to 
other  increases  in  cost.  117. 

McCartor.  Thomas  N. :  on  regulation  of  capi- 
talization in  Massachusetts.  92-93;  statistics 
on  decreased  values  of  Public  Service  Rail- 
way and  Public  Service  Corporation  securi- 
ties. 122;  on  9-cent  fare  in  New  .Icrsey.  668- 
669:  on  emergency  relief,  684;  personal  in- 
terest  in   valuation  results.  696-697. 

McElroy,  J.  M.:  referred  to.  on  financial  pol- 
icy of  Manchester.  England.  642-643. 

McLeod.  Frederick  T.:  on  credit  situation.  8; 
on  Boston  Elevated  depreciation  and  niain- 
tcnanre,  57-58;  on  competitive  overbuilding 
in  Massachusetts,  64-65 ;  on  holding  com- 
pany abuses  in  Massachusetts,  69;  on  public 
ownership,  1.^7 ;  on  effect  of  fare  increases, 
175-176;  on   Boston   Elevated,  468-469. 

Memphis,  Tenn. :  1917-1919  comparison  of 
fares  and  traffic.  186,  205,  of  fares  and  rev- 
enues. 1<32.  2tt8:  wage  rales.  533,  Note  1  of 
Ch.  XLIII;  service  at  cost  for.  Note  1  of 
Ch.  XLl. 

Merchants  .'Xssociation  of  New  York;  on  pub- 
I'C  ownership.  142-143;  prniioses  bill  for  con- 
tinuity of  service,  553,  555-557. 


Metropolitan  Strict  Railway  Company :  over- 
capitalization of   (G.  E.  Tripp).  38.  44. 

"Mexican  dollar"  theory.  691,  693-694. 

Michigan  Railway  Co.:  1917-1919  comparison 
of  fares  and  traffic.  187,  206.  of  fares  and 
revenues,  193,  209;  succeeded  by  Michigan 
United  Railways  Co.,  Note  1  of  Ch.  II. 

Michigan  United  Railways  Co. :  recent  wage 
changes.  Note  1  of  Ch.  II. 

Middlesex  &  Boston  Report  (Massachusetts 
Public   Service   Commission)  :   373-374. 

Mileage:  1917  total,  1;  compared  with  steam 
railroads,  1;  classification.  2;  increase  over 
1902,  16. 

Miller,  Nathan  L. :  New  York  City  Transit 
Commission  fostered  by.  Note  3  of  Ch. 
XXXI V,  Notes  3  and  4  of  Ch.  XL.  m 

Milner  service-at-cost  plan:   (See  Toledo).         B 

Milwaukee  Electric  Railway  &  Light  Com- 
pany: depreciation  (J.  D.  Mortimer).  49-50; 
overbuilding  (J.  D.  Mortimer).  62;  per- 
centage increases  of  fares  and  revenues.  178- 
179;  1917-1919  comparison  of  fares  and  traf- 
fic. 185.  206.  of  fares  and  revenues.  191.  209; 
central  zone  system,  222-223 :  experiences 
witli  commission  regulation,  407-411;  1919 
strike  data,  531;  cooperative  plan,  611-616; 
1920  valuation,  729,  730.  736;  recent  fare 
changes,  Note  1  of  Ch.  XXIX. 

Minneapolis,  Minn.:  (See  Twin  City  Rapid 
Transit  Co.) 

Minnesota:  "Home  rule"  in.  413:  deviations 
from  home  rule.  Note  1  of  Ch.  XL. 

Mitten,  Thomas  E. :  (Sec  also  Joyce.  Coleman 
.1.)  ;  on  service  at  cost.  491 ;  on  extravagance 
of  employes,  579;  on  Philadelphia  overcapi- 
talization, 601-602;  on  Cooperative  Plan,  602- 
605,  609-610. 

Mohler,  Charles  K. :  analysis  of  certain  fea- 
tures of  Public  Service  Railwav  valuation, 
703. 

Money :  effect  of  decreased  value  on  new  capi- 
tal recpiirements,  29-30;  decreased  x-alue  of, 
Ch.  XXII,  116-128.  (G.  E.  Tripp)  36.1  ef- 
fect on  investors,  118-119.  390-391.  (G.  E. 
Tripp)  364-366,  (I.  Fisher)  120-121.  388-390, 
692-693 :  co.st  of  securing,  (Massachusetts 
Public  Service  Commission  in  Bay  State 
case)  375.  (Interstate  Commerce  Commis- 
sion  in   Texas-Midland   Report)    378-379. 

Monopoly:  relation  to  credit,  16;  private,  ne- 
cessity of  regulation   over,  673. 

Montreal.  Quebec :  faro  system,  and  effect  on 
traffic  and  revenue.  215-216;  comparison  with 
Toronto.  217;  franchise  taxation.  251;  serv- 
ice-at-cost contract.  456-463:  comments  on 
plan  (C.  K.  Robinson),  502;  wage  rates,  533, 
Note  1  of  Ch.  XLIII. 

Mortimer.  James  P. :  on  depreciation,  49-50, 
55-56:  on  Cleveland  plan,  50-52,  55-56.  455: 


Index 


781 


on  Boston  depreciation  policy,  56 ;  on  over- 
building (Milwaukee),  62;  on  use  of  police 
power  in  Wisconsin,  90-91 ;  on  limitations  of 
fare  increases,  172;  on  jitney  competition  in 
Kenosha,  295-296;  on  public  guaranty  in 
Kenosha,  316;  on  operating  economies  and 
abandonment  of  unprofitable  lines,  326;  on 
"watered  stock,"  331-332;  on  return  on  capi- 
tal, 395 ;  on  regulation  in  Wisconsin,  407- 
409,  411-412;  on  service  at  cost,  491;  on 
Philadelphia  plan,  599-601 ;  on  Milwaukee 
cooperative  plan,  611-615;  on  Wisconsin 
Board  of  Conciliation,  615. 

Mote.  Carl  H. :  on  jitney  competition,  107;  on 
zone  system,  240-241 ;  on  "knocking  down" 
(Indiana),  300-301;  on  overcapitalization 
(Indiana),  332-333;   on  service  at  cost,  490. 

Motor  trucks :  competition  of,  for  interurban 
freight   (C.  L.  Henry),  298. 

Municipal  ownership:  (See  Public  ownership 
and  operation). 

Murphine,  Thomas  F. :  on  reasons  for  Seattle 
railway  purchase,  520;  on  labor  conditions  in 
Seattle.  585. 

Nash.  Luther  R. :  on  franchise  ta.xes,  250;  on 
effect  of  public  guaranties  on  credit,  316;  on 
regulation,  433 ;  on  service  at  cost,  493-495, 
496-499,   500-501. 

Nashville,  Tenn. :  1917-1919  comparison  of 
fares  and  traffic,  187.  205.  of  fares  and  rev- 
enues, 193,  208;  1919  strike  data,  531;  wage 
rates,  533.  Note  1  of  Ch.  XLIII. 

National  Association  of  Railway  and  Utilities 
Commissioners:  resolution  on  valuaton  (P. 
P.  Haynes),  380-381. 

National  Consumers  League :  on  compulsory 
arbitration,  557-559. 

National  War  Labor  Board :  quoted  on  credit 
situation,  6;  relation  to  Federal  Commission, 
6;  on  wages,  9-10;  dealings  with  wage  dis- 
putes, 530.  534 ;  dealings  with  strikes,  539. 

New  Bedford,  Mass.:  (See  Union  Street  Rail- 
way Company). 

New  Brunswick  plan:  471. 

New  Haven,  Conn.:  (See  also  Connecticut); 
wage  rates,  532,  Note  1  of  Ch.  XLIII. 

New  Jersey :  criticism  of  zone  plan  in,  by 
.Associated  Municipalities,  231 ;  Local  Trans- 
portation Issues  in,  Appendi.x  A,  659-716; 
Street  Railway  Valuation  Act  amended. 
Note  2  of  Appendix  A. 

New  Jersey  Board  of  Public  Utility  Commis- 
sioners :  on  zone  fares.  220 ;  on  zone  system 
for  Public  Service  Railway,  229-230,'  231- 
232;  rate  of  return  allowed  in  Passaic  gas 
case,  387;  criticised  by  C.  L.  S.  Tingley,  423; 
decision  in  Public  Service  Railway  case. 
Note  2  of  Ch.  XXVII.  Note  7  of  Appen- 
dix A. 


New  Orleans,  La. :  effect  of  fare  increases  in 
(J.  K.  Newman).  171;  1917-1919  compari- 
son of  fares  and  traffic,  185,  206,  of  fares  and 
revenues,  191,  209;  taxation  (J.  K.  New- 
man), 250;  finances  (J.  K.  Newman),  338; 
wage  rates,  532,  Note  1  of  Ch.  XLIII. 

New  York  City :  increase  in  traffic,  3 ;  ta.xation, 
85-86;  operating  ratios,  123;  1917-1919  com- 
parison of  fares  and  traffic,  183,  199,  205, 
of  fares  and  revenues,  189,  208;  comparison 
of  fares  and  traffic  with  Boston  Elevated, 
198,  200;  with  Public  Service  Railway  Com- 
l)any,  200;  explanation  of  average  fare  fig- 
ure, 204;  use  of  motor  buses  to  compel  res- 
toration of  S-cent  fare,  287-288;  indirect  sub- 
sidies in,  318-320;  criticism  of  Public  Service 
Commission  in  (J.  L.  Quackenbush),  413- 
417;  1919  strike  data,  531;  wage  rates 
(Brooklyn,  Staten  Island),  532,  Note  1  of  Ch. 
XLIII ;  results  of  year  ending  June  30,  1920, 
Note  2  of  Ch.  XVI ;  subway  policy  affected 
by  1921  law.  Note  3  of  Ch.  XXXIV;  changes 
in  public  service  commission  law  affecting. 
Notes  3  and  4  of  Ch.  XL. 

New  York  Railways  Company:  1918-1919  taxes, 
86;  1917-1919  comparison  of  fare  and  traffic, 
183,  of  fare  and  revenues,  189;  receivership, 
414,  416. 

New  York  Public  Service  Commission,  First 
District :  proposes  hill  for  continuity  of  serv- 
ice, 553-555,  557-560;  changes  in  law  affect- 
ing. Notes  3  and  4  of  Ch.  XL. 

New  York  State:  (See  also  Jenks  bill);  con- 
stitutional obstacles  to  public  subsidies.  306; 
plans   for  continuity  of  service,  552-560. 

New  York  State  Railways:  1917-1919  compari- 
son of  fares  and  traffic,  184,  206,  of  fares  and 
revenues.  190,  209;  wage  rates,  532,  Note  I 
of  Ch.  XLIII. 

Newark.  N.  J.:  (Sec  also  Public  Service  Rail- 
way Co.)  ;  wage  rates,  532,  Note  I  of  Ch. 
XLIII;   jitney  traffic  in,  666-668. 

Newman,  J.  K. :  on  overcapitalization,  38;  on 
loss  of  credit,  municipal  ownership  and  serv- 
ice at  cost,  133-134 ;  on  effect  of  fare  in- 
creases, 171;  on  taxation,  249-250;  on  prob- 
lems of  reorganization,  337-338;  on  plan  of 
reorganization,  338-340;  on  theory  of  valua- 
tion, 361;  on  valuation,  370;  on  rate  of  re- 
turn, 401. 

Niagara  Falls,  N.  Y. :  (See  International  Rail- 
way  Co. ) 

Nixon,  Lewis:  on  taxes  and  paving  require- 
ments, 252-253. 

Norfolk,  Va. :  (See  also  Virginia  Railway  & 
Power  Co.)  ;  wage  rates,  532,  Note  1  of 
Ch.  XLIII. 

Northern  Ohio  Traction  &  Light  Co. :  1917- 
1919  comparison  of  fares  and  traffic.  186, 
206,  of  fares  and  revenues,  191,  209;  wage 
rates,  533,  Note  1  of  Ch.  XLIII. 


782 


Index 


Northern  Texas  Traction  Co.:  (See  Fort 
Worth,  Texas). 

Oakland,  CaHf. :  (See  also  San  Francisco- 
Oakland  Terminal  Railways  Co.)  ;  wage 
rates,  532,  Note  1  of  Ch.  XLIII. 

Oakwood  Street  Railway  Co.;  (See  Dayton, 
Ohio). 

Obsolescence:  G.  E.  Tripp.  Commissioner 
Beall.  etc.,  on,  151-152;  M.  E.  Cooley  on, 
357-358. 

Ogburn,  William  F. :  on  living  wage,  570-579. 

Omaha  &  Council  Bluffs  Street  Railway  Co. : 
1917-1919  comparison  of  fares  and  traffic, 
186,  205,  of  fares  and  revenues,  192,  208; 
wage  rates,  533,  Note  1  of  Ch.  XLIII. 

One-man  cars :  policy  of  Stone  &  Webster, 
196;  C.  W.  Kellogg' on,  272-273;  A.  E.  R.  .\. 
Committee  on  One-Man  Car  Operation  on, 
272-273;  general  discussion  of  (Kellogg, 
Tripp,  Tingley  and  Loring  quoted),  273-281; 
in  Detroit,  Note  4  of  Ch.  XI II. 

Operating  ratios:  general  statistics,  122-123; 
in  New  York  City,  123;  in  Cleveland.  124. 

Operation,  economies  in:  (See  also  One-man 
cars.  Power,  economics  in);  Ch.  XX.XI.  2t)()- 
285;  J.  D.  Mortimer  on.  326;  J.  A.  Beelcr 
on,  326;  relation  to  scrvice-at-cost  plan,  435- 
437. 

Oregon  Public  Service  Commission :  Portland 
valuation,  727. 

"Organization  expense" :  defined  by  A.  E.  R.  A. 
Committee  on  \'aluation,  349. 

Ottawa,  Out. :  wage  rates,  533,  Note  1  of  Ch. 
XLIII. 

Overbuilding:  Ch.  XI 11.  61-66. 

Overcapitalization:  (Sec  al.so  Watered  stock. 
Capitalization,  Holding  companies.  Banker 
control);  efftfct  on  credit.  Ch.  IX,  ,?6-42 ; 
amortization  of,  Ch.  X.  43-45 :  in  Philadel- 
phia. (W.  S.  Twining)  283-284,  (T.  E.  Mit- 
ten) 601-602;  J.  D.  Mortimer  on.  331-332; 
F.  H.  Sisson  on.  3i2;  in  Indiana  (C.  H. 
Mote),  .332-333;  of  Indianapolis  Traction  & 
Terminal  Co.  (A.  F.  Potts),  3.U-.W4 ;  In- 
diana Public  Service  Commission  on,  334- 
335;  S.  P.  Jones  on,  591-593;  W.  .1.  Lauck 
on,  593-595;  an  issue  in  New  Jcrsev,  671- 
672.  710. 

Overhead  charges:  treatment  by  A.  E,  R.  A. 
Commillec  on  Wtluation,  ,W9-3.50:  M.  E. 
Cooley  on,  356;  treatment  by  Massachusetts 
Public  Service  Commission  in  Bay  State  rale 
case,  374-375.  733;  treatment  by  Interstate 
Commerce  Connnission  in  Texas-Midland 
case,  376-379,  733;  treatment  by  Wisconsin 
Railroad  Commission,  733 ;  in  Des  Moines 
Gas  case,  733;  in  Denver  Union  Water  case, 
733. 

Owosso  (and  Corunna),  Mich.:  1917-1910  com- 
parison of  fares  and  traffic.  187.  207.  of  fares 
and  revenues,  19,1,  210. 


Pacific  Electric  Company:  (See  Los  Angeles 
Calif.) 

Pardee,  John  H. :  on  need  of  change  in  publi 
relations,  155-156. 

Passaic  gas  case:  rate  of  return  allowed  (N. 
Board  of  Public  Utility  Commissioners). 
387 ;  rate  of  return  discussed  (Justice 
Swayze),  387-388. 

Paterson,  N.  J.:  (See  also  Public  Service  Rail- 
wav  Co. )  ;  wage  rates,  532,  Note  1  of  Ch. 
XLIII. 

Paving:  (See  also  Franchise  obligations)  ;  C.  J. 
Bullock  on.  82;  San  Francisco-Oakland  Ter- 
minal Railways  Co.  (W.  E.  Creed),  84;  re- 
lief from  (H.  J.  Pierce),  132;  D.  F.  Wilcox 
on,  246-247;  J.  K.  Newman  on,  249-250; 
treatment  of,  in  Cincinnati  (W.  C.  Culkins), 
250-251;  in  Cleveland,  252;  Lewis  Nixon  on, 
252-253 :  general  discussion  of  charges,  253 ; 
L.  S.  Storrs  on,  253-254;  R.  W.  Babson  on. 
254-255;  G.  C.  Cummin  on,  255-256;  C.  W. 
Kutz  on,  256;  J.  B.  F.astmatl  on,  256;  V.  H. 
Sisson  on,  257;  T.  Conway  on,  257;  relief 
from   (R.  T.  Higgins),  291. 

Pawtucket,  R.  I.:  (See  Rhode  Island  Co.) 

Pennsylvania  Public  Service  Commission :  re- 
port on  Pittsburgh  Railways  Co..  371 ;  com- 
mented on,  by  C.  L.  S.  Tingley,  423 ;  pro- 
cedure commented  on  by  T.  Conway,  42,<- 
424;  commented  on  by  W.  D.  George,  425. 

PennsyKania    Public    Service    Company    Law 
provisions   of,    371-372;   eflfect   of,    in    Pitt.-,- 
hurgh  valuation,  372. 

People's  Railway  Co.:  (See  Dayton,  Ohio). 

Peters.  A.  J. :  on  wage  rates  for  Boston  Ele- 
vated, 581-582. 

Philadelphia  Rapid  Transit  Company:  1917- 
1919  comparison  of  fares  and  traffic,  183, 
199,  205,  of  fares  and  rc%-enues.  189,  208; 
comparison  of  fares  and  traffic  with  Boston 
Ele\'ated,  198;  with  Public  Service  Railwa>. 
200-201 ;  reduction  of  accident  expense  (C.  .1 
Joyce),  270;  fire  insurance  policy  (C.  j 
Joyce),  270;  operating  economies  (C.  j. 
Joyce),  270-271;  city's  attitude  toward  (\V. 
S.  Twining),  282-285;  Philadelphia  plan  (T 
E.  Mitten),  301  ;  comparison  of  revenues  with 
those  of  Indianapolis  Traction  &  Terminal 
Co.,  301-302;  Co-operative  Plan,  598-611; 
recent  wage  changes.  Note  1  of  Ch.  II;  re- 
cent fare  increase.  Note  1  of  Ch.  X\'. 

Pierce,  HcnrA-  T. :  on  continuing  5-cent  fare. 
132-l.U 

Pingrec.  Hazen  S. :  pioneering  efforts  of,  68' 

Pitney,  Justice:  treatment  of  rate  of  return 
Lincoln  Gas  &  Electric  Light  Co.  vs.  Linci-; 
386;  quoted  on   labor  contract   rights    (Cop- 
page  vs.  Kansas),  545. 

Pittsburgh,  Pa  :  1917-1919  comparison  of  fares 
and  traffic,  184,  199,  207,  of  fares  and  rev- 
enues,   190,    210;    discussion    of    fares    and 


Index 


783 


traffic,  202;  zone  system,  223:  fare  system 
and  effect  of  zoning  (VV.  D.  George),  240; 
report  of  Engineers  \'aluation  Board,  368- 
371,  706;  report  of  Pennsylvania  Public  Serv- 
ice Commission,  371 ;  public  attitude  in  (C. 
A.  Fagan),  425;  public  regulation  in  (C.  A. 
Fagan),  42S ;  regulation  in  (E.  V.  Babcock), 
429-430;  capitalization  in,  512;  1919  strike 
data,  531 ;  wage  rates,  532,  Note  1  of  Ch. 
XLIII. 

Plumb  Plan :  Amalgamated  Association's  de- 
mands opposed  to,  563 ;  commented  on,  616- 
617. 

Police  power:  (See  also  Service,  Regulation); 
use  in  bettering  service.  Cb.  X\'II.  88-91. 

"Politics"  under  public  ownership :  J.  K.  New- 
man on,  133;  E.  N.  Foss  on,  144;  F.  B. 
deBerard  on.  144-145;  S.  R.  Bertron  on, 
Note  2  of  Ch.  XXIII. 

Population  served :  4. 

Portland,  Maine;  (See  Cumberland  County 
Power  &  Light  Co.). 

Portland,  Ore. :  1917-1919  comparison  of  fares 
and  traffic,  186,  206,  of  fares  and  revenues, 
192.  209;  wage  rates,  533,  Note  1  of  Ch. 
XLIII:  valuation  per  mile,  727,  730. 

Potts.  Alfred  F. :  report  on  Indianapolis  Trac- 
tion &  Terminal  Co.,  333-334. 

Power,  economies  in:  (See  also  Operation, 
economies  in)  ;  J.  A.  Beeler  on,  268;  VV. 
Jackson  on.  268-269;  H.  G.  Bradlee  on,  269. 

Productivity,  increased:  W.  J.  Lauck  on,  588; 
.■\.  Sturgis  on,  590-591 ;  as  determining  wages 
(J.   D.   Mortimer),  612-613. 

Profits:  past  (\V.  H.  Taft),  37;  as  controlling 
motive,  151.  722;  D.  F.  Wilcox  on,  152-153; 
early,  from  5-cent  fare,  328-329. 

"Promotion  expense" :  defined  by  A.  E.  R.  A. 
Committee  on  Valuation,  348;  M.  E.  Cooley 
on,  355. 

Promoters'  profits :  treatment  by  Massachu- 
setts Public  Cervice  Commission  (Bay  State 
Case),  375. 

Providence.  R.  I.:  (See  also  Rhode  Island 
Co.)  :  1919  strike  data,  531  ;  wage  rates,  532, 
Note  1  of  Ch.  XLIII;  1919-1920  results  un- 
der zone  plan.  Note  2  of  Ch.  XXIX. 

Public,  the:  two  conceptions  of  the  term,  560- 
561. 

Public  hostility:  G.  E.  Tripp  on,  37-38;  F.  H. 
Sisson  on,  38,  154;  \V.  H.  Taft  on,  154. 

Public  operation  with  private  ownership:  H. 
Loring  on.  136-137:  F.  T.  McLeod  on,  137; 
Boston  Elevated.  464-471  ;  Eastern  Massa- 
chusetts Street  Railway  Co.,  471-476. 

Public  ownership  and  operation  :  G.  E.  Tripp 
on,  129;  H.  C.  Clark  on.  131-132;  H.  J. 
Pierce  on,  132-133:  J.  K.  Newman  on,  133; 
S.  R.  Bertron  on,  135-136,  Note  2  of  Ch. 
XXIII;  R.  T.  Higgins  on,  136;  H.  Loring 
on,  137;  F.  T.  McLeod  on,  137;  J.  A.  Beeler 


on,  138;  C.  W.  Kutz  on,  138;  H.  L.  Stuart 
on,  139;  general  discussion,  Ch.  XXIV,  140- 
148;  of  roadbed  (C.  W.  Kutz),  256;  taxation 
under,  in  Detroit.  259;  fare  provisions  under, 
in  Detroit,  310-311;  T.  Conway  on,  314;  re- 
semblance of  Cleveland  plan  to  (N.  D. 
Baker),  451;  F.  Sanders  on,  453;  R.  VV. 
Babson  on,  470;  use  of  public  credit,  506- 
527;  employe  relations.  Ch.  XLVIII,  618- 
620;  the  ultimate  solution,  Ch.  LIV,  635-643;' 
favored  in  dissenting  report  of  Massachusetts 
Special  Commission,  Note  1  of  Ch.  XX ;  De- 
troit program,  Note  2  of  Ch.  XXVTII; 
Seattle  experience.   Note  4  of  Ch.  XLII. 

Public  ownership  with  private  operation :  C. 
VV.  Kutz  on,  138;  of  roadbed  (C.  VV.  Kutz). 
256;  E.  V.  Babcock  and  C.  K.  Robinson  on, 
507. 

Public  relations:  (See  also  Cooperation);  sig- 
nificance of  franchise  rights  and  of  com- 
panies' appeal  to  Federal  Commission,  4-5 ; 
interrelation  with  credit  and  labor,  Ch.  IV, 
15;  need  of  change  in  (J.  H.  Pardee),  155- 
156. 

Public  Service  Commissions:  (See  also  Police 
power.  Service,  Regulation)  ;  H.  L.  Stuart 
on,  93;  R.  Schaddelee  on,  97-98,  291-292. 

Public  Service  Railway  Company  (New  Jer- 
sey) :  current  replacement  costs,  32-33;  de- 
preciation policy,  53 ;  depreciation  and  divi- 
dend policy  (Utilities  Commission),  59; 
decrease  in  values  of  securities  (T.  N. 
McCarter),  122;  1917-1919  comparison  of 
fares  and  traffic,  183,  199,  207,  of  fares 
and  revenues,  189,  210;  comparison  of  fares 
and  traffic  with  Philadelphia,  200-201,  with 
New  York  City,  200-201 ;  zone  system,  229- 
232;  comparison  with  Cleveland  Railway. 
252;  1919  strike  data,  531;  wage  rates,  532. 
Note  1  of  Ch.  XLIII;  general  relation  to 
local  transportation  issues  in  New  Jersey, 
Appendix  A,  659-716;  recent  wage  changes. 
Note  1  of  Ch.  II ;  application  for  10-cent 
fare.  Note  2  of  Ch.  XXVII,  Note  7  of  Ap- 
pendix A;  failure  of  attack  on  jitneys.  Note 
4  of  Appendi.x  A ;  new  wage  agreement  ef- 
fective August  1,  1921,  Note  6  of  Appendix 
A ;  valuation  of.  by  Ford,  Bacon  &  Davis, 
Note  7  of  .Appendix  A. 

Puget  Sound  Traction,  Light  &  Power  Com- 
pany: (See  also  Seattle,  Wash.);  purchase 
by  Seattle,  517-520. 

Purdy.  Lawson :  on  special  assessments,  528. 

Quackenbush,  James  L. :  on  public  service  com- 
missions, 88-89,  413-417;  on  public  ownership, 
510-511. 

Railroad  Valuation  Act  of  March  1,  1913:  terms 
of,  376. 


7S4 


Index 


Read,  William  T. :  letter  of  D.  F.  Wilcox  to, 
re  New  Jersey  situation,  661-663;  action  of, 
as  member  of  Valuation  Commission,  Note 
3  of  Appendix  A. 

"Readiness-to-serve":    (See    Standby    charge). 

Receiverships :  relation  of  wage  increases  to 
(1".  H.  Sisson),  10;  statistics  on  (J.  W. 
Welsh),  64;  A.  E.  R.  A.  on  miles  of  track 
in  receivers'  hands,  ill;  Secretaries  of  Com- 
merce and  Labor,  on  companies  in  receivers' 
hands,  327;   when  advisable,  723-724. 

Record,  George  L. :  connection  with  Public 
Service  Railway  case,  664. 

Refunding;   difficulty  of,    19-20. 

Regulation:  (See  also  Jitneys);  origin  and 
significance  of,  4-5,  677;  relation  of  over- 
capitalization to,  36-37;  of  capitalization,  (Th. 
-Will,  92-96;  abandonment  of  (R.  W.  Bab- 
son).  104-106;  failure  of  (G.  E.  Tripp), 
129;  criticism  of  commission  (R.  Schadde- 
lee),  291-292;  state  vs.  local,  293-294;  of  jit- 
neys, 288,  (R.  W.  Babson)  292-293,  (1.  A. 
Bceler)  292,  (L.  S.  Storrs)  294-295,  in  Dal- 
las (W.  B.  Head)  295.  (D.  C.  Jackson) 
297-298;  of  motor  trucks  (C.  L.  Henry), 
298;  state,  unrestricted,  Ch.  XL,  405-433; 
commission,  compared  with  service  at  cost, 
435 ;  local,  in  Cleveland,  443-444 ;  abandon- 
ment of,  Ch.  LI,  624-625;  inadequacy  of,  Ch. 
LH,  626-630,  677-678;  necessity  of,  in  case 
of  private  monopoly,  673;  endangered  by 
financial  distress  of  companies,  674-675. 

Rehabilitation:  necessity  for,  33-34;  of  Boston 
Elevated,  467;  of  Eastern  Massachusetts 
property    (H.   Loring),  474. 

Relief:  (See  Fare  increa.scs.  Remedies). 

Remedies :  ( See  also  Fare  increases.  Subsi- 
dies) ;  abandonment  of  regulation,  (R.  W. 
Babson)  104-106.  Ch.  LI,  624-625;  for  credit 
situation.  Ch.  XXIII,  129-139,  157;  suggest- 
ed, 343-344 ;  Paul  Shoup  on,  421  ;  the  four 
choices,  Ch.  L,  623;  commission  regulation. 
Ch.  LH.  626-630;  service  at  co.st.  Ch.  LIH. 
631-634;  public  ownership  and  operation, 
Ch.  LIV,  6.?5-643;  recommendations  in  Den- 
ver report,  725. 

Reorganization:  Ch.  XX.XVI,  327-342;  as  rem- 
edy for  financial  embarrassment  (W.  H. 
Taft),  324. 

Replacements:  Public  Service  Railway,  i2-Zi\ 
Cleveland  Railway,  ii.  394,  444;  J.  D.  Mor- 
timer on,  411;  Montreal  policy,  459-460. 

Reprixluction  cost  melhixl  of  valuation:  (See 
\'alualion). 

Return  on  capital :  metho<ls  of  increasing,  Ch. 
XXVI,  157-1.59;  rate  of,  general  discussion, 
Ch.  XXXIX,  .?8.';-404;  j.  D.  Mortimer  on, 
412-413;  under  service-at-cost  plans,  4.W-439, 
740;  in  Cleveland.  440-441  ;  in  Montreal.  460- 
461;   under  Jrnks  hill,  464;  on   Boston   Ele- 


vated, 465-466;  on  Eastern  Massachusetts, 
473;  L.  R.  Nash  on,  498-499;  variable  rate 
of  (T.  L.  Sidlo),  499;  flexibility  of,  499- 
500,  (L.  R.  Nash)  500;  relation  between  high 
rate  and  market  value  of  stocks,  Denver, 
731. 

Revenues :  total  for  1917,  1 ;  compared  with 
steam  railroads,  1;  per  passenger  (1917),  4; 
increase  over  1902,  17 ;  collected  in  advance. 
17-18;  relation  of  wages  to  (W.  J.  Lauck), 
114-115;  effect  of  increased  fares  on,  Ch. 
XXVIII,  165-217;  loss  of,  through  dishon- 
esty and  carelessness  of  emploves  (C.  H. 
Mote),  300. 

Richmond,  Va. :  (See  also  Virginia  Railway  & 
Power  Company ) ;  wage  rates,  532,  Note  1 
of  Ch.  XLIII. 

Rhode  Island  Company  :  Z.  W.  Bliss  on  taxa- 
tion, 83;  W'.  C.  Bliss  on  jitnev  competition, 
106-107;  data  on  1917-1919  fares,  traffic  and 
revenues,  185,  191 ;  meaning  of  fare  and  rev- 
enue statistics,  1%-197;  zone  svstem  (W.  C. 
Bliss),  223-226:  1919  strike  data.  531;  wage 
rates,  532,  Note  1  of  Ch.  XLIII. 

Riding  habit :  significance  of,  214. 

Right  to  strike:  D.  F.  Wilcox  on,  153-154; 
limitation  of,  Ch.  XLV,  541-563. 

Robinson,  Charles  K. :  on  service  at  cost,  501- 
503;  on  public  ownership  with  private  oper- 
ation, 507;  on  Pittsburgh  capitalization,  512. 

Rochester,  N.  Y. :  (See  also  New  York  State 
Railways)  ;  wage  rates,  532,  Note  1  of  Ch. 
XLIII;  service  at  cost  for.  Note  1  of  Ch. 
XLI. 

Routing:  improvement  of  (J.  A.  Becler),  265; 
in  Philadelphia  (C.  J.  Joyce),  265-266;  sav- 
ing in  Cincinnati,  267. 

Ryan,  John  .\. :  connection  with  Denver  inves- 
tigation, 719. 

St.  Louis,  Mo. :  1917-1919  comparison  of  fares 
and  traffic,  184,  206,  of  fares  and  revenues, 
189,  209;  wage  rates,  532,  Note  1  of  Ch. 
XLIII. 

St.  Paul,  Minn.:  (See  Twin  Citv  Rapid  Tran- 
sit Co.) 

Salt  Lake  City,  Utah:  1917-1919  comparison  of 
fares  and  traffic,  187.  206.  of  fares  and  rev- 
enues. 193.  209;  wage  rates,  533,  Note  1  of 
Ch.  XLIII. 

San  .■\ntonio.  Texas :  1917-1919  comparison  of 
fares  and  traffic,  188.  205,  of  fares  and  rev- 
enues, 194.  208;  wage  rates,  hil.  Note  1  of 
Ch.  XLTII. 

."^an  Diego.  Calif. :  adopts  zone  svstem.  Note 
5  of  Ch.  XL. 

San  Francisco,  Calif.:  depreciation  policy.  Mu- 
nicipal Railway,  53-.=;4,  746;  1917-1919  com- 
parison of  fares  and  traffic,  184,  205,  of  fares 
and  revenues,  190.  208:  results  of  municipal 
operation,  524;   wage   rates,  532,   Note   1   of 


Index 


785 


Ch.   XLIII ;    1916-1917   maintenance  and  de- 
preciation   (Municipal  Railway),  744. 

San  Francisco-Oakland  Terminal  Railways 
Companv ;  taxes  and  franchise  obligations 
(W.  E. 'Creed),  83-85;  1917-1919  comparison 
of  fares  and  traffic,  185,  206,  of  fares  and 
revenues,  191,  209;  wage  rates,  532,  Note  1 
of  Ch.  XLIII;  6-cent  fare,  Note  5  of  Ch. 
XL. 

Sanders.  Fielder:  on  Cleveland  plan.  452-453; 
on  miniicipal  ownership,  453. 

Schaddelee.  Richard:  on  holding  companies, 
70;  on  public  service  commissions,  97-98;  on 
jitney  competition,  110,  291-292;  on  commis- 
sion regulation,  291,  421-423;  on  rate  of  re- 
turn. 400. 

Schedules  : 

improvement    of:    (I.    A.    Beeler),   264-265; 

in  Philadelphia   (C.  J.  Joyce),  266-267. 
of    working    time :    Detroit,    584 ;    Cleveland. 
584-585 ;     method    of    determining    under 
Philadelphia    plan,    604-605 ;    statistics    of, 
Philadelphia  and   Detroit,  610. 

Schenectady :  1917-1919  comparison  of  fares 
and  traffic,  Schenectady  Railway,  188,  (city 
lines)  205,  (interurban)  206,  of  fares  and 
revenues,  194,  (citv  lines)  208,  (interurban) 
209;  wage  rates,  533,  Note  1  of  Ch.  XLIII. 

Schreiber.  Martin :  connection  with  Public 
Service  Railway  valuation.  687,  689. 

Scranton  Railway  Company :  dividend  and 
maintenance  policy  (C.  L.  S.  Tingley),  59- 
60;  1917-1919  comparison  of  fares  and  traf- 
fic, 187.  207,  of  fares  and  revenues.  193,  210; 
wage  rates,  533.  Note  1  of  Ch.  XLIII. 

Seattle.  Wash.:  1917-1919  comparison  of  fares 
and  traffic,  185,  205,  of  fares  and  revenues, 
191,  208:  method  of  acquiring  railway,  517- 
520;  results  of  railway  operation,  520-524; 
1919  strike  data.  531 ;  wage  rates,  532.  Note 
1  of  Ch.  XLIII ;  purchase  price  of  railway, 
729,  730;  fare  increase.  Note  1  of  Ch.  XV, 
Note  4  of  Ch.  XLII;  Councilman  Erickson's 
policy  with  respect  to  street  railway  purchase 
and  fares.  Note  4  of  Ch.  XLII ;  Mayor  Cald- 
well's investigation  of  street  railway  pur- 
chase. Note  4  of  Ch.  XLII. 

Second  Avenue  Railway  Company  (New  York 
City):  1918-1919  taxes,  86;  receivership  (J. 
L.  Quackenbush),  414. 

Secretary  of  Commerce  and  Secretary  of  La- 
iKir :  letter  of  Mav  15.  1919,  to  the  Presi- 
dent, in. 

Securities:  (See  also  Capitalization.  Regula- 
tion. Reorganization);  demand  for,  (H.  L. 
Stuart)  6-7,  (S.  R.  Bertron)  7;  ratio  of 
stocks  to  bonds.  18-19.  94-95;  not  retained 
by  promoters  (G.  E.  Tripp).  54;  change  in 
value  of  electric  railway  (R.  \V.  Babson), 
121-122;  of  utilities  in  general.  122;  guaranty 
of   bends    (F".    H.   Sisson),    134-135;    shrink- 


age in  value  of,  335 ;  ratio  of  stock  to  funded 
debt,  335 :  fate  of  outstanding  ( F.  H.  Sis- 
son),  iid-iZl ;  treatment  of,  in  valuation  (G. 
E.  Tripp),  364;  value  of,  Boston  Elevated 
(B.  Warren),  398-399,  400,  Eastern  Massa- 
chusetts, 399. 

Security  holders :  relative  effects  of  high  prices 
on  stockholders  and  bondholders,  118-119, 
(Fisher)  120-121,  388-390,  692-696,  731,  12,1 - 
738. 

Self-supporting:  meaning  of,  for  street  rail- 
ways, 303-304. 

Service:  (See  also  Police  power)  ;  personal  na- 
ture of,  9;  use  of  police  power  for  better- 
ment of,  Ch.  XYII,  88-91;  as  controlling 
motive,  151,  (D.  F.  Wilcox)  152-153;  con- 
tinuity of.  153,  (D.  F.  Wilcox)  153-154; 
ways  of  improving  (J.  B.  Eastman),  271; 
regulation  of  jitney  (R.  W.  Babson),  292- 
293;  free,  advocated  by  R.  S.  Bauer,  309; 
control  of,  under  service  at  cost,  (Cleve- 
land) 443-444.  (Montreal)  458,  (Boston  Ele- 
vated) 465,  (Eastern  Massachusetts)  472, 
(Massachusetts  service-at-cost  act)  478, 
(Cincinnati)  482-483,  (Denver)  741;  value 
of.  effect  of  jitney  competition  on,  671. 

Service  at  cost:  (See  also  Cleveland,  Cincin- 
nati, Montreal,  Boston  Elevated,  Eastern 
Massachusetts,  Youngstown)  ;  G.  E.  Tripp 
on.  130-131;  H.  C.  Clark  on,  131-132;  J.  K. 
Newman  on,  133-134;  S.  R.  Bertron  on,  135; 
J.  A.  Beeler  on.  137-138;  effect  on  fares, 
163-164:  incentive  under.  402-404:  relation  to 
commission  regulation.  406;  J.  D.  Mortimer 
on,  412;  Ohio  cities  adopting,  426;  general, 
Ch.  XLI,  434-504,  Ch.  LI II.  631-634;  analy- 
sis of  Denver  ordinance.  738-744. 

Shoup,  Paul:  on  jitney  competition,  99-100; 
on    remedial    measures,    420-421. 

Sidlo.  Thomas  L. :  on  financial  policy  of  Cleve- 
land Railway  Co.,  19;  on  return  on  capital, 
499:   on   compulsory  arbitration,   543-544. 

Sisson,  Francis  H. :  on  effect  of  wage  increases, 
10;  on  public  hostility  and  overcapitalization, 
38;  on  indebtedness,  44.  12;  on  effects  of  war 
prices  on  credit.  126-121 ;  on  public  guaran- 
ties, 134-135;  on  public  ownership,  140-141; 
on  justification  for  public  hostility.  154;  on 
effect  of  fare  increases,  169;  on  paving  and 
other  charges,  257 ;  on  efficiency  of  manage- 
ment. 261 ;  on  abandonment  of  unprofitable 
lines,  323-324;  on  overcapitalization,  332;  on 
relation  of  capitalization  to  value,  335-336; 
on  fate  of  outstanding  securities,  336-331 ;  on 
importance  of  the  valuation,  368;  on  rate  of 
return.  397-398;   on   regulation,  432. 

Skip-stop  plan:  effect  of  (G.  C.  Cummin), 
267:  in  Philadelphia  (C.  J.  Joyce),  267;  J. 
A.  Beeler  on,  267. 

Smvth  vs.  Ames :  Justice  Harlan's  decision, 
380. 


786 


Index 


Sommer,    Frank    H. :    connection    with    Public 

Service   Railway  case,  665. 
Special   assessments:    (See   also   Contributions 
by    property    owners)  ;    M.    R.    Maltbie   on, 
317-318.  528;  Lawson  Purdy  on.  528. 
Special  franchise  tax:   (See  Franchise  tax). 
Spokane.  Wash.:  1917-1919  comparison  of  fares 
and  trafflc,   187.  of   fares  and  revenues,   193; 
wage  rates.  533.  Note  1  of  Ch.  XLlll. 
SpraRue.  Frank  j.:  on   future  of  the  industry 

and  on  cfTect  of  competition,  290-291. 
Springfield,     Mass.:     jitney     competition      (B. 
Warren),     100;     1917-1919    comparison     of 
fares  and  traffic.   186,  206,  of  fares  and  rev- 
enues, 192,  209;  zone  .system.  226-227;  wac;c 
rates.  533,  Note  1  of  Ch.  XLIIl. 
Squires,    Benjamin    M.:   on    Canadian   compul- 
sory  investigation  act,   549. 
Standardization:    (See    Equipment). 
Standby  charge:   Public  Service  Railway  Com- 
pany. 230-231,  237-238. 
Stanley,   John   T. :  on  Cleveland  reorganization, 
51;  on  relation  of  bankers  to  credit.  73;  on 
franchise    requirements,    251 ;    on    contribu- 
tions  by    proix-rty    owiiers    for   extension    in 
Cleveland,  317;  on  rate  of  return  in  Cleve- 
land.   .Wl-392;    on    regulation,    426-427. 
Statistical    fables:    New   York   City    traffic,   3; 
wage    rates,    13;    earnings    and    construction 
expenditures.    Stone    &•    Webster    companies, 
22;   annual    capital   additions,   2i.   2S:    gross 
earnings   and    capital    investment,    27 ;    taxa- 
tion  statistics,  79;  taxes  and   franchise   obli- 
gations,   81  ;    taxes,    San    I'rancisco-Oakland 
Terminal   Railways,  84;   percentage  of  taxes 
to  revenue.  New  York  City,  86;  jitney  and 
street    car    traffic,    Bridgeport,    Conn.,     102; 
ratio  of  salaries  and  wages  to  operating  rev- 
enues,   113:   operating    revcn\ic   per  employe, 
114;   operating   ratios,   123;   operating   ratios. 
New  York  City.  123,   Cleveland.    124:   aver- 
age  cost   of   supplies.   124;    rates  of    fare   in 
\'arious   cities.    16.1;    percentage    increases    in 
faros  and  revenues.  (Milwaukee)   179.  ( Hor- 
nell)    179,    (Cumlx-rland   County)    179:    rela- 
tion of  traffic  to  fare  increases  on  principal 
U.   S.  systems    (Table   I),    18,M88:   relation 
of    revenues    to    fare    increases   on    principal 
U.    S.    systems    (Table    II),    189-194;    traffic 
compari.sons,     princinal     U.     S.     systems,     6 
months    basis     (Table    III),    199;     formulas 
for   relations  of    fares,   traffic   and   revenues. 
203 ;   sninmary,  traffic   compared   to   fare   in- 
creases, principal  V.  S.  systems   (Table  IV), 
205-207 ;     summary,    rcveiuies    compared    to 
fare  increases,  principal  U.  S.  systems   (Ta- 
ble \'),  208-210;  general  summary,  effect  of 
fare    increases    upon    traffic    and     revenues, 
principal    U.    .S.    systems    (Table    \I).    212; 
comparison    of    fares,    traffic    and    revenues. 
Montreal  with  Toronto,  217;  Cleveland  taxes 


(1918),  252;  Public  Service  Railway  taxes 
(1918),  252;  comparison  of  financial  results 
under  one-man  car  operation  with  those  un- 
der heavier  equipment,  279;  total  net  capi- 
talization (1917),  330;  increase  in  gross  rev- 
enues. Eastern  Massachusetts.  476;  income 
per  passenger  in  Cincinnati.  485 ;  comparison 
of  servicc-at-cost  cities  with  others  as  to 
effect  of  fare  increases,  495;  depreciation 
percentages,  Seattle,  521-522;  revenue  and 
expense  statement,  Seattle  Municipal  Kail- 
way  (1919),  523;  table  of  strikes,  with  rev- 
enue losses  (1919),  531;  wage  rates  in  prin- 
cipal cities,  (Jan.  1,  1920)  532-533,  (.Ian.  1, 
1921)  Note  1  of  Ch.  XLIII;  length  of  runs, 
Detroit  and  Philadelphia,  610;  jitney  traffic 
in  Newark.  N.  J..  667;  valuation  compari- 
.sons. 727.  730;  distribution  of  San  Francisco 
Municipal  Railwav  net  earnings.  Note  2  of 
Ch.  XI. 
Stone  &  Webster:  earnings  and  construction 
expenditures,  22;  one-man  car  operation, 
196;  purchase  arrangement  with  Seattle,  517- 
.520,  Note  4  of  Ch.  XLII;  connection  with 
Public  Service  Railway  valuation,  661-662. 
Stops,  location  of:  (See  also  Skip-stop  plan); 
J.  A.  Heeler  on.  267. 

Storrs,  Lucius  S. :  on  use  of  police  power  in 
Connecticut.  89-90;  on  jitney  competition, 
Massachusetts  and  Connecticut.  101-l(i3;  on 
limitations  of  fare  increases,  170-171  ;  zone 
system  in  Connecticut,  232-235;  on  justice  of 
paving  and  other  charges,  253-254;  on  jit- 
ney competition  and  regulation,  294-295 ;  on 
public  subsidies,  314-315;  on  track  mileage 
and  intenirban  development  in  Great  Brit- 
ain and  United  States,  .125. 

Streets :   significance  of  rights  in.  4. 

Strikes:  (See  also  Right  to  strike);  preven- 
tion of  (W.  C.  Bliss),  11:  table  of.  with 
revenue  losses  (1919),  531;  effect  of  automo- 
bile on,  5.34-535:  in  Des  Moines,  538-539; 
National  War  Latvir  Board's  dealing  with, 
5.W;  in  Toronto,  549;  in  Philadelphia.  605- 
606;  in  1920  and  first  half  of  1921,  Note  2 
of  Ch.  XLIII. 

Stuart,  Harold  L. :  on  demand  for  securities, 
6-7;  on  public  service  commissions,  93;  on 
public  ownership,  139;  on  rate  of  return, 
.W-.W;  on  regulation,  431-432. 

Sturgis,  .■Xrthur:  statistics  of  wage  rates,  569, 
571,  589- .590;  on  increased  productivity,  590- 
591  ;  on  efTect  of  wage  increases,  591. 

Subsidies,  public:  (See  also  Remedies);  Ch 
XXXIW  303-321. 

Summary  and  outline  of  analysis  of  electric 
railway  problem,  with  final  conclusions  in- 
dicated:  644-657. 

Superseded  property:  (Sec  al.so  Obsolescence)  ; 
A.  E.  R.  A.  Committee  on  Valuation  on. 
350;  G.  E.  Tripp  on,  366. 


Index 


787 


Surplus:  use  of,  to  meet  losses,  118;  as  equal- 
izer.  402;    under   service-at-cost   plan,   439. 

.Swayze,  Justice:  on  rate  of  return  (Passaic 
gas  case),  ,587,  671. 

Syndicates:    (See  Holding  companies). 

Syracuse,  N.  Y. :  (See  also  New  York  State 
Railways)  ;  wage  rates,  532,  Note  1  of  Cli. 
XLIII.' 

Systems,  statewide :   195. 

Taconia.  Wash. :  1917-1919  comparison  of  fares 
and  traffic,  188,  207,  of  fares  and  revenues, 
194,  210;  wage  rates,  533,  Note  1  of  Ch. 
XLIII. 

Taft,  William  H. :  on  credit  situation,  6;  on 
relation  of  wages  to  finances,  10;  on  over- 
capitalization and  past  profits,  37 ;  on  reme- 
dies, 138;  on  public  ownership,  140;  on  jus- 
tification for  public  hostility,  154;  on  limi- 
tations of  fare  increases,  168;  on  ta.xation, 
247-248;  on  policy  of  public  subsidies.  321; 
on  reorganization  and  abandonment  of  un- 
profitable lines,  324. 

Taxation:  (See  also  Franchise  taxes);  total 
(1917),  4;  special,  Ch.  XVI.  78-87;  relation 
to  rise  in  costs,  117;  H.  J.  Pierce  on,  132; 
R.  T.  Higgins  on,  136;  relief  from,  Ch. 
XXX,  244-259,  286:  of  private  vehicles.  286- 
287;  "equal."  and  limited  exemption  from 
C.  J.  Bullock),  307-308;  Massachusetts  Pub- 
lic Service  Commission  on  taxation  to  sup- 
port street  railways,  308-309;  of  land  values 
to  make  up  deficit  in  revenues  ( F.  F.  In- 
gram). 309-310;  Massachusetts  Special  Street 
Railway  Commission  on,  313 ;  relation  to 
service-at-cost  plans,  437 ;  in  Cleveland,  443 ; 
N.  D.   Baker  on,  451. 

Tayler  grant:  (See  Cleveland  Railway  Com- 
pany). 

Taylor.  A.  Merritt :  on  valuation,  .361-362. 

Terre  Haute.  Ind. :  1917-1919  comparison  of 
fares  and  traffic,  Terre  Haute.  Indianapolis 
&  Eastern  Traction  Co.,  188.  (city  lines)  205. 
(interurban)  207.  of  fares  and  revenues,  194, 
(city  lines)   208,    (interurban)   210. 

Te.xas-Midland  Railroad :  report  of  Interstate 
Commerce  Commission  on  valuation  of,  376- 
379. 

Third  Avenue  Railroad  Company  (New  York 
City)  :   overcapitalization.   44. 

Third  .\ venue  Railroad  Company  (New  York 
City):  1918-1919  taxes,  86;  1917-1919  com- 
parison of  fare  and  traffic,  183,  of  fare  and 
revenue.  189. 

Tingley,  C.  L.  S. :  on  dividends  and  mainte- 
nance policy  (Scranton).  59-60;  on  increased 
costs,  127;  on  effect  of  fare  increases,  169; 
on  commission   regulation,  423. 

Toledo.  Ohio:  1917-1919  comparison  of  fares 
and  traffic,  186,  207,  of  fares  and  revenues, 
192,  210;  local  regulation  in   (H.  L.  Doher- 


ty),  428;  wage  rates,  533,  Note  1  of  Ch. 
XLlll;  1920  value,  729,  730;  Milner  service- 
at-cost  plan.  Note  6  of  Ch.  XL. 

Toronto,  Ont. :  fare  system  and  efTect  on  traf- 
fic and  revenue,  216-217 ;  comparison  with 
Montreal,  217;  wage  rates,  533,  Note  1  of 
Ch.  XLIII;  valuation,  727-728;  municipal 
ownership  program.  Note  5  of  Ch.  XXVIII. 

Track:  comparison  of  mileage  in  Great  Brit- 
ain and  United  States,  322,  (L.  S.  Storrs) 
324-325. 

Traffic:  total  for  1917,  2;  compared  with  steam 
railroads,  2;  increase  in,  2-i;  New  York 
City  increase,  3;  increase  over  1902.  16;  ef- 
fect of  increased  fares  on,  Ch.  XXVIII,  165- 
217. 

Trailers :  use  of,  in  Detroit,  269,  in  Cleveland 
(N.  D.  Baker).  269. 

Transfers,  abolition  of:   H.  J.  Pierce  on.   132. 

Transmittal,  letter  of:  Delos  F.  Wilcox  to 
Charles  E.  Elmquist,  Chairman,  June  8,  1920, 

-X. 

Transportation  areas  (or  districts)  :  suggested 
by  Massachusetts  Special  Street  Railway 
Commission,  313;  to  avoid  city  boundary  dif- 
ficulties, 511. 

Trenton.  N.  J. :  1917-1919  comparison  of  fares 
and  traffic,  188.  207,  of  fares  and  revenues, 
194.  210;  wage  rates,  533,  Note  1  of  Ch. 
XLIII. 

Tripp,  Guy  E. :  on  new  capital  requirements, 
21;  on  overcapitalization,  37-38,  44;  on  pro- 
motion policy,  54;  on  uniform  fare.  76;  on 
failure  of  old  methods  of  control  and  on  pos- 
sible remedies.  129-131 ;  on  obsolescence.  151- 
152;  on  limitations  of  fare  increases,  168; 
on  zone  systems,  236-237 ;  on  taxation.  248 ; 
on  one-man  cars.  274;  on  valuation.  362-367. 

Troy:  (See  also  United  Traction  Company); 
Note  2  of  Ch.  XLIII,  Note  3  of  Ch.  XLIII. 

Twin  City  Rapid  Transit  Co.  (Minneapolis  and 
St.  Paul.  Minn.)  :  1917-1919  comparison  of 
fare  and  traffic,  184.  205.  of  fare  and  rev- 
enues, 190,  208. 

Twining,  William  S. :  criticism  of  Philadelphia 
Rapid  Transit  Company,  report  of  Nov.  14, 
1919,  282-284. 

Union  Street  Railway  Company,  New  Bedford. 
Mass.:  1917-1919  comparison  of  fares  and 
traffic.  188,  205.  of  fares  and  revenues,  194, 
208;  compared  with  Eastern  Massachusetts, 
476;  1920  situation.  Note  1  of  Ch.  XV. 

Unions,  recognition  of:  (See  also  Collective 
bargaining)  ;  National  War  Labor  Board  on, 
566;  W.  J.  Uuck  on,  566-.S68. 

I'nited  Railroad.^ :    (See  San   Francisco). 

United  Railways  Co.:  (See  St.  Louis.  Mo.) 

L'nited  Railways  and  Electric  Co.:  (See  Bal- 
timore, Md.) 


788 


Index 


United  Traction  Co.  (Albany,  Troy,  etc.)  : 
strike.  Note  2  of  Cli.  XLIIl. 

Utah  Light  &  Traction  Co.:  (See  Salt  Lake 
City). 

Utica.  N.  Y.:  (See  also  New  York  State  Rail- 
ways) ;  wage  rates,  532,  Note  1  of  Ch.  XLIIL 

Vahey,  James  H. :  on  Massachusetts  compul- 
sory arbitration   bill,   545-549. 

Valuation:  Ch.  XXXVIII,  345-3»4;  methods 
of  certain  valuation  engineers,  44;  as  basis 
for  rate  fi.\ing  and  purchase  price,  385;  J. 
D.  Xliirtimer  on,  411-412;  Cleveland  method 
(N.  U.  Baker),  446-447;  under  service  at 
cost,  (C.  K.  Robinson)  503,  739;  under  mu- 
nicipal ownership,  639;  under  I'^owler  bill, 
639-640;  New  Jersey  Commission,  661-663, 
711-712;  conflicting  theories  and  their  re- 
sults, 681-712;  general  significance  of.  725- 
727 ;  analysis  of  Denver  mctliods  and  re- 
sults, 725-738;  New  Jersey  act  amended. 
Note  2  of  -Appendix  A;  by  l"ord,  Bacon  & 
Davis,  Note  7  of  Appendix   A. 

Xancouvor,  B.  C. :  wage  rates,  533,  Note  1  of 
Ch.  XLIIL 

Van  Winkle,  Marsliall :  connection  with  Pub- 
lic Service  Railway  case,  664. 

Vegelahn  vs.  Guntner:  Justice  Holmes  quoted 
on  labor  organization,  546. 

Victoria,  B.  C. :  wage  rates,  533,  Note  1  of  Ch. 
XLIIL 

Virginia  Railway  &  Power  Co.:  1917-1919  com- 
parison of  fares  and  traffic,  185,  205,  of  fares 
and  revenues,  191.  208;  wage  rates,  532,  Note 
1  of  Ch.  XLUl. 

M'age  boards :  under  New  York  Public  Serv- 
ice Commission  bill.  554. 

Wages:  (See  al.so  Cost  of  living.  Labor,  Living 
wage)  ;  National  War  Labor  Board  on,  9- 
10;  W.  H.  Taft  on  relation  to  finances,  10; 
F.  H.  Sisson  on  cflFect  of  increase.  10;  eflfect 
of  increases  (W.  C.  Bliss),  11;  W.  J.  Lauck 
(Brief)  defends  increases,  11-12;  efTect  of 
increases,  (M.  E.  Cooley)  12.  (T.  Conway) 
12;  rates  and  increases  (J.  W.  Welsh),  13; 
W.  J.  l-auck  on  waite  ihcnry.  14.  on  relation 
to  revenues.  113-115:  increased  (C.  L  S. 
Tingley).  127;  in  Cleveland  since  war,  530- 
531  :  National  War  l_ihor  Board's  dealings 
with  disputes,  5M).  5.W :  rates  in  principal 
cities.  (Jan.  1.  l<>2«(i  532-5.U  (Jan  I.  I<)21  i 
Note  1  of  Ch  XLIII;  determination  of.  un- 
der New  York  Public  Service  Commission 
bill.  553-554:  average  rates  at  different  \w- 
rio<ls,  (.\.  Slurgis)  569,  571.  (Magmisson) 
571;  increase  in  (Boston  Elevated).  .SSl- 
583;  effect  of  increases  (.\.  Sturgis).  .'!91  ; 
under  Pliiladcl|>hia  plan.  605-606;  recent 
changes.  Note  I  of  Ch.  II.  Note  2  of  Ch 
Xl.lll,   Note  3  of  Ch.   XLIIL 


Wakelee,    Edmund    W. :    on    capitalization    of 

franchises,  672. 
Walsh,  John  J. :  on  public  subsidies,  314. 
War  conditions :  effect  on  value  of  money  and 
on   credit,   Ch.    XXII,    116-128;    scarcity   of 
free  capital  due  to.  388. 
Warren.   Bentley  W. :  on  increased  costs,   13; 
on     jitney     competition,     Springfield,     Mass., 
100;  on  valuation,  345;  on  value  of  securities 
of  Boston  Elevated,  398-399. 

Washington.  D.  C. :  1917-1919  comparison  of 
fares  and  traffic,  185,  206,  of  fares  and  rev- 
enues, 191,  209;  zone  system  for  (C.  W. 
Kutz),  241;  wage  rates,  532,  Note  1  of  Ch. 
XLIII;  1919  valuation,  730;  fare  increase. 
Note  1  of  Ch.  XV. 

Washington,  State  of :  provisions  as  to  borrow- 
ing for  public  utilities,  515-520. 

Washington  Water  Power  Co.:  (See  Spokane, 
Wash.) 

"Watered  stock":  (See  also  Overcapitaliza- 
tion) ;  M.  E.  Cooley  on,  355. 

Welsh.  James  W. :  on  wage  rates,  13;  annual 
capital  additions,  23 ;  statistics  on  receiver- 
ships and  abandonment,  64;  taxation  statis- 
tics, 79-80,  81 :  on  operating  ratios,  123 ;  net 
income   statistics,   157. 

White.  Chief  Justice:  quoted  on  status  of  rail- 
wav  labor  (.^damson  Law,  Wilson  vs.  New), 
550-551. 

Wilcox.  Delos  F. :  testimony  on  public  own- 
ership, 147-148;  on  fundamental  questions 
involved,  149-150;  service  vs.  profits  as  con- 
trolling motive.  152-153;  continuity  of  serv- 
ice, 153-154;  on  financial  reorganization,  340- 
341. 

Address,    Conference    of    Mayors,    Philadel- 
phia,  1914,  on   nature  of  public  utility  in- 
vestments,   150-151. 
The    .\iuials,    March,    1915.    on    taxation    of 

public  utilities,  244-247. 
Letter  to  Cleveland  Street  Railroad  Commis-, 
sioner.  October  3,  1919,  on  amortization  of| 
capital,  455. 

Willcox.  O.  B. :  on  new  capital  requirements, 
29. 

Williams,  Timothy  S. :  on  compulsory  arbitra-^ 
tion,  559. 

Wilmington,  Del. :  1917-1919  comparison  of 
fares  and  traffic,  187,  206,  of  fares  and  rev-i 
cnues.  193,  209;  wage  rates,  533,  Note  1  of 
Ch.  XLIII. 

Wilson  vs.  New:  Chief  Justice  White  quoted,! 
550-551. 

Wilson,   Woodrow :   on   8-hour  day,   583. 

Winnipeg.  Man. :  wage  rates,  5.^3,  Note  I  of ' 
Ch.   XLIII. 

Wisconsin :  use  of  police  power  (J.  D.  Mor- 
timer), 90-91;  law  providing  for  public  guar- 


Index 


789 


amies  (J.  D.  Mortimer),  316;  rate  of  re- 
turn in  (J.  D.  Mortimer),  395;  regulation 
in.  405-413;  restrictions  on  borrowing  for 
public  utilities,  525-527;  Board  of  Concilia- 
tion (J.  D.  Mortimer),  615;  valuation  over- 
heads allowed  by  Railroad  Commission,  733 ; 
attitude  of  Commission  on  cash  working 
capital,  734. 

Witt,  Peter :  relation  of  Cleveland  capitaliza- 
tion to  fare,  446. 

Wolff.  Mark:  analyses  of  cost  and  capitaliza- 
tion of  Public  Service  Railway  Company, 
685-686.  707,  708,  710. 

Worcester.  Mass. :  1917-1919  comparison  of 
fares  and  traffic,   186,  207,  of   fares  and  rev- 


enues, 192,  210;  wage  rates,  533,  Note  1  of 
Ch.  XLIII. 
Working  capital:  limited  requirements  an  aid 
to  credit,  17-18;  defined  by  A.  E.  R.  A.  Com- 
mittee on  Valuation,  350;  M.  E.  Cooley  on 
need  for,  355-356;  not  a  proper  item  in  valu- 
ation for  rate  making,  734-735. 

Youngstown,  Ohio:  changes  in  fare,  164;  1917- 
1919  comparison  of  fares  and  traffic,  186,  206, 
of  fares  and  revenues,  192,  209;  wage  rates, 
533,  Note  1  of  Ch.  XLIII. 

Zone  fares:  Ch.  XXIX,  218-243;  to  combat 
jitney  competition,  668,  669. 


I 


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